In the Long Run, Optical Will Matter
August 29, 2008
We welcome commentary and discussion on issues, and the following post is in response to a comment received on my two cents on PAETEC.
In a previous life, I served as the President of Frontier Communications. Frontier Communications was the first locally competitive telecommunications company under special license by the New York State Public Service Commission in 1994. For disclosure, I did leave Frontier long before the “old” Global Crossing acquired Frontier, as the smell was bothersome, and I don’t want my name associated with what that management team was doing to the company. Obviously Global Crossing has risen above their challenges and rebuilt into something much better for customers.
For Frontier I managed the entire gambit of services from T1 to optical. I saw firsthand the real numbers as well as reliability statistics. Just like 14 years ago, as it is today, the best of class in T1-like services, the ILECs, generate gross margins of 40%. Obviously anyone can buy from the ILEC under CA96, as best of class may someday reach 30% GM on low end, copper-based services. On optical services, as AFS has experienced, one derives gross margins of 70% – 80% for optical services, but this is only accomplished by having the wisdom, patience and perseverance in understanding that in the long run, optical is all that will matter.
Thank you for the compliment on our unique market position. But what I can tell you is that it was not by accident and I had many, many, many Wall Street firms back in 1999/2000 telling me that basically a demand-based business model like AFS is not a good idea – we were not raising enough money or moving fast enough. Of course, we know what happened – over supply, over building, shared routes without demand resulting in our industry having its first ever depression. Up until this time, since the phone was invented, every year our industry had grown in revenue and profitability.
In order to achieve 70%-80% gross margins, you have to have the fortitude to base your business on the long run and the costs associated with a high-cost, fixed asset network strategy such as fiber optics. As basic economics teaches us, once you are past the high fixed costs investment, the incremental costs of generating high margin revenue in relative comparison is peanuts. I ascertain that owning a metropolitan network creates a barrier to entry for others, and as of 2008, no one is investing into local network builds on any great scale without demand built-in.
Shoot me an email or add a comment below.
Written by Dave Rusin - Telecom Executive
Posted by admin | Filed Under American telecom, Telecommunications companies, Telecommunications industry, Trends + telecommunications, Trends in telecommunications
(No Ratings Yet)
Loading ...Comments
Got something to say?
Feeds
