Latest Meltdown a Blessing?
November 24, 2008
In my last post, Consolidation in an Unstable Economy, I talked a bit about the choices open to AFS given the economy and that we’re not compelled to sell for anything other than optimal value. That said, we are also pursuing acquisitions as I am most certain the latest economic meltdown will push a few gems to the surface sooner or later.
Some think I am nuts in viewing the latest meltdown as a blessing. I thought I would never see M&A deals like the dot-com bubble pushed to the surface again in my lifetime. But here we go again … marginal companies with highly levered debt are suspect targets as the global economy reels in pain for the next two to three years. I would prefer not to have this blessing as the collateral damage of this meltdown and its innocent victims will be substantial and very unfair. However, I believe Karma wreaks havoc on people involved with over-the-top greed lacking any type of moral compass.
What I do believe will be different this go around is value being placed on hard assets. This meltdown has demonstrated the inability to hold value if you are light in assets and/or primarily paper pushing. Debt lenders have learned a valuable lesson of lending purely against paper-based cash flows. Paper-based cash flows can disappear overnight!
As one with American Indian ancestry, I have often said that those utilizing the ILEC infrastructure have the shallow root base of a willow tree. AFS has built a mighty oak with deep roots. Sure the oak does not grow as fast as the willow, but when the strong winds blow, the soft wood of the willow breaks and falls while the mighty oak remains. When hurricane winds blow, the willow will be ripped from its shallow roots, yet the mighty oak remains. I will have passed from this earth and the mighty oak networks we have built at AFS will remain for decades beyond my departure. The economy can blow its harsh winds at AFS, and this mighty oak stands.
Wall Street has little patience for growing oaks over willows. I will let you decide if the oak or “Wall Street willow” is more reliable, predictable and enduring.
Shoot Dave an email or share your comments and opinions below.
Consolidation in an Unstable Economy
November 21, 2008
With an unstable economy, we’re going to see more consolidation. Who do I see partnering and conjoining in all this?
I am expecting more M&A to emanate from foreign entities such as Reliance Telecom, Deutsche Telecom, T-Mobile, etc. What you will see, given the financial mess the world is in, the consolidation will be driven and valued on hard fixed assets. Carriers of the rental or co-location genre will get heavily discounted as broadband demand continues to grow and outstrips the need for or carrying capacity limitations of copper loops, T1, DSL, coax and SONET/ATM.
So what does that mean for AFS? What are AFS’s plans in this arena?
I have come to find that those out looking to acquire travel like lemmings. For example, if all the EBITDA multiples are 7x, then everything must sell at 7x. I am sorry to point this out to public shareowners, but this is as sophisticated as due diligence gets with some Investment Bankers. So a company like AFS that is growing, profitable and has probably the lowest churn in our industry can afford to wait until the lemmings move back up the scale. Companies not similarly situated, you get what you can when you can get it.
AFS is somewhere between a number of options, and as I write this, the option I prefer is management buying AFS from our existing investors and moving forward from there. We have often received unsolicited offers or inquiries of interest on a regular basis. Any decisions made will always be made in the optimal value interests of all our shareowners. As I stated earlier, there is no compelling reason to sell for less than optimal value in our case.
More to come on all this…
What’s your take on consolidation and the state of the economy? Shoot Dave an email or post a comment below.
Growth in Backhaul and Data Centers
November 18, 2008
I was asked to speak to the growth in backhaul demand as well as what we’re focusing on at AFS relative to that and other areas of opportunity. With the economy in a state of flux, we are seeing two areas of continued growth for all optical services: wireless backhaul and data centers.
Wireless backhaul continues to grow at double digit rates as more and more data IP applications get deployed wirelessly. We are building fiber to towers for wireless carriers. Outside of the demand, the fiber to the tower by AFS does two things for wireless operators. The first, we are not the ILEC, so you are not funding AFS to steal your customers. The second, fiber access is the most prudent, reliable and future proof way to go given escalating demand. However, what I am finding amusing is that certain carriers are getting snookered by believing copper bonding is a solution.
