Difference Between Wholesale Business & Enterprise Business
October 29, 2008
Continuing our discussion on our reader’s main question:
I wanted to see if you would comment on the differences between running a wholesale business vs. an enterprise business. It has been my recent experience that the next gen companies that have tried to combine the two models have had only marginal success. An analogy that told to me is that it’s like running a corporate bank versus a retail bank. The skills of the executive team has to be different with different philosophies on how to build market share taking into account off-net strategies, empowering local sales managers to expect lower margin or longer payback on companies with great long term potential, and how much to invest in SG&A etc.
The issue of retail v. wholesale business management skills is a matter of segmentation and focus. I do believe that you can be a better retail provider if you have wholesale network operating skills and experience to be applied. Someone with purely retail skills, well, there just isn’t much differentiation — the retail side has become a “me too” value proposition. The other nuance and trap of retail is the lust of revenue growth for the sake of revenue growth. The real smart guys on Wall Street seem to focus their attention on a company’s revenue growth and growth prospects and think everything else is secondary. Then there are the CEOs in retail growth for the sake of testosterone/estrogen buzz of having a big revenue business with a wish of reading about themselves in the Wall street Journal with a dot matrix photo of themselves.
Silly us at AFS, we focused upon long term sustainability and profitable growth — one building at a time.
Why we don’t like retail at this time is simple. There are no barriers to entry. Anyone can get a CLEC license and start reselling, ILEC renting or what have you doing nothing more than competing on price. Retail means lots of customers, lots of small ARPU’s (we average $6000 ARPUs), lots of sales people, lots of back office complexity, lots of customer hand holding and lots of churn. Very costly and risky.
Eventually this will change as bandwidth demand outstrips copper facilities rendering most retail models obsolete. Having direct building or residential access is the long term game. Most retailers today have no long term position or underlying staying power. The more a competitor to an ILEC is dependent upon the ILEC, the greater the risk of not being here in the long run. Anyone relying on the Federal Government by way of the FCC or Congress is, in my informed opinion, a fool. As we are learning via the financial collapse we are facing, Congress is for sale and non-ILECs don’t have the cash collectively to be noticed. This is a reality of which so many are in denial.
The bottom line: if I were an investor in a “provider” that is trying to straddle retail and wholesale — I would rethink that investment, refocus the business on a winnable, defensible niche or change out management, or at least have management get a drug test.
Today, our (AFS) position in the value chain is one of opportunity. We can inch up this chain toward retail as the economy and opportunity presents itself. Our high fixed costs capital expenditures are behind us and we can lever very profitably as driven by demand.
My opinion, the present state of our economy is going to be brutal on highly leveraged, highly ILEC-dependent retail companies.
Agree? Disagree? Weigh in by shooting Dave an email or sounding off with comments below.
Drinking Your Own Kool-Aid Can Be Dangerous
October 27, 2008
Got another email the other day that I wanted to share. Keep ‘em coming.
I’m an investor in telco, all “next gen” type providers, and I wanted to see if you would comment on the differences between running a wholesale business vs. an enterprise business. It has been my recent experience that the next gen companies that have tried to combine the two models have had only marginal success. An analogy that told to me is that it’s like running a corporate bank versus a retail bank. The skills of the executive team has to be different with different philosophies on how to build market share taking into account off-net strategies, empowering local sales managers to expect lower margin or longer payback on companies with great long term potential, and how much to invest in SG&A etc. Perhaps if you feel so inclined you could post a few of your thoughts in this area? Regardless, thanks for your comments I enjoy them very much (although I don’t agree with all of them!)
Fair enough. I don’t expect everyone to agree with my comments that’s what America is all about – freedom of expression. However, when I do post my opinions, they are informed opinions and typically based upon experience and results. I don’t spend time wishing the way things should be, but rather I deal with the reality of each situation that presents itself to me.
The greatest poison competitive carriers face is trying to be all things to all prospective customers. So far, after 100+ years of regulation, only the ILECs have demonstrated that this can be done. For the life of me, prior to the telecom crash, the thought that a company capitalized at a billion dollars of equity and debt is somehow going to be a national threat to the ILECs was ill conceived to me – but not the “real smart guys” on Wall Street.  The real smart guys poured billions of dollars into hundreds of CLECs after drinking their own Kool-Aid. (My apologies to Kraft Foods, the makers of Kool-Aid.)
