I’ve Been Workin’ on the Railroad…
November 24, 2009
I was recently struck by the Swine Flu, which had me tied up for a few days.
Since I own (rent – pay attention FCC) a DVR, I eventually found time to review a few things of interest.
On November 16, Warren Buffet of Omaha fame was on the hard hitting Charlie Rose Show. I like listening to Mr. Buffet because he has a very practical, common sense way of looking at things. If you can somehow see this episode, it’s worth a watch.
Anyhow, my new friend, Warren, spent some appreciable time talking about the recent purchase of Burlington Northern by Berkshire Hathaway for a cash sum of $26 billion.
Considering the constant analogies of railroads to fiber optics in Telecom, Warren had a bit of wisdom to share in addressing his purchase. I found his insights interesting and perhaps some company valuation experts in Telecom may care to comment on his observations.
Paraphrasing points:
1. He paid a premium for Burlington Northern and he knew he it –it’s a well run company. He will pay a premium for a well run company.
2. The value is in owning a UNIQUE hard asset as in this railroad line. Paying the premium for it was not bothersome at all per Warren. “I will get great returns.”
3. Owning the railroad tracks is a more efficient way of moving goods around – today one gallon of diesel fuel will move a freight train 400+ miles very efficiently.
4. Railroads are going to be needed for at least the next 100 years, he joked.
5. It would cost someone well over $200 billion now to build or replicate the tracks/footprint of Burlington Northern, plus the time to do it.
6. He places great emphasis on long term value of owning a hard asset over many years, given what it can produce over long periods of time and its uniqueness.
7. He does not invest in things he can’t understand in simple terms.
For all my lemming, vanilla EBITDA multiple, non-differentiated company valuation experts, all-look-alike bankers, bottom feeders and those similarly situated – please explain to me why Buffet is wrong? In parallel with Telecom?
1. Is a Telecom firm that owns its tracks of less or more valuable than one that does not? How about if the tracks are unique? Diverse?
2. How about if they own the tracks and the railroad is well run?
3. Who can carry more freight? A Telecom firm that owns the tracks or the one that does not? Which is more sustainable? More innovative?
4. How long can all Telecom firms be valued in a similar EBITDA multiple range when some are running a railroad with no tracks, some by riding on the tracks of others and some are running their railroad by government order over established railroads like the ILEC? Doesn’t each of these have differentiation, limitations and barriers in comparison with one another? How about long term risk to non-track railroads – someone who owns a railroad with tracks sells it to another railroad that has tracks except the new owner says: “No one rides my tracks anymore but me?”
5. Is there value in owning unique hard assets as Warren suggests? Or is virtual ownership less risky? Or is accounts receivable the only value? (Warren has done pretty well with the boring hard asset investing logic – don’t ya think?)
6. Should Warren have tried to steal the tracks by just valuing the Burlington Northern Business financials with no consideration for the hard assets – the tracks? Would such a move affected is reputation? Should Burlington Northern just sold the “business” but not the tracks?
I have more … but the aforementioned quick six just come to mind.
Like Warren, I think Telecom and the need for Telecom hard assets may be around for the next 100-years as well. Over 100-years of value if you own the tracks in my opinion … not some trailing twelve-month EBITDA multiple lacking any sophistication relative to the economics, strategy, positioning, infrastructure location and competitive advantage by owning the tracks. I think, like the railroads, it’s not about valuing for next quarter; it is about fair value based upon the infrastructure that makes up the railroad, that makes it different and less risky…which seems to get ignored or, unless every Wall Street analyst is, lazy.
I enjoyed listening. Not once did Warren bring up what the spreadsheet says or what the experts are thinking. I actually have an impression he actually thinks for himself based on whatever data and sources he uses. Imagine that …
If you think Warren was nuts for paying a premium for Burlington Northern perhaps some history to validate his wisdom. Many thought he was nuts in the early 1980’s after the Carter administration had collapsed the economy. Warren was out there buying all sorts of hard asset pipeline companies – the well run ones – at a premium. He made a fortune after doing so over the following decades.
Pipelines – another term often tied to fiber optic Telecom. How interesting.
