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Zayo's Aggressive Approach to Network Infrastructure Lands Major Client

By Christopher Mohr
Contributing Writer

An unnamed cloud communications provider has selected Zayo to connect nine of its data centers in the U.S., Europe, and Asia. Zayo will also create a point of presence (PoP) in Singapore as part of the arrangement. The announcement comes at a time when Zayo is either building or purchasing infrastructure aggressively.

Boulder, Colorado-based Zayo Group (News - Alert) Holdings, Inc. provides communications infrastructure, colocation, cloud technology, and consulting services to customers building their own networks. The company was completing a fiber buildout in the San Antonio-Austin, Texas area. It expects to have three million net installs by the end of 2016. According to its website, Zayo already has 112,000 route miles of network in North America and Europe.

It might seem questionable at first why Zayo is taking this approach. Building network infrastructure by its nature is cost-intensive and on top of that it often takes longer to make money off the project. If Zayo relied only on buildouts upon customer request for its main revenue source, this would be true.

Where Zayo has untapped profit potential lies in the way it will use newly-built infrastructure for future customers. Once a customer provides the funds needed to undertake a buildout, Zayo can add additional fiber and offer it to new customers. This leads to greater profitability, because the cost per unit of fiber is much less even though the revenue for that unit of fiber is no different. It has one Wells Fargo (News - Alert) analyst bullish on Zayo’s outlook.

To supplement that strategy, Zayo has also bought companies that built infrastructure. This is really just another variation of the same strategy, in the sense that Zayo does not have to fund a buildout itself, yet can still benefit from the revenue it generates. When Zayo bought Viatel last November, a simple pen stroke gave Zayo a Pan-European network infrastructure, which will be used by the aforementioned unnamed cloud communications provider, and Link11.

Zayo appears to have a sound business strategy when it comes to profiting from a growing demand for network infrastructure. The biggest concerns are likely to be getting its installations built and if it has built enough infrastructure in reserve to meet what is expected to be an explosion in demand for data.