Here at AFS we have management very familiar with retail telecommunications. So much so that we purposely have avoided the retail side of the business and have focused on our business – underserved second tier markets, data, IP access, on-net buildings, 10 meg + demand and owning the local fiber optic infrastructure. (Note: given the current economic uncertainty, our model has us positioned quite well in a McKinsey nine-box matrix against most other competitors.) This has been our choice since day 1 and given that we are facing yet another downturn, our position is capable of weathering the worst of storms.
More to come soon on my response to our friend…
Have a question, comment, complaint or otherwise for Dave? Shoot him an email or post a comment below.
As Long As I Have Your Attention…
October 24, 2008
As long as I have your attention, let me address the broader economy relative to AFS. Here is what I have communicated to our team regarding the current financial conditions:
This economic downturn is much different from the Internet bubble of 2001-2003. Telecom is not at the center of this downturn. We are experiencing a combination of Congress, Wall Street, Hedge Funds and Financial “Banks” being caught up in a lending house of cards relative to the mortgage industry. If you want a life lesson out of what is going on today, just remember this: there is nothing immune from economic business cycles … nothing. Somehow the real smart guys (RSGs) believed housing prices were going to keep rising forever and people were afforded mortgages (Fannie Mae and Freddie Mac) on homes without having a job, address and/or a down payment. The RSGs in Congress, Wall Street, Hedge Funds and “Banks” in combination drove the collapse of our financial institutions.
Also please note, whenever there is a downturn based upon over exuberance, you will always find Wall Street’s finger prints all over it.
Compared to the Internet bubble, today AFS is a much different company and in a better position than most. Our constant drive for quality customers, high bandwidth customers and profitable customers is what has and will continue to sustain us. Yes our mantra – deliver on-time, on-budget, reliable services and proactive customer services, is what has sustained us and will continue to do so. We do not need to change a thing.
Those in telecom that I believe face great exposure are those firms serving the low end of the market via copper loops, T1, IADs, VOIP or special access. Because this segment of the market relies on the ILEC for network, as credit gets tightened, a number of these firms will start doing something real dumb to raise near term cash to pay the bills … they will start cutting prices. The problem with this strategy, outside of its lack of sophistication, is that their Cost of Sales via the ILEC is fixed. As they price war each other, it becomes a death spiral as every dollar in price dropped is a direct dollar in margin dropped. In addition, this segment of the market historically churns at a very high rate in a down business cycle as small businesses cope with declining demand or lack of capital. Thus, the situation is a one-two punch for those serving the SME segment via the ILEC infrastructure.
As you know, I constantly encourage everyone to be creative in our business dealings whether to increase sales, lower costs or streamline processes to the benefit of customers. If we had a conforming business model and culture like other telecom companies to the benefit Wall Street, we would not be in the growth position we have experienced. My opinion is Wall Street and investors look for conformity to gain comfort. This is often referred to as the lemming culture. Such conformance may provide a few relative data points, but in my opinion, diversity of ideas and talent gets stifled whenever it is okay to look and act like everyone else. It is fair to say, and it’s not hindsight, that our contrarian culture and demand-driven strategies have greatly benefited our investors, customers and employees. No one is here to satisfy me – we are all shareowners.
As we go forward, I encourage you now more than ever to get creative to streamline processes, increase sales or lower costs to the benefit of our customers.  This credit crisis is going to get butt ugly. Cash is king. The more cash we have on our balance sheet, the better we can serve customers, weather this storm or take advantage of opportunities that present themselves.
Do you have a take on the financial crisis? Post a comment below or shoot Dave an email.
Just for Grins
October 23, 2008
Just for grins, when I originally sought funding for American Fiber Systems in 1999, I had a business model that was purely demand driven. The model was based on a fundamental premise that in the long run, if you do not own and operate your own local fiber optic infrastructure but rather rely upon your largest competitor to stay in business, well, it is simply not a smart idea.
Once again, it’s 1999 – my view based on experience, you cannot rent or lease your way to sustainable economic success through the ILEC. The more you depended upon the ILEC pieces and parts, your ability to innovate, time-to-market, provision and compete is limited. When your largest competitor, the ILEC, basically controls your costs and has expertise in regulatory and judicial matters, I don’t see this as a win-win formula … but I could be wrong.
