Texas.net Grows

A business-oriented ISP that focuses on serving major cities in Texas has survived the VC-funded dot bombs and is ready to take on the post-bankruptcy zombies that remain as it announces its latest acquisition.

by Alex Goldman ISP-Planet Associate Editor [August 25, 2003]

Like many successful ISPs, Texas.net was founded many years ago and has stayed within its local area. The company was founded in 1994 in San Antonio, originally providing webhosting, outsourced mail solutions, and T-1 and T-3 lines. It expanded to Austin in 1995, Houston in 1996, Dallas in 1997, and Fort Worth in 1998.

When the dot com bust happened, the company did not try to keep growing at all costs. Instead, as companies came on the market at cheap prices, Texas.net made a few acquisitions.

"Business took off in the fall of 1994, when Mosaic arrived," remembers Texas.net co-founder and CEO Jonah Yokubaitis. "In 1999 and 2000, and part of 2001, we did see VC-funded companies offering services at below cost, but their business depended on the availability of additional capital, and after early 2001, they could not get it."

With some of those companies exiting chapter 11 bankruptcy, Yokubaitis sees "at least another year of artificially low pricing. It's not natural competition because it's not a cost plus profit business model. Some companies are still trying to do anything to get revenue." And "anything" includes selling at prices that are below cost.

Financial writers call these companies "zombies" because they survived death (bankruptcy) but are not alive (profitable), which makes them living dead: zombies.

But Yokubaitis is not worried. "This industry is a deflationary industry. You cannot charge too much more than the competition. Customers will pay no more than a 20 percent premium even if you deliver service that's 50 percent better. A lot of this business is about negotiating with your suppliers. We are paying on time, which is big. Many wholesale customers stopped paying on time or restructured and washed away many of their past due bills. Our suppliers know that in a bankruptcy, unsecured creditors do not get paid. We find you get a better rate when they know you're going to pay."

Buying bandwidth in large quantities also helps. "Suppliers know we have the ability to pay, plus the amount of capacity we can buy helps keep costs down."

Yokubaitis says this cycle of virtue gets passed on to good customers. "We'll do the same for customers. If they've been with us a while and pay on time, they get a better price. If we feel they have a 30 percent chance of not being able to pay, we need to cover that cost. On the other hand, if you know you're going to get paid, you don't have to charge for a potential nonpayment."

He adds that serving the business market rather than the consumer market helps fight off discounters. "The consumer market is very price sensitive. It may go to the best deal, but business customers look for ISPs not on shaky financial ground."

Yokubaitis and his partners own 100 percent of the business. The business has never had to borrow money. This does mean, however, that the business' financials are not public.

In 2000, Texas.net acquired Data Foundry, a data center company. In 2001, it bought the Internet division of Reliant Energy. Last week, it bought another data center in Austin Texas (its third in the Austin area), from Verio. The new data center, lovingly described here and here, is fully redundant to a degree that was possible only in the venture capital fuelled boom. They just don't make data centers like this any more. Built for $5.5 million (including $1 million in security cameras and palm readers), we guess that Texas.net paid under $1 million for the facility (but the company, privately held, will not be disclosing the price of its acquisition).

Yokubaitis has some helpful advice for anyone contemplating buying IT assets in a market where prices are low but where there are many potential hidden costs.

"We're buying because we found it cheaper to lease than to build. Some data centers were built with revenue of $500+ per square foot built into the business model. We pay 10 percent to 20 percent of the build price, never more than 20 percent."

If that wasn't cautious enough, Yokubaitis says the deals he makes protect his company from financial deception. "We structure the deal so that if the numbers they gave us were not real, there are penalties."

—End