My reality check: AFS has done copper bonding as a test in one of our markets. Bottom line: we have ruled copper bonding out. It is only as reliable as a copper loop is until the next rain storm, signal dispersion ratio and its distance limitations. At AFS we go out of our way to avoid copper Type 2 anything. Some data: on our networks where we have some copper Type 2’s, over 95% of our service alarms per month are from these Type 2 circuits. Our end-to-end, all fiber enabled customers have had 100% service reliability since our inception eight years ago. At AFS we deliver on-time, and our networks are highly reliable. I see no use changing to copper bonding and risking our business reputation on ILEC copper pairs.
The second area of substantial growth is data centers. Enterprises and data center owners are recognizing the importance of having diverse optical network connectivity coupled with ring-protect fail over, circuit-protection and card level redundancy. Enterprise customers have learned that fiber to the data center which is diverse is a necessity to even enter a data center. It wasn’t long ago where the assumption was that the transport already exists at a data center placing the cart before the horse. On-time delivery, network reliability/diversity is very important to customers of data centers.
Shoot Dave an email or leave a comment below.
Guess Who’s Coming to the xchange magazine Blog?
November 14, 2008
You guessed it. This month I started a guest blog feature for xchange magazine on xchangemag.com. I posted my second xchange blog entry today entitled “Two Topics, One Conclusion” in which I wrote about how forbearance can help solve the fiber glut myth that exists. It also continues my commentary on the case for forbearance and answers a recent question I got:
“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?”
Here’s an excerpt from my post on the xchange blog:
Forbearance is the right tool to increase investment into local fiber optic infrastructure. This local fiber infrastructure is much needed to surpass today’s basic copper broadband to make the U.S. globally competitive in an array of industries.
As a result of being granted forbearance, ILECs will likely raise wholesale prices, as they should. This will generate profits for some, and for others, grant a timely death or consolidation. But as profits rise and regulatory certainty of forbearance manifests itself, then and only then will investment groups have an interest in entering the highly fixed cost business of local market competition on a fiber access platform. The worry that the ILECs will price everyone out of business is just a worry. Even the craziest of ILECs will recognize that if they get out of line, soon they would face regulatory scrutiny again. If anyone knows the touch point for monopolistic behavior, it is the ILEC. The last thing they want is more regulation when they have the control to avoid it. Control – understand that is what the ILEC is all about – from there, design your execution strategy.
Forbearance can also be a managed process. It does not necessarily represent a light switch. There can be safeguards and indices built into the process. But clearly, we need a sunset provision whereby all gloves are off the ILEC within five years. A five year sunset provision would mean that CLECs will have been given 17 years since CA 1996 to figure things out for themselves. Having such a sunset provision would clearly signal to investors that making high-cost investments in local fiber optic infrastructure is a value proposition and a long term advantage. Imagine if we had an eight-year sunset provision at the outset in 1996 – we would not be in the current mess. However, no one back then asked the non-celebrity types about regulatory policy – what could they possibly know? After all, they are from outside the beltway.
Is Dave right on or way off? Shoot Dave an email or post a comment below. You can also follow Dave’s xchange blog.
Latest Peering War
November 13, 2008
I’ve received several great questions via email recently — thanks much to those of you who are participating in the discussions in this forum, both with your ideas and your questions. Here’s a question I thought may be of interest to you.
What do you think of the latest peering war between Cogent and Sprint?
In one statement: Here we go again. It appears each time there has been a publicized peering dispute, Cogent shows up. I would feel different if we had the likes of Level 3 or a Global Crossing having disputes with others, but they don’t. All I can speculate upon this time is what Cogent stated previously about a drop in internet traffic on their backbone.
They made this admission on their last quarterly call. If the traffic drop is severe enough, it would cause an imbalance between carriers resulting in Cogent traffic being carried for free in a load sharing arrangement. What would drive traffic to fall? Well, if Cogent is the lowest priced provider, perhaps the theory of elasticity of demand just isn’t working. As the theory goes as you lower your prices, usage demand rises. Other carriers have not reported a drop in traffic demand albeit priced higher that Cogent. Other issues can affect traffic loss as well – things like coverage or network reliability. I don’t know if reliability is a problem for Cogent, but what I do know is that it is quite typical in telecom to get what you paid for.