Those Were the Days…
November 19, 2009
Not too long ago we had our last Telecom hype of over accelerating bandwidth demand, which resulted in a major land grab for fiber optic networks. Build it and they shall come…
Remember that? I think it was the late 1990’s…yes that was it…how fast we forget our lessons learned.
Tens of billions of dollars were lost in investment and hundreds of billions in paper tiger market capitalization of land grab companies who quickly found themselves in Chapter 7, Chapter 11 and, for a few brilliant CEO’s, Chapter 22. They found themselves singing the Archie Bunker song, “Those were the days ….”
I have been around Telecom for awhile, and one thing I can tell you for sure is that the understanding of demand (especially Telecom service demand) is not in the blood of most Teleconomists. For example, the term “Convergence” – I have heard that one since at least 1983, before demand materialized via IP in the late 1990’s (albeit over copper using IAD’s). As an out-of-the-closet, admitted fiber optic bigot, real convergence has yet to occur where ranges of rich data may be accommodated/scaled without the limits of a copper loop.
My most favorite term of late is “IMS” or “Internet Media Server” and the various derivatives thereof. This one has been around a few years and is the holy grail of transparent ubiquitous protocol connectivity amongst carriers. Said connectivity is all IP based. My prediction on this one is that we won’t see IMS, or inter-carrier IP connectionless routing, for at least 5-8 more years. The reasons for this are ones that I will perhaps some day blog about. For those investing into IMS or derivatives thereof – my best wishes to you.
I want to address the current hype that is sweeping the trade journals based upon company press releases and of course, all those independent research studies fanning the flames. It’s all over the place on the Internet, trade press, and even a few main stream publications.
I had a Wall Street analyst in my office last week discussing this latest hype in greater detail. In a nice back-handed way, the analyst told me that I am the only one thinking a certain way (read on).
As an aside, I enjoyed this indirect compliment from my analyst friend. I have made a living, and have provided shareholders with nice returns throughout my career, because I was the only one thinking a certain way then the crowd, the lemmings, the zombies, the bell curve babies, the tech groupies, and the Kool-Aid drinkers were all marching in lockstep.
As I explained to my analyst friend, the last time I wasn’t thinking like others was in 1999, when I wrote the business plan for AFS. At that time, if you were not in the “build it and they will come” lemming mindset, you were clueless per many, many Wall Street experts I met with. Clueless, I tell you…according to them. Well, I was clueless as we built AFS from zero relying on market demand pull and success based funding for ten years into a prosperous business. Sure, we are not the biggest but we are one of the best if not the best – just ask our customers. Customers and employees matter and will provide a quality top line with low churn in the world of deregulated Telecom. Top line growth for the sake of top line growth – here, many have failed. The IP world gives you scale – you don’t have to be the biggest to be the best anymore.
So here is what my analyst friend said I am thinking that is so different than everyone else: fiber-to-the-towers or FTTT.
Yes, folks–that new goldmine just waiting to be tapped with insatiable demand mounting by the minute. Being first to the tower with fiber wins and they will live happily ever after! It will rain dollars on the chosen few who get there first, as towers are about to melt given the heat of the spectrum delivering this insatiable demand.
As Monty Python would say, and now for something completely different: Reality. Listen closely if you are an investor–
First, a disclosure: my company has deployed fiber to towers, but our return on capital is 12-14 months… otherwise we say “no”. I know for a fact that many of those out there hyping they have built to 300, 600 or more towers need to answer one simple question – when are you getting a return on your capital? Answer: I know you are out somewhere between 60-72 months. Why? Because you have built to serve and replace the equivalent of T1/TDM circuits with a “promise” of future riches from wireless carriers. I have read the same RFP’s and RFI’s as you!
Justifiable demand for a FTTT build is, in my opinion, at least 2-4 years away if you care about return on investor capital. Otherwise, spend all you can – it is not without risk.
What is it that is going to drive this insatiable need for 100’s of megabytes, if not gigabytes, to a tower? It is certainly not voice or texting. Video will play the predominant role but you need to ground yourself in reality first. Interactive video will be the main driver – streaming works just fine today. High Def video synchronously delivered to the mobile community – globally is the ticket.
