American Recovery and Reinvestment Act of 2009
February 27, 2009
Though I’m not affiliated with any political party, and have been extremely busy as of late, I keep getting prodded to make a comment or two about the oodles of dollars flowing in from the Stimulus Bill.
Right or wrong about the package–it’s a lot of future debt…and I’m not comfortable with the speed in which it was enacted.
What remains missing, in the overall scheme of things, are the fraud and violation of fiduciary duty criminal charges. The longer the Department of Justice waits, the more time the Real Smart Guys can hide assets.
My overriding concern with the “funds” is that, within a few years, we will find ourselves with millions of dollars in fraud and abuse. Let’s face it-–money will flow to political cronies and schemers, who will eventually surface in future years as flat-out criminals. I am not psychic. It just seems to be an acceptable norm in America (think Fannie Mae and Freddie Mac).
Hell, if you can get a Cabinet post or Congressional seat without previously paying your Federal income taxes, what are a few misplaced bucks amongst friends?
The Telecom piece of the pie has more mystery at the moment. The Rural Utilities Service (RUS) portion for RLECs is pretty straight forward. The RUS has been conducting programs for years, so they are applying existing “rules.” RUS history on these loans has had a default rate of 30%–and that’s after the RLEC audits where RUS funds were used to pay dividends and for other non-qualified uses of the loan/grant programs. I expect history to repeat itself.
The other piece (non-RLEC) of the Telecom slice is being administered by the NTIA. The NTIA is commencing meetings next week to receive input on “various issues” and definitions of the program. At this point there is more unknown than known.
Yes, yours truly will be traveling to the beltway in the next week or two to express my views and provide input. Quite frankly, I just want to be on the record for posterity if some pink elephants enter the room and get ignored.
Sorry Level 3–You’re Damned if You Do…and Damned if You Don’t…(Part 2)
February 19, 2009
After explaining the response to Level 3’s recent financial reports, Dave expressed his sympathy in the previous post, “Sorry, Level 3—You’re Damned If You Do…and Damned If You Don’t…” Here’s some more on the topic:
Level 3 CEO, Jim Crowe is either lucky, psychic, or both. Way back, when Level 3 was formed, Crowe intentionally loaded up on all the possible debt he could find to fund his business plan. It was in the multiples of billions of dollars. As a result of this strategy, Level 3 never ran out of cash during the Telecom meltdown of 2001-03.
Well, the “hindsight analysts”, didn’t like this notion and highly criticized Level 3 over the years for having too high a debt load. As a result, they ended up beating the stock down pretty good to show their disdain.
Yet, it appears that having all that cash proved to be a good thing, didn’t it? Jim Crowe appeared to be right. And in their mighty logic, Wall Street then punished him for it.
Sorry Level 3–You’re Damned if you do…and damned if you don’t…
Now some of the more foolhardy have a difficult time understanding the capital expense requirements of real Telecom companies. These are the same folks who are
drinking the Kool-Aid being handed out by “light-asset” telecom companies (read: those that own little to no fiber optic infrastructure or pass off two-strand IRU’s as “fiber route miles.”)
Here’s the cold, hard truth: Level 3 is absolutely making the right call.
Their intent to cut capital spending in order to drive faster to free cash flow positive status is being done so that they can readily finance their 2010 debt obligations.
Really think about it for a minute–if you were CEO of Level 3, would you do it any differently?
If any genius out there sees a different way to play this out, I am all Obama…I mean all ears.
So, here’s the moral of this whole story: Wall Street moves as a herd of cattle or group of lemmings over a cliff (you choose). Don’t rely on Wall Street to differentiate real players from the pretenders.
Think you can handle the truth? Here it is. The value of a company will go up as all boats rise in the eyes of Wall Street.
Trading at 4x EBITDA today? Well, just run a tight ship, then sit back and patiently wait until EBITDA ratio’s are in fashion again. Then, you will suddenly be the Golden Boys of Wall Street. Brilliant!
When the herd moves, all boats rise or fall. It’s no more sophisticated than that.
I am confidant that, in our little niche, eventually the underlying organic demand for bandwidth will separate the real players from those who can’t get in the game.
But in the eyes of Wall Street, I am certain of one thing: we’ll be damned if we do and damned if we don’t…
Sorry Level 3–You’re Damned if You Do…and Damned if You Don’t…
February 17, 2009
Or: An Insider’s Guide to the Constant Bait and Switch With Wall Street.
In my past 10 years as CEO of AFS (as well as in my past lives), I have become all too familiar with the continual dance with the boys on Wall Street to obtain the best valuation for our company. It goes something like this…
We meet with The Real Smart Guys on Wall Street, who proclaim, “Well, you have a pretty good company, but it’s not worth what you think it is today. However, once you get funded your value will go up… “
Once you have your funding, you’ll hear, “Well, I guess that’s good news, but once you have gross margins above X, your value will go up…”
Hit that and you’ll hear, ”Once you have a consistent recurring revenue stream…once you are operating cash flow…once you are EBITDA positive…once your EBITDA margins out perform others…once you hit nirvana of achieiving Free Cash Flow Positive (“FCF+”) and net income positive…and so on and so on…”
It’s always the next thing that will drive value.