Anyhow, the reason I bring this up is purely for grins. In 1999 I pitched many investment banks, a/k/a “experts,” for funding, Lehman Brothers and Bear Stearns amongst them. Across the board, I was told by the Wall Street experts that my demand-driven, slow role, metropolitan fiber based business model was not attractive and not fast enough. They were critical because I had an incremental, success-based funding model. I was told that unless I was raising $500 million equity and $300mm in high yield debt (heroin), I had no idea what I was doing.
Thank god I had experience, common sense and thick skin. I ignored them and eventually went the venture capital route. So as I watch Lehman Brothers and Bear Stearns fade from our memories … with more to follow … I guess I will let the record speak for itself alongside the business moral values of some CEO from upstate New York who had no idea in 1999 how to build a business according to the big Wall Street firms.
Shoot Dave an email or include your insights and questions below.
You Want the Truth?
October 22, 2008
This post is part II in a series on telecommunications forbearance and getting on the bandwagon.
If you want the truth, here it is: Most asset-light competitive CLECs started out all having the same business plan — targeting a 12% market share in each market by colocating, renting, #5ESS switching, UNE-P, UNE-L, etc. If you have 30 competitors in the same market, all with the same business model, the odds of capturing a 360% market share is illogical. In addition, few will admit it, but back in the 1990s, the CLEC fantasy was to build out with a #5ESS and rent — look like an ILEC and be acquired by a long distance carrier for doing so. Well, who would have predicted the collapse of all the major long haul carriers that were consolidated by the ILECs and blessed by the United States government? Perhaps, just perhaps, if a few Wall Street experts thought a little longer term, that maybe recommending company stocks that actually owned local fiber optic infrastructure, that built it out slowly and selectively, were a better bet than 30 look-alikes vying for 12% market share. I must be nuts; Wall Street can’t get past a 90-day horizon, so my conjecture is a pure indication I am off my meds today. In assuming any type of long term fiduciary duty on the part of Wall Street — is insane.
What some more truth? Investor experts of the 1990s flocked to celebrity-like CEOs and CFOs that showed up with a CLEC plan. The majority of these CEOs and CFOs came from the long haul or old CAP business with great claims to fame. The truth is, running a local metropolitan network, in any form, is 10 times more costly and complex than any form of long haul or CAP networks. Many of these CEOs and CFOs gorged themselves on investors’ cash while they were in reality getting on the job training at shareowners expense. Pick any CEO that went bankrupt… you will see what I mean. Check out any of their current resumes – they won’t say they went bankrupt, they will use the word “acquired.” Though having your assets or business “acquired” in bankruptcy is a small detail they leave out. Yet, the insanity continues. Why the hell would anyone hire a CEO or CFO that destroyed a company and lost everything while doing the lemming waltz with Wall Street? Strangely enough, it happens. I guess if you didn’t destroy shareholder value, you are not “experienced” enough for Wall Street.
Still more to come on this topic. I’m pacing myself…
Is Dave right on or do you think he’s missed the mark? Tell him so. Shoot him an email or give him a piece of your mind below in the comments section.
Part I: The Forbearance Bandwagon
October 20, 2008
We took a break from forbearance for a bit – but I was asked by Rob Powell over at TelecomRamblings.com a while ago to make a case for forbearance, and I didn’t want to leave that question unanswered. Here’s what he said:
So Dave, to get me to jump off the fence and onto your bandwagon, can you answer this question? If all such forbearances were granted and the government stops watching, what will stop the ILECs from doubling prices where there isn’t competition and cutting prices in half where there is - thus ending the business case for anyone else to hook up more buildings with fiber? In other words, does granting forbearance necessarily lead to more choice?
Let’s have a reality check. Telecom is a high fixed cost, fixed asset business. For the life of me, I can’t figure out how the self-proclaimed “National CLECs” think for a billion dollars in debt/equity that they can compete on a national basis with an ILEC that spent tens of billions of dollars over 100 years just to get where we are today. Please no whining about guaranteed rates of return – it bolsters my argument as to why there should have been zero incentive for any “rational CEO” CLEC to have bought/rented anything from an ILEC.