Now let’s think about this for a moment. Today, download links are predominant but the uplinks, well, let’s just say pretty light and not so ubiquitous. You can download a movie onto a crackberry, IPhone or equivalent today – takes about 90 minutes but once downloaded, you are all set. Why people watch a movie on a tiny screen without high def or an OLED screen escapes me … a future blog about some laser technology I am aware of will solve this screen problem … Please remind me to write about it–
In order to truly feed the mobile demand environment, a number of things need to happen first … bigger uplink connections need to be made in the last mile wire line world – how else does a producer of content (professional or amateur) get to a server for redistributive downloading? Sorry, but the United States is lagging the world in down and up linking all together.
Now, let’s say the uplinking problem is solved on a wire line basis, where it needs to be solved for the sake of argument. We now run into the next problem – capacity on the tower.
Today, word has it that those running 2.5G and 3G technology are bursting at the seams…though I have not heard of any major outages or data which supports this outside of the occasional Google Mail outage for a day or two. More on Cloud Computing/SAAS reliability another day…
There is plenty going on in the deployment of LTE, WiMax and 4G solutions that, as advertised in brochures, will increase carrying capacity on towers anywhere between 5x-20x over the 3G service capabilities of today. So lets say video is going nuts, when will this next generation of 5x-20x improvement have enough installed to make the customers service ubiquitous, reliable and data rich? These deployments have begun – completion is years away. Or, said differently what side of a mobile link do you want to be on with a video app — the 2.5G/3G side or the new LTE, WiMax or 4G side at a 5x-20x improvement?
Today, about 1/60th of all video known to mankind is being carried over the internet. This brings me to the next obstacle in demand and timing: DRM. DRM stands for “Digital Rights Management”, which is a heated topic with no near term solution on the horizon. Yes, the copyrighted owner of any content, including video, actually wants to be paid a royalty for their work. Piracy and theft of content is the burning issue followed by payment streams.
The Ad people can’t wait for DRM to be resolved, but redefining royalty arrangements and tightly controlled access from the analog age of content is going to take some appreciable time to bridge it into the digital era. What’s in the way, in my opinion, is not technology as much as the old analog model of content distribution. There always was a non-value add middleman taking gobs of cash for who they knew in distributing the content where as we all know the Internet no longer has a need for such a middle man.
The Internet and IP neutralizes the middle men and, with billions of dollars at stake with DRM, this problem will not be solved over night. Plus, the Internet can distribute content to all sorts of devices (including machine-to-machine) and managing this is not something the yesteryear is accustomed to giving up control over. In addition, companies like Google, Yahoo and Microsoft have done a good job showing the DRM world how Ads can work alongside the content. Though I am from upstate New York, something tells me that perhaps–just perhaps, the content owners just may want a piece of this Ad revenue.
The next problem facing us in future years as demand increases as the above items discussed evolve, is competition. I know for a fact, reading the same RFP’s and RFI’s as everyone else, that wireless carriers looking for this future capacity are not committing to Minimum Usage Guarantees (MIG) or take-or-pay provisions even on forward pricing. I don’t believe for a second that, on the densest towers out there, Mr. ILEC as demand materializes won’t rip out their copper and replace it with fiber placing the early land grabbers in an awkward position delivering T1 equivalents as momentum changes unless they are protected contractually. The wireless carrier won’t give a rat’s ass from whom they get capacity but there is some probability an early builder could get used and used badly.
My final obstacle as LTE, 4G and WiMax evolves will be the actual need of the number of towers deployed given the next generation of wireless capability can go greater distances with higher bandwidth than current methods deployed. So, there may be a risk that tower consolidation or decommissioning occurs because of the coverage and distance of these new technologies. Interestingly enough, I read an article today on a WiMax deployment internationally that is destroying DSL business … I must apologize as I don’t remember where I read it, just the fact WiMax is creaming DSL and beating it mercilessly.
Single tenant towers? More remote towers? They will have less competition as the economics to serve them change substantially. These towers, in my opinion, will have wholes sale capacity aspects to them instead of multiple, physical providers.
I did not share most of the points above with my analyst friend. I just took the position that things take longer in Telecom to occur than our trade press, research firms and Wall Street predicts and I don’t believe we will see the “tower explosion” being hyped for at least another 2-4 years as the aforementioned gets sorted out.
I can’t get away with building fiber to a tower from our backbone with a 60-72 month payback while hoping on a future promise of more business. If I did, my Board would have me for breakfast and I would become part of the 10.2% unemployed.
