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15-year-old vision starts to pay off

Winter 2015

NS’ T-Cubed subsidiary finding revenue under the rails

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Michael Borem, assistant manager
T-Cubed field operations, right, confers
with a contractor installing fiber-optic
cable for T-Cubed customer Allied Fiber
at a site alongside NS tracks in Macon, Ga.

When it was launched in 1999, Norfolk Southern subsidiary T-Cubed had a lot going for it: a catchy name, a smart leader who later would become CEO, and thousands of miles of potential business opportunity.

With Wick Moorman as president, Thoroughbred Technology and Telecommunications, Inc. had ambitious plans: To turn the underused rights of way along NS’ tracks into a revenue-generating information highway. In entrepreneurial fashion, T-Cubed intended to install and lease underground conduits to rapidly growing telephone, cable television, and Internet providers seeking locations to install fiber-optic telecommunications cables.

Starting with a flourish, T-Cubed buried groups of eight to 12 fiber-optic conduits along approximately 1,500 miles of track rights of way. Then, in early 2001, with T-Cubed poised to prosper, the telecom industry boom went bust.

Fortunately, that was not the end of T-Cubed’s story. Moorman survived the world of telecom to become the chief executive of a thriving NS, and, thanks to demand from a resurgent telecommunications industry, the early investments T-Cubed made are starting to pay off.

“We only had a toe in the water, not the whole body, so NS was not hurt very much by the telecom bust,” said John Friedmann, vice president strategic planning and T-Cubed’s president since early 2009.

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An NS double-stack container train passes
orange and white posts warning of buried
fiber optic cable alongside track near Austell,
Ga.

Fundamentals remain sound

What Friedmann describes as T-Cubed’s long, quiet period has given way to increasing bursts of activity. As deregulation of the telecommunications industry continues to unfold, telecom companies large and small are looking for efficient ways to expand offerings for voice, data, video, and cable transmission. Today, T-Cubed has active agreements with about 24 customers, including many brand-name telecom companies, to use the previously installed underground conduits. 

“Fiber-optic infrastructure needs to be renewed,” Friedmann explained, “and when it needs to be renewed, people want to put in bigger, newer cable. In the same way that people aren’t using the same cellphone they had in 2000, telecom companies aren’t using the same fiber-optic cable, and the demand for bandwidth has increased – particularly as we’ve seen growth in mobile applications for smartphones and other handheld devices.”

Customers, who typically sign long-term agreements for use of the conduits, like the ease of doing business with T-Cubed, Friedmann said.

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Fiber-optic cable is being installed along
NS track rights of way.

“If you’re trying to run fiber-optic cable over hundreds of miles and have the choice of dealing with a single landlord or hundreds or thousands of individual landowners, you’ll choose the first option,” he said. “If the landlord happens to have a conduit in the ground, life gets even easier.”

Although all railroads lease rights of way to telecommunications companies, NS is one of the few major railroads to build and market its own fiber-optic conduits.

“Every day, people see the revenue that rolls along on top of our rails, but what they don’t realize is that underneath our tracks, we’re making money, too,” Friedmann said. “The revenue T-Cubed brings in is an added benefit and doesn’t interfere with the railroad’s principal business of hauling freight.”

Along with revenue from lease contracts, NS often obtains the rights to use strands of fiber-optic cable installed by T-Cubed customers. The railroad’s communications and signals and information technology departments, for example, can use the fiber to strengthen the railroad’s signals and telecommunications networks.

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John Friedmann, left, NS vice president strategic planning and T-Cubed president, and Chip Meador, NS director strategic planning and T-Cubed vice president, look over plans for a fiber optic installation along an NS right of way.

 

An East Coast connector

T-Cubed’s profit margins have been growing the past five years, said Chip Meador, director strategic planning and current T-Cubed vice president.

“We sat on those assets in the ground for almost a decade, and now customers are coming back to us,” Meador said.

One pivotal deal in T-Cubed’s turnaround involved a lease agreement in mid-2009 with Ridgeland, Miss.-based Spread Networks. The private telecommunications company used T-Cubed conduit and NS rights of way as part of a high-speed fiber-optic cable network introduced in 2010 to connect Chicago and New York. The project, designed to offer faster communication links for Wall Street traders, is featured in the 2014 New York Times bestseller “Flash Boys.”

“That transaction was the first of many that reinvigorated T-Cubed,” Meador said.

After launch 15 years ago, T-Cubed installed conduits in areas of high projected demand, including from Washington, D.C., to Chicago, and from Chattanooga, Tenn., to Jacksonville, Fla. Made of PVC pipes, the conduits are buried at least 3½ feet underground.

“Now, we’re focusing on putting those assets to work instead of spending a lot of money on new conduits,” Meador said. “As long as you don’t disturb them, they’re in fine shape to be utilized.”

Where conduits have not been installed, customers, such as Spread Networks, can use NS’ rights of way to install their own conduits, also known as ducts. In its conduits between Chattanooga and Atlanta, T-Cubed owns and leases “dark” fiber-optic cable – an industry term to describe cable before it is activated by a telecom provider. However, T-Cubed does not offer telecommunication services.

“You’ll never get a dial tone from T-Cubed,” Friedmann said.

In 2014, Allied Fiber, a dark fiber provider, signed a contract with T-Cubed to lease conduits between Atlanta and Jacksonville, Fla. Based in New York, the six-year-old company aims to build a new open-access communications infrastructure across the nation, allowing any network operator to connect and enhance its network. That goal would be impossible without contiguous rights of way, said Jason Cohen, Allied Fiber’s chief operating officer.

“Allied Fiber has mapped out a plan for the entire East Coast utilizing Norfolk Southern and T-Cubed rights of way and duct,” Cohen said. “Allied Fiber will use the ducts to install a new fiber-optic cable system while building co-location facilities along the rail network. By using the NS right of way and the existing T-Cubed ducts, Allied Fiber will complete the approximately 390-mile network from Jacksonville to Atlanta by mid-2015.”

T-Cubed’s conduits offer Allied Fiber the most direct, secure path between Jacksonville and Atlanta, Cohen said.

“Because the T-Cubed ducts are already installed, it eliminates one of the largest construction risks for a long-haul fiber project,” he said. “Once the duct is in the ground, running the fiber-optic cable through it is fairly straight forward, and working with a single landlord for the entire route is priceless.”

Although T-Cubed’s fortunes are improving, Friedmann and Meador cautioned that the subsidiary is unlikely to be material to NS’ overall financial performance.

“The revenues T-Cubed brings in are an added benefit, but it’s a small business compared to the rest of NS’ business,” Friedmann said. “It’s not going to be a main driver of NS’ fortunes, but we’re glad to help.”