Musing on a Hypothetical
September 30, 2008
I’ve been getting some interesting questions and comments lately. Here’s one I got recently from a reader with about how American Fiber Systems (AFS) measures up in a hypothetical sales situation. I’ve asked Jeff Williams, the VP of Enterprise Sales for AFS, to weigh in.
How does AFS handle a sales situation like the following:
Bldg > Data Center or Carrier Hotel with multiple ON-NET providers; let’s say Level3, XO, ATT, Verizon, and AFS.
SLA > All are very similar regarding uptime, etc.
Provisioning > All promise 5-7 business day install intervals.
Price > Lets say L3 and XO are 15% less than everyone else.
What is AFS’s compelling value proposition in the above?
AFS focuses on working with customers who have mission-critical bandwidth needs across a metro-fiber network, not just bandwidth requests that are entirely served from a single data center location. This is especially true with enterprise clients who typically connect their data center infrastructure to their corporate/regional HQ within a metro. In these instances, Point A will be located with all the other providers in the data center, but Point B is at another location in the city. In this situation, not all circuit designs/service are the same from each vendor:
- Do all the vendors mentioned below have “on-net” fiber at both Point A & Point B?
- Will they commit to a firm install date…and meet it? (numerous horror stories of installs gone astray – months of delay for the customer)
- With what degree of expertise/responsiveness/level of clue will your fiber build be managed?
Let’s look at these questions individually. First, do all vendors offer on-net service at both locations? The answer is no. In fact, the other vendors mentioned often approach AFS to provide the Point B connectivity from a wholesale perspective. Next, when they give you a date, can you count on them to hit it? I think we’ve all heard numerous horror stories of installs gone astray. In some cases, customers have experienced months of delay with other providers. Not so with AFS. And finally, does your provider have the experience as well as the responsiveness you’re seeking as you undertake a fiber build? We believe we are the leader in providing both.
In closing, AFS is disciplined in its core competency. We don’t go chasing every new revenue stream that looks to be attractive. This includes long haul, CDN, hosting,etc. Most of the other vendors mentioned attempt to be that “one-stop” shop. Some do it better than others. While you can make an argument that a bundled service offering/one-stop-shop serves the generic needs of the down-market prospect, it seldom meets the specific, critical needs of larger enterprise infrastructure. And as a result of trying to build a support team to meet numerous different products, the depth of knowledge in any one area becomes diluted. By remaining disciplined to the core – we’re able to groom, train and develop an operational staff which is 100 miles deep in a single & critical competency.
Here’s an analogy that illustrates AFS’s specialization:
If I became interested in joining a motorcycle riding club, I might go to my local Harley dealer and buy the motorcycle, the bandanna, maybe even those crazy leather chaps & some fancy chrome fenders. If I’m interested in building a $100,000 custom chopper with a high-performance engine – I’m going to Orange County Choppers.
Do they know about motorcycles at the Harley Davidson dealership? Sure. Are they aware of the custom-motorbike building world? Yes again. Would I trust them to build from scratch my $100,000 bike in the back of their showroom? NO WAY!
With experience in both enterprise and carrier sales, Jeff Williams has 14 years in telecommunications with the likes of Sprint, Metropolitan Fiber Systems and most recently, AFS. Care to comment? Shoot Jeff or Dave an email or post your thoughts below.
Someone Has to Pay for the Plumbing
September 25, 2008
I ran across an interesting article by Mary Lennighan at Total Telecom from this past Tuesday entitled Wholesale giants say Internet will no longer be free. Lennighan is covering the Carriers World event, a European wholesale capacity conference. Here’s an excerpt from Lennighan’s article:
As demand for online content grows, so does the need for more bandwidth, giving rise to debate over who will pay for that bandwidth. And the answer could be to restrict “free” access to services like the BBC’s iPlayer that allows users to stream BBC TV content over the Internet, according to keynote speakers at an industry event in London on Tuesday.