I bring this up because Level 3 reported results a few days ago. And The Big Wig Analysts, in their infinite wisdom, are trickling out their criticisms of Level 3.
You see, Level 3 explained that they are cutting back on capital expenditures in order to achieve a positive, sustainable free cash flow positive (“FCF+”) position. The rationale is both reasonable and fundamentally sound: by cutting their capital expenses, their cash flows will increase.
This is something our friends on Wall Street have been asking of Level 3 for years—Focus on Free Cash Flow Positive, baby.
So everyone is happy right? Wrong.
Instead, Level 3 heard catcalls from the very same folks pushing them to focus on Free Cash Flow. Here’s the gist of their criticisms: “Hey Level 3–what are doing making an effort to achieve FCF+ by cutting capital expense? This is just going to slow your top line growth and end up squandering the long term advantage you’ve reaped by always investing in capital!”
I am not making this up.
The truth is, if you are a real Telecommunications company with hard assets, it is capital that drives nice margins, market sustainability, and competitive advantage. Capital has been the growth differentiator in telecom since the beginning of time.
So what is Level 3 to do? Focus on Achieving Free Cash Flow in this economy or focus on sustaining their long term advantage by maintaining leaving Cap Ex alone?
Well according to Wall Street, both are wrong answers.
Sorry, Level 3, It appears you are Damned if you do, damned if you don’t.
I’ll have more to say on this in my next post….
Dear Government: Before you hand out any money for Telecom infrastructure investment.
February 14, 2009
We need you to tell us six things
1) Tell us how you will recognize that this nation needs deep, rational fiber deployments as the priority, thus enabling greater competition in order to drive long term job creation
2) Tell us how you will “Fund” proven companies in the field and not just about anyone showing up with a story
3) Tell us how you will audit the results
4) Tell us how you will audit progress.
5) Tell us how you will NOT fund equipment upgrades for bandwidth that will be obsolete in three years over fiber cable deployments–which have a 40-year life as an economic enabler
6) Tell us how you will NOT fund big carriers who will replace type 2 circuits from the ILECs with a fiber lateral into a building or home, resulting in that last-mile optical pipe being closed to others
Please, tell us…I promise you, we are listening, and patiently awaiting your response.
Dear Government: Before you start handing out money, do a quick credit check.
February 13, 2009
I can think of several CLECs and municipal owned initiatives that are failing because of a bad business model, inexperienced management, or both. Our tax dollars should not be issued to shore up anyone’s balance sheet or prop up a struggling, unproven business model. Funds must be denied to companies that use the “free” business model of service offerings. I have yet to see a company or municipalities offering “free” anything survive
Think “free” Wi-Fi
We need a mechanism to screen company bailouts of marginal companies from new deployments of fiber optic infrastructure by healthy companies
Oh—and by the way–if you have a CEO, CFO, or major investor on a Board that was involved in a network service provider bankruptcy in the past 10-years, funds should be denied (or at least limited) to these entities
Why? Because, if one can bankrupt a company with private shareowner money, I can’t begin to imagine what one would do with your government money, which is not accountable to shareowners. Big sums of money should not go to those who demonstrate a past propensity to spend it, regardless of results
Isn’t that just common sense
I could go on…but, again–no one from your office has responded with interest in my opinion or experience
Dear Government: It’s Time To Use The Battering Ram On The RLEC Drawbridges.
February 12, 2009
It is not an industry secret that the small RLECs are little cash machines, whereby local Kings and Queens have created fiefdoms off of your government dole for years. I think it would be a pleasant surprise within rural settings if these networks were opened to others. I submit that the Rural Local Exchange Carriers, or RLECs, should be required to open their networks to competitors
Technology has solved a lot of problems over the past 100 years, despite what the lobbyists are telling you and your representatives. The 700Mhz spectrum alone makes all the rural sense in the world to deploy within a RLECs footprint for all services–competitively
I favor funding rural regional fiber connectivity, but not the local last-mile RLECs. Get fiber to these rural locations. Competition will follow, especially via wireless
For a moment, however, please allow me to get back on my soapbox and suggest that before issuing funds, you, the government, need to recognize the difference between a carrier that leases circuits, and one who bought an IRU–whereby they do not own physical fiber optic network or route miles of fiber sheaths. We need to be cautious that an IRU, or asset-light wielding carrier, does not get funds to overbuild on top of an existing open access provider per my definition of open access in my initial letter to you, the government—which, by the way, I have not yet received a response–.
Dear Government: Begin With The End In Mind…1 Gb To Every Home in America.
February 11, 2009
I’m sure you, the Government, has heard that that South Korea just announced an initiative to deliver 1 gig of bandwidth to every resident and building by 2012, right
1 gigabit. 1,000 megabits. To every resident. In less than five years
When compared to our current status, where many consider 1.5mb to be a “high bandwidth” connection, it’s readily apparent that we have a problem
We are playing Madden 2009 on-line with the world…and we’re using a dial-up modem.