So, once again, I am not thinking like other folks are today. I remain conservative with our investors’ funds and am not diving in for T1 equivalent fiber build, I guess time will tell again … I have always enjoyed the story about the Tortoise and the Hare. So far this Tortoise through the Telecom meltdown and recent collapse of our financial markets continues to maintain a CAGR of 25%+, 70%+ Gross Margins and a near doubling of EBITDA the past few years.
A Passing Thought on Public Company Valuations…
November 17, 2009
An interesting thought has occurred to me that I’d like to share with private company CEO’s and various Telecom analysts.
Why are carriers trading at mundane multiples, while data centers are trading much higher though they are codependent?
Here is my theory: I believe analysts have seen inside a number of private carrier companies, a.k.a. “the numbers,” and they are seeing those of us who survived the downturn out-performing most public companies.
If my theory holds water, it creates an interesting Catch 22 situation. Public comps are muted because private companies are bursting at the seams with growth. But a public company will not acquire a private healthy company because they limit themselves to their current EBITDA multiple, and can’t figure out how to explain paying up for a private concern to Wall Street.
Interesting conundrum isn’t it?
I do have one exception to my theory, as I believe this company represents more what many healthy private carrier companies look like. That company is AboveNet. The analysts need to start placing AboveNet in a category of its own, given what we are seeing in their results. Also very reflective of many private carrier companies.
My opinion, knowing thoroughly the AboveNet business model, is that they should be trading at least 10x -12x forward EBITDA in comparison to peer companies. An all data/IP business with no legacy, limited type 2 circuits is an efficient, growth oriented profitable business. I say get ready to get bored with AboveNet – they will be predictable in continued positive growth and results without changing a thing for at least the next three years easily. They are not weighed down by legacy infrastructure, ILEC reliance for pieces and parts and are selling a reliable platform for anyone to use – an open network! No applications with thin margins, high churn, high sales costs and high back office costs. What’s there not to like?
I’m Not Picking On Anyone…But…
November 12, 2009
I typically try to listen in to the quarterly calls of publicly traded carriers just to benchmark AFS and see what underlying trends are being identified. Since I was on a secret mission last week, I missed a few calls. When I miss the calls I get a copy of the call transcript, read it, and mark it up for internal distribution to our leadership team at AFS.
I missed the call last week.
Before I go further on an observation I made, let me tell you what we believe in at AFS: The Golden Rule. Business is business, and applying The Golden Rule suffices in most situations if all parties are objective. In addition, in competing for business, we don’t deal in dishonest dollars or unethical conduct. Winning business at any cost requiring an employee to trade off their moral beliefs, ethics or soul to gain a deal is business we would rather not have. Questionable conduct takes two parties–the buyer and the seller.
I want non-carriers reading this to also pay close attention to this blog and ask themselves, “how would I respond in this situation?”
To start, I want to quote exactly from the transcript for accuracy:
“Analyst: Just a question on the pricing environment, if you could give us a sense of how we’re positioned today in the NetCentric base specifically? Some of the [inaudible] some more aggressive pricing there as well as some updates this quarter in terms of benefits that we’re seeing from some of the content players in the market. The secondly, if you could just delve in to the lowest price guarantee a little bit more for us? I wanted to understand the mechanics of this and in particularly trying to get a sense of the extent to which you have some flexibility there to reject some of these lower prices on the basis of non-comparable networks and how that’s determined? That would be very helpful. Thanks so much.
Carrier: The NetCentric market is one in which we and other providers are selling a commodity based service. We offer the greatest amount of connectivity and capacity operating on a network on a non-oversubscribed and non-blocked basis. We have a standard pricing policy that prices services anywhere from $4 to $10 per megabyte depending on contract term and length. Occasionally we do offer special promotional programs either on a given period of time or in a given geographic region. We remain the lowest cost provider. We believe that our price at $6.33 for our install base is at about 50% of where the market is. In addition to that, our average new sale in the quarter at $4.82 we believe is less than 50% of the average price in the market. We have seen situations a couple of times in this most recent quarter where we have offered lower prices in response to discounts from others. We have a policy where if a customer shows us an invoice from another tier-1 network operator, some other network operator that is offering global connectivity, we will beat