The international market is no different from the United States; someone has to pay for the plumbing. The “free” business model has been proven over and over again that it does not work – just check out any recent free wi-fi business model. Even ad based models have limits.
Copper piping is no longer the answer either. No pipe, no payola.
I welcome comments on this topic of how the growing hunger for bandwidth intensive content will be delivered — and how, if possible, to keep everyone happy — the end user, the publisher and last, but not least, the connectivity provider.
Shoot me an email or post a comment below.
Much Ado about XO
September 24, 2008
Looks like there’s some back and forth commentary on a recent XO post. It all started with this comment:
I chuckle whenever I hear people suggest that PAET should buy XO. PAET is primarily a type 2 reseller. XO, on the other hand, has quality metro fiber assets throughout the country.
Which was followed by this:
And I chuckle whenever I hear that XO “has fiber all over the place”. We have ordered 1000’s of circuits from XO, and I will tell you righ now that 90% of them are Type II from ATT or VZ. Especially DS3 or below. Even their EOTDM product is delivered via Type II RBOC loops.
And here’s the rebuttal:
Hi Anonymous - Sounds like you have fallen victim to an overzealous XO sales rep. One of the many weaknesses in the industry (poor quality sales reps).
If you really have ordered 1000s of circuits in different locations around the country, the majority will be offnet (type 2). XO (or AFS for that matter) is a good fit in on-net locations, but not really a great carrier to use for a nationwide buildout. IMO, you’d be better going direct with ATT or VZ.
And EOTDM should always be type 2 by definition since CLECs don’t deploy copper plants (only fiber). At least i am not aware of CLECs deploying copper plants.
“Poor quality sales reps” — don’t get me started on that topic. Our industry has lazy management and lazy sales people. When I interview sales people, I give them a sales situation and ask how they would respond. If price comes out of their mouth within the first three sentences, the interview is over. We have an industry that delivers high value connectivity, but we allow “low price” sales slugs to discount the value of our services. CLECs don’t get it – you can’t price lower than your costs, and 90% of the time, some sales person is playing Chicken Little in your ear with falling prices. If you have a customer opportunity and that customer wants you to lose money, let the next idiot carrier have that customer on a silver platter. Is it really that hard to say “no”?
Value = Benefits minus Price. We need to stop selling technology and sell solutions. I have yet to see the proverbial “hardware box” sell a customer – though the box makers want you to think so. What would you rather sell? “Our network runs on ‘box brand X’” or “we have a track record of 100% on-time delivery and 100% network up-time for on-net, all optical customers”?
You can see the comments as they happen by subscribing via RSS here. If you’d like to add a comment or ask a question, shoot Dave an email or leave your thoughts and opinions below.
XO, Credit Crunch & the Ultimate Backstop
September 22, 2008
Here’s another great comment I got from a reader on a recent blog post about XO:
I chuckle whenever I hear people suggest that PAET should buy XO. PAET is primarily a type 2 reseller. XO, on the other hand, has quality metro fiber assets throughout the country.
Thank you for your response, and keep the emails coming.
The challenge XO has with any M&A opportunity of strategic value may be Carl Icahn.  Mr. Icahn has a propensity to view just about anything he “invests” as a purely financial exercise. The ability to buy strategically and execute financially should be the criteria.
With the credit crunch on, asset light companies are going to have a very difficult time demonstrating margin growth to facilitate further borrowing leverage. The risks of ILECs raising costs to CLECs will be a great concern to surviving financial firms with much tighter lending standards.  Revenue growth will be taking a back seat to EBITDA margin growth and quality of EBITDA which, in my opinion, only local fiber-based players can demonstrate. In addition, those hard fixed assets (fiber sheaths) provide the ultimate backstop for tighter credit standards.
Just a note, in case readers didn’t see it in an earlier post, “type 2″ refers to situation where a carrier who buys a circuit wholesale from Ma Bell and then resells this circuit to an end-user.
Want to weigh in on the credit crunch, fiber assets or other topics? Shoot me an email.