Before we are ever going to see this alleged plethora of highly rich, user defined applications, there is an inherent need for bandwidth. And I am not talking about “basic” broadband that is dominant today. I am talking about 50 megabits ubiquitously within three years and 1 gigabit ubiquitously within ten years. Sorry to say, but this requires fiber, not rented copper. Inside baseball – don’t tell anyone – the ILECs know the need for fiber. That’s why they are spending over $30 billion annually on new builds though, according to Wall Street experts not so long ago, we had this HUGE fiber glut. As of today, does Wall Street have any credibility with anyone besides themselves?
Like Lehman Brothers, Bear Sterns and more to follow, let telecom wholesale prices rise by way of forbearance to weed out the weak balance sheets. Those running a telecom business on paper (like Wall Street has) by colocations and renting – let this brilliant management group demonstrate their abilities to compete without any more government supports. The CA 1996 is 12 years old; do the asset-light CLECs deserve another 12 years to figure things out? I can’t help it that they took their investors money and went 100 miles wide but an inch deep. Perhaps, like a few of us have done, if they decided to go 20 miles wide but 10 feet deep, I would not have to point this out. However, these CEOs had choices to make over the past 12 years; they had a business plan that gave investors a choice to invest or pass. It is time to lift wholesale rates vis-à -vis forbearance.
Stay with me. Much more to come in this dialogue.
Do you want Dave to shoot straight on another telecom topic of interest to you? Shoot him an email or post your comment/question below.
Network Reliability:You Get What You Pay For
October 17, 2008
I mentioned in an earlier post that I would throw in my two cents on this question we received:
Question about 100% on-net network uptime for all optical customers. Does AFS have any on-net bldgs that are stubbed (no dual entrance)? AFS has never had a fiber cut to a stubbed bldg? AFS has never had ANY outage for an on-net all optical customer?
First, to have an all-optical customer, you must own a metropolitan fiber backbone that is configured redundantly. Renters have a difficult time doing this. An all-optical customer chooses to be an all-optical customer – it is the highest form of redundancy offered. We offer all sorts of scalable options. The customer chooses this path as they recognize any SLA payment is not worth the cost of late delivery, service affecting outages, budget over runs and excuse spinning customer service. An all-optical AFS customer enjoys access redundancy, network redundancy, circuit redundancy and card level redundancy. And it is not cheap, but depending on the enterprise — i.e. hospitals, government, financial, casinos — that require 100% uptime, it becomes more of a corporate risk management issue than a low price issue from purchasing.
Yes, AFS has had outages, but given the redundancy we offer, this customer set has never been affected. They usually don’t know there is a problem. For example, if we have a fiber cut, we call the customer to let them know, though the ring configuration they are on maintains traffic load integrity. They are grateful we called. As I have said over the years, connectivity is perceived as a price-driven commodity until it does not work. Reliability — you get what you pay for — today, tomorrow and 20 years from now. The key is customers needing to know what to ask in separating the lying rats from the straight shooters. If you would like, I wrote a white paper on network clouds that gives you the ammunition and questions to ask a prospective carrier pitching you their solution. The paper assists in smoking out the lying rats. It can be downloaded here and feel free to send it to all your friends.
On stubs, I cover this in the aforementioned white paper. You are describing a collapsed lateral, whereby the provider dedicates four fibers on the same lateral into a building dedicating one pair to a port and another pair to a port on the same box or redundant boxes. The box running the ports has no idea the fiber pairs are on the same lateral and the customer believes they have redundancy until such a time that lateral is cut. At AFS, we don’t sell collapsed laterals as a redundancy feature, some lying rats do, and some don’t disclose the risk. We explain to customers that choose to be all-optical the requirement and cost to have dual fiber entry into their building. Once again, those in corporate risk management recognize the value over low price.
Shoot Dave an email with any questions or comments on this post or fill out the comment form below.
The Secret of Our Success
October 16, 2008
We were asked recently, “What is AFS’s compelling value proposition” (the case of competing carriers such as LVL3, XO, Verizon and ATT)? You can read the post leading up to this one that explains the full question here.