Please tell me you agree?
Tell you what–let’s scrap these ideas of anything less than 1 gigabit of service…and put America on the same playing field as the rest of the world.
Dear Government: Invest with Those Who Have Proven They Will Use The Money Wisely
February 10, 2009
Now is not the time for an inexperienced start-up to be funded by you, the government. Nor is it the time for a construction firm to take a flier with free money, even though the Congressman may be related to the owner
Instead, it’s important to fund small and existing owners of fiber optic infrastructure
As we have learned from the past, the inexperienced can get irrational in thought, in network design and in fiber cable placement. The players that operate fiber optic networks today–especially those who have not gone bankrupt–know how to deploy and place the fiber, which would give the government more bang for the buck. Any carrier under $500 mm in revenues should not be eligible for funds. You, the government, should desire to create a locust of fiber infrastructure deployments, not just large carriers cherry picking. Robust, local deployments will drive local job creation faster and more efficiently than major carriers hiring a national construction project management firm at an add-on cost of 30% to deploy the same fiber
You, the government, should prioritize the funds to established companies deploying fiber optic infrastructure. Logic says the fiber must be installed before knowledge-jobs can be created around more high-tech boxes and software applications. Once gear and software applications can be attached to installed fiber, then more jobs get created. Until then, it makes no sense to push technology or enhanced services
Will you, the Government, listen…or will you put our tax dollars in the cart before the horse?
An Open Letter to the Government Addressing the Telecom Portion of the Economic Stimulus Plan…in 6 Easy-to-Understand Posts
February 9, 2009
The First Post: Dear Government: Please Define “Open Access” Before You Fix It
Now that the Economic Stimulus Package seems on its way to becoming a reality, the great promise of billions of our tax dollars flowing into the deployment of “Broadband Infrastructure” by the Federal Government is stirring up frenzy. Will we have another boom of irrational Telecom deployments as dumb business people chase even dumber cash handouts
With certain definitions like “open access” yet to be defined by Congress and lobbyists, I have no doubt that a clear, precise definition will not be found
Here’s an idea–let’s try my definition of open access: Owning a physical fiber optic network
If you do not already own physical fiber optic infrastructure, you should not be eligible for funds. The last thing we need are asset-light carriers providing “open access” over an OC-48 circuit they lit on someone else’s fiber, or the circuit belongs to someone else
Have you not yet learned that people will say all sorts of things to get money
Device open access is a myth. Industry standard protocols already allow for device open access. Here’s the question: Is the physical network infrastructure open access to others or closed
Thus, my definition of open access–and eligibility for funds–are for those existing entities that own and operate an existing fiber optic infrastructure. This means the entire sheath, not an IRU or fiber swap. It’s for those whose regular course of business is leasing dark fiber and wholesale capacity within those sheaths to others on a commercial basis thus enabling competition
Given this definition, ILECs, Cable Companies and a few CLECs with closed network infrastructure could not receive a dime
This is fair and opens up competition.
Question Coaching for Harry Homemaker, Enterprise CIOs, and Financiers
February 6, 2009
To sum up the last week and a half of network infrastructure discussion, I’d like to speak directly to Harry Homemaker, Enterprise CIOs and Financiers:
The next time telecom infrastructure comes up, just ask a few questions:
1. If the network is an IRU, who owns it?
2. If the network is an IRU, how many strands are left in the sheath? Will you, Mr. Carrier, be able to get to them if need be? Can you prove it? Can you post a bond?
3. If the network gets cut, who fixes it? Where are you in the queue?
4. What is your fiber count in the local network? When will you exhaust your fiber count due to add/drops, splices and db loss budgets? Do you have extra fiber strand when this occurs? Is your local metropolitan fiber point-to-point, or a ring?
5. When you say you are in hundreds of markets, does this mean you pass through it with a long haul network, or IRU? Or do you actually have an appreciable metropolitan footprint outside of the carrier hotel you pass through in each market?
6. Is your network open or closed to competition? If it’s closed, why? Competition is good isn’t it? What are my options?
7. How diverse is your network route? Can you show me your route compared to other carriers or options? I would not want all my traffic running on the same fiber sheath from multiple IRU’d or resale “carriers” thinking that it’s diverse, would I? We need at least two physically different carriers, don’t we?
8. How many buildings or residents do you pass, per route mile, that are within 1,000 feet of all your fiber routes? Metropolitan routes?
9. How many fiber route miles do you own, or is it an IRU? Are they oceanic? Long haul/ regional long haul? Metropolitan back bone? Access? Please break this out-a pie chart would be nice.
10. Do you consider a town, hamlet, or village a “market”? Isn’t wireless more appropriate in these settings with terrestrial fiber backhaul?
And one last comment for America: All carriers “infrastructure” are not created equal, caveat emptor. Do your homework.
Unless you have a fiber pipe in your building or home already, the next time the subject of telecom infrastructure comes up, make sure your politician understands what and where real telecom infrastructure is and where it is needed.
All communications infrastructure is local. That’s the focus.
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