What America Needs is Choice (and I’m not talking about the election)
September 18, 2008
We have not experienced in 12-years a migration from ILEC dependency by CLECs. The CA 96 was designed to create competition – it has failed. So, do we need other 12-years of status quo? Absolutely not!
What America needs is choice. Choice in true facilities based competition and not the holographic companies that claim they “own” a network.
How will you get true choice? Real competition? You don’t do it by continuing regulations that have not worked. You do not do it by relying on Governments that are only interested in sapping fees from users of any operator’s customers plus the operator. It is time to wake up – you need to do what you need to do and stop relying on the Beltway Broadband Bandits. You do this by leadership and not whining how unfair it is if I don’t get 12 more years of renting. You realize the government is NOT on your side and you figure out your destiny. Prolonging the inevitable only provides the ILECs and cable Companies more opportunity to penetrate with facilities which lock you out of competition.
The Global bandwidth driven economy is passing America up and bandwidth is fast becoming the oil of the 21st century. So let’s keep arguing for the status quo so we can fall behind further.
Yes, the ILECs do not have to share fiber, it’s the law. So why do we sit around and whine about it? A lot of CLECs do whine which is a waste of time and lawyer/lobbyist money. Get over the anger and denial and stop counting on the government. Also, by law, cable companies do not share networks or even rent out pieces like the ILEC is required. I don’t hear too much pissing in the wind about this fact!
Yes, granting forbearance will drive prices up in the short term, as it should. This is called an open market finding competitive equilibrium. The reason we hear; “Oh my costs will go up and my prices will go up” is because the weak CLECs that only compete on price have no value add to offer customers. They don’t have sales people whom are sophisticated enough to sell up the value chain on value and a profitable return. They believe telecom is homogenous and it is all about low price elasticity. Bottom line: being on the ILEC dole so long, some CLECs have become plain lazy. Exactly what the ILEC wants.
As competitive equilibrium is reached in a post-forbearance market and profits realized, then and only then will private investment occur into more local fiber optic infrastructure and access. When investors clearly realize that they can get a return on the capital deployed in this high fixed cost business under a forbearance-granted market, the investment flows. Profits create competition, not the continuance of the telecom welfare state as we know it.
Over 90% of business buildings in this country still do not have cable #2 into their building from a true facilities competitor. It is estimated it would take $125 billion in investment to bring needed fiber to every home and business as entry stakes for Global broadband access. We will not attract new infrastructure investment as long as government regulations make earning a profit a risky undertaking in what is and always has been and will always be, a high fixed cost business for participants of stamina.
Weren’t those 12-years enough time to figure things out?
Shoot me an email or add a comment below.
Opportunity Abound for XO Despite NOL’s
September 16, 2008
I recently received the following comment in response to What Frontier Means on a Resume:
The viability for PAETEC will be integrating the McLeodUSA fiber into the PAETEC environment.
I have been challenging tax assessments on this industry specifically focusing on CLEC’s and IXC’s back to 2000. Because of the NOL’s, property tax was a major part of the CLEC operating expense. A CLEC without fiber going forward will soon see the end. I am sure if the credit markets would allow and the PAETEC stock price would rise, Arunas would be after more fiber…possibly XO.
XO is next. Question is who is the buyer.
Thanks Brian.
I believe if anything reasonable were in M&A play, XO is in a better position to go on an acquisition spree. Mr. Icahn recently cleaned up their balance sheet and they are now debt light. The owners of metro fiber like an XO can benefit by adding customers and applications to their local fiber infrastructure at a reasonable valuation. The net effect of doing this is the acquired customers’ margin contribution to the fiber-based entity can increase as much as an incremental 40%.
The converse, an asset-light company buying a metro fiber based company with its customers, is a different animal altogether. The same 40% in margin increase can be had by the acquirer as it comes with the fiber platform, however, the valuation profile of such a local fiber-based company will be much higher than an asset-light company. The thinking behind such a scenario isn’t as much about the local the cost of acquiring the metro fiber business but the value of its metro fiber; it quickly becomes a valuation of “what does it cost me if I don’t have access to the metro fiber M&A play and get locked out by a competitor?” It is not an industry secret that there is a shortage of metro fiber and having to build it if you can’t buy it is a costly proposition. It costs 60% more today for the same metro fiber build than what it cost to build 5 short years ago.