I will share with you the company secret that has made us successful. Do not share this with anyone else. Here it is: (1) We deliver on-time all the time for the past eight years; (2) we always meet the quoted budget for the past eight years; (3) our networks work and are highly reliable – we have all optical customers for eight years who have never experienced a network failure; and, (4) when we do have a problem, we are proactive with the customer in telling him or her what is going on without any spin. Funny thing, customers can tolerate things if you are honest with them. That’s it … the secret to our success. To make it a matter of fact, we are so good at these four points, we are the underlying carrier for most carriers in our markets.
Pricing you ask? We don’t price below the ILEC because of the four points above. We have charged premiums to carriers who are very willing to pay it as our track record has given them the confidence over eight years that we deliver on-time, on budget, reliable service and proactive customer communication. I have had CEOs of our carrier customers tell me they know they are paying a premium but they also know we are not lying rats (plus we don’t steal their customers).
By the way, our sales organization is also a very important part of this mix. They know the value we deliver, and they sell that value. If you are looking for a low priced transaction based “partner”, we are not it. Our sales people are more than happy to leave prospective customers with other carriers that want low price or wish to lose money on the service requested. We have had many low price buyers return to us after a few rounds with the lying rats. Our sales people are business people first, and they do and will say “no” to a bad deal. I love our sales force. It’s all about the love at AFS since 1999.
Added tidbit: That “free” business model and selling below costs has yet to work for anyone I know.
My Recon from 1999
October 14, 2008
So we’re continuing our discussion on how AFS would handle a sales situation in competition with LVL3, XO, ATT and Verizon, given the hypothetical scenario in which we’re all supposed to have “similar” SLAs, provisioning and pricing. I ended my last post on separating fantasy from reality by saying that I had done my own recon in 1999 instead of relying on the information from the providers and the media.
I decided, using my brain, that I would call the major construction firms in the United States that would be deploying such fiber and pose as if I had the crazy equity and high yield “heroin” money that was prevalent at the time. After capturing their interest in greed, this is what I found out for myself:
- The concentration of metropolitan fiber builds were occurring in the top 12 US markets, not the 150+ advertised.
- On average, there were 12-15 independent fiber networks being deployed in each of these markets. Metromedia FiberNet aka MFN was a king pin fiber builder in these markets as well back then. [Bill LaPerch CEO of AboveNet has done an outstanding job reconstituting the company under the AboveNet moniker.]
- The ILECs were deploying fiber as a defensive move in these markets as to fend of competition given the crazy investment cash flow into the CLEC sector.
- The cable companies were deploying local fiber in preparation of the telephony-meets-video collision coming down the pike.
- When we had them back in 1999, long distance companies such as original herbs & spices AT&T, Bernie’s WorldCom, Sprint, Level 3 and others were busy deploying in these markets.
- Many of the builds were becoming joint builds – sharing the trench – to save capital dollars driven by bean counters or forced trench sharing by municipalities when carriers would cut power lines, water mains, etc., in their lust to land grab.
My point? If I believed the lying rat websites, brochures and PowerPoints, I might have never started AFS, or I might have gotten drunk on all that easy money. Believe me, the latter would not have happened – all the smart guys on Wall Street – like Lehman, Wachovia, Merrill Lynch, Forstmann Little et al – told me point blank that I was clueless with the AFS demand-based business model to build out fiber, a focus on underserved second tier markets and the audacity to suggest incremental success-based funding. Why does that Elton John song lyric keep playing in my head, “I’m still standing after all this time”? But what the heck, what does someone from upstate New York know in relation to all the Wall Street, Ivy League spreadsheet sophistication and “deal makers”?
So I have taken the long way to explain to you that none of those carriers listed (and others) are homogeneous in delivering services. None. We are all different. Do your homework. They all might make the same promises, but the challenge for customers remains, in the worse of settings, to separate the lying rats from reality.
What do you think about this post? Shoot Dave an email and tell him. Or better yet, post your ideas and questions below.
Taking the Day Off
October 13, 2008
I will be out of the office Monday, October 13th. This is Columbus Day. This is when Columbus discovered the American Indians … all six million of them.
I’ll be back in action tomorrow. If you want some good reading between now and then, check out this article.
Shoot Dave an email or post below to throw in your two cents, ask questions or even disagree.
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