Next quarterly call, let’s see what Cogent reports on churn and their traffic patterns.
Shoot Dave an email with your take, or post a comment or question below.
AFS Philosophy
November 10, 2008
I departed last week from telecommunications news and commentary to thoughts on choosing your attitude, individual contributions and personal excellence. I included a list of 10 expectations we have of the AFS team. These were surprising to some of you because telecom isn’t known for setting high expectations for its internal audiences. You may be even more taken aback by our business philosophy, which we communicate and reinforce to our team at every opportunity.
AFS Philosophy
We are in business to make a profit
We are customer centric; we solve customers problems (pain)
We are easy to do business with
We compete by being faster and more reliable than competitive alternatives – constantly improving
We want relationships with our customers, not transactions
We are a knowledge organization
We effectuate process to speed things up, to lower our costs and improve value delivery to our customers Hiring right is our most important process
We are one team united – internal politics are considered a cancer and counter productive at AFS
We have direct, open and honest communications amongst ourselves with full disclosure
Remember: the softest pillow is a clear conscience.
Dave
Share your thoughts and ideas about business ethics, philosophies and expectations. Shoot Dave an email or post a comment below.
More on Expectations
November 5, 2008
I wrote an entry the other day on Thank Goodness Its Monday and referenced #10 on our expectations chart, “Be responsible for your own happiness.” Well, a funny thing happened. It created some curiosity, and some of you inquired as to what the other nine expectations were on the chart so I thought I’d share the full list.
At AFS, you are expected to
- Maintain highly ethical conduct in all your work and dealings.
- Be a self-starter capable of your position and responsible for your professional growth.
- Think like a business person first and always in solving problems.
- Be creative and innovative to lower our costs, increase our value to customers and to differentiate AFS
- Be a team player 110% of the time
- Be personally accountable to results
- Understand our business, strategy and focus
- Communicate, communicate, communicate – don’t assume anything. Trust and verify.
- Document external conversations/understandings.
- Be responsible for your own happiness.
And there you have it.
Shoot Dave an email or leave a comment below.
A Little Prognosticating on Election Day
November 4, 2008
Several of you have asked me for my take on politics, and while I won’t get into any specifics about the candidates or their widely publicized policies on taxes, health care, defense, etc., I will throw in my two cents on how each leader might affect telecom.
First of all, I don’t see telecom high on either candidate’s priority list as a core, burning issue given that they’ve got bigger fish to fry with the global financial problems and growing deficits in bailing out the bad characters (who should be going to prison). I would not expect anything of note to emerge until after the 2010 mid-term elections. I do see both parties finally figuring out that we are woefully behind in real broadband globally and that DSL, T1, DOCSIS and copper loops belong in the Smithsonian.
And what of the FCC leadership? No matter who wins the Office of President, there will be a transition period. I don’t see a substantive change until June/July 2009. If I were handicapping the next Chairperson, for the Republicans I would suggest Maureen McLaughlin and for the Democrats Julius Genachowski. McLaughlin because she is not controversial and would have an easier go of an appointment approval dominated by the Democratic Party. Genachowski, a friend of Reed Hundt and law school pal of Obama is my other guess.
Whom I can assure you neither party would appoint as FCC Commissioner is yours truly. I have no party affinity and view telecom on a basis solely as what is good and needed for America in a global teleconomy. I am too pragmatic to work inside the Beltway.
Is Dave right on the money or do you think Dave’s out to lunch? Send your predictions and comments his way.
Thank Goodness It’s Monday
November 3, 2008
At each AFS team huddle I often refer to point #10 on our expectations chart — we are each responsible for our own happiness.
This video clip is on message.
No company is going to be happiness candy land. Your happiness in life is an individual responsibility, while at the same time contributing indirectly to the happiness of others around you.
My goal is that I want the same person showing up to work just as he or she is at home. I have been around too many Jekyll & Hyde situations … thus my belief in business casual and no ties. We don’t want or need a costume party of facades daily at work; we need authenticity.
Dave
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