In an acquisition or merger, NOL’s get fractionalized to such an extent by the IRS, they are of marginal value. Whether you agree with Mr. Icahn or not, he restructured XO in such a manner within his holdings that he can take advantage of the lion’s share of XO’s NOL’s.
Shoot me an email or add a comment below.
Wisdom from the Street — High Margin is Bad
September 11, 2008
One of my readers, Mark Miller of Miller Capital Partners, wrote asking about my thoughts on an announcement by TWTC:
Any thoughts on the announcement today from TWTC (a big fiber owner), recent issues with CCOI [Cogent], while LVLT [Level 3] and GLBC [Global Crossing] say no slowdown in sight? Is it that TWTC have so much voice and CCOI sells basics, whereas LVLT and GLBC have a different revenue base? I guess we’ll see what LVLT and TWTC have to say later today.
First of all, thanks for writing, Mark. I really enjoy hearing from other professionals about telecom topics such as this.
For those not following the story, TWTC filed something with the SEC yesterday and said that they are experiencing churn from their very small customers who are not paying their bills. Well, as soon as the Chicken Littles got this news, the knee jerk reaction is to downgrade. I say upgrade TWTC; this is good news.
The Street reaction to the tw telecom filings, per usual, just demonstrates to me, again, a major disconnect between Wall Street and reality. Once again, Wall Street does the “the sky is falling” routine.
Want a stock tip: buy TWTC courtesy of Wall Street Analysts that are short sighted. Clue: You can’t find an analyst on Wall Street that has run a telecom firm that can distinguish between staying power and last night’s date.
Wall Street has some kind of Oedipus complex with top line revenues. Any disruption to revenue growth, well, that is not acceptable. When will Wall Street start realizing this game is about predictable margin and profitability growth?
If “small customers” (a/k/a Type 2 **) are churning out of TWTC, this is good. These marginal, no growth, financially strapped customers are leaving for another carrier. I say lets get a cake and have a party. TWTC margins will improve! Low end, low margins v. high end, high margin customers … what’s the problem? Rejoice!
I would be more concerned if TWTC were having a run on the on-net customers since these are high margin, high revenue customers. But they are not and will not because TWTC owns local fiber optic infrastructure. Metropolitan fiber allows you to play at the 70% - 85% gross margin level with on-net customers; it’s the type 2 customer that drags down margins. Type 2 customers – good riddance — have a piece of cake on the way out. Go back to Ma Bell where you belong.
So, in my simple way of thinking, since tw telecom does not make sub-prime mortgage loans, manufacture automobiles or build houses, I think they are a buy. Funny thing – the credibility of Wall Street firms – they create the bubbles and somehow want to be seen as credible. To Citicorp that provided a downgrade take note: people who live in glass houses should not be throwing any stones.
Do your homework, and jump on buying opportunities like this when the uninspired, inexperienced Wall Street spreadsheet jockeys hand you a gift like today’s.
** Type 2 describes when a provider like TWTC buys a circuit wholesale from the phone company (because they don’t have a particular building On-net), and they then resell this circuit to an end-user. AFS does Type 2 circuits less than 5% of the time. Paetec is 100% type 2.
Shoot me an email or add a comment below.
What Frontier Means on a Resume
September 4, 2008
I am often asked two things: Are you ever taking AFS public, or would you be interested in a CEO opportunity at a public company?
No.
Why?  Just spend some time at conferences with investment bankers and industry analysts.  I have met very few, if any, who have ever had any public company experience themselves, let alone hands-on operating experience.  Do I really want to get onto the 90-day gerbil running wheel-of-infinity with these folks telling the world what we are doing wrong or right based on an opinion and a spreadsheet at best? No, thank you. I may have opinions, but at least mine are informed, experienced opinions.
Why do I bring this to your attention? PAETEC.
I know Arunas; Arunas knows me. We hardly kibitz with one another on our respective enterprises, but if I come along something that may be of interest to PAETEC, I am not shy letting Arunas know.  PAETEC is an interesting story. It is one of only a few CLECs that successfully built a CA96 “UNE”/Special Access model. As we know, most similar attempts went bankrupt.
There is a lot to be said for this accomplishment.  However, nothing stands still in telecom, and with the exception of our recent meltdown, typically telecom service demand grows substantially annually. I have never witnessed a net decline of bandwidth demand in over 25 years. Being a fiber bigot it is my strong belief that bandwidth enriched content and high touch interactivity is a long term requirement which makes it imperative to become independent of the ILEC.  As I stated above, moving up to 70% - 80% gross margins and 30% - 40% EBITDA margins is not something an ILEC is going to allow.
Here is what I do know, with the exception of less than a handful of former Frontier executives who formed CLECs that went bankrupt during the irrational telecom bubble, most CEOs and CFOs with Frontier on their resumes seemed to have managed their businesses through the telecom crash without using bankruptcy as a strategy. Rochester, New York, is where Frontier had its roots formally as Rochester Telephone has produced many CLEC success stories when most others failed or went bankrupt.  I believe that perhaps 2 out of 600+ CLEC bankruptcies had former Frontier executives at the helm.
Arunas has Frontier on his resume, and like others who passed through the culture and discipline of Frontier, we have been well prepared.  I would not knock PAETEC’s viability, but I would keep a watchful eye on things as optical network platforms quickly become table stakes for rapidly growing Internet and Ethernet proliferation. I just believe in owning fiber is a great mechanism of immunity from regulatory bodies as well as providing a platform to innovate from without relying on the speed, temperament or self-interests of the ILEC.
Got a question, comment or even a gripe? Email me or leave a comment below.
What Will the Future Hold for Fiber, FiOS?
September 2, 2008
I disagree with the premise there isn’t fiber network investment interest. There is investment interest, but the problem is not the debt markets, it is regulatory.  Until the investment community can see some level of certainty of profits, we won’t see large investment flows into local fiber infrastructure which is badly needed in America.  Why? Denying forbearance keeps the status quo of a regulated wholesale industry which is not reflective of market-driven profits whereby an intelligent investment decision and rationale can be made.
The good news about the telecom collapse is that when sustainable profit growth is demonstrated, we won’t have the irrational exuberance and land grabbing at any cost mentality. Â We may actually get route partnering where route installation is optimized amongst parties as investors have learned having 10 carriers joint build on the same route - well, it just might be a bad business model.
Getting forbearance granted is not a matter of if, just when.  And as it happens, it is a friendly reminder I make, it takes 18 months to two years to build out a metropolitan footprint. So fighting forbearance without any forward planning is, in my opinion, a fool’s bet.  I often say never rely on anyone inside the beltway for your business viability … never. We need forbearance granted sooner rather than later, to reignite our industry infrastructure investment and cure our global bandwidth disadvantage.  A sunset provision for piece-part renting should have been in CA96 if someone would have asked a reasonable, rational, non-ILEC business person for an opinion.
I also disagree that FiOS will not have “real ROI”. Yes, I am a fiber bigot. Growing bandwidth needs in a very short period of time are going to bury copper access by pure physics requiring optical capacity.  Not if, just when.  What is driving this is a chasm today - rich, interactive content is being developed requiring a rich customer experience, and the physics of this experience requires gobs of bandwidth.  Within three years we are talking about 500+ hi-def, uncompressed interactive video programming channels into homes, virtual real-time network based DVRs, GPS enabled content applications … this alone puts the cable companies on the DOA path. Reliability and customer richness of experience is what sells.
Disclosure: I own Verizon stock, and I am long.
Shoot me an email or leave a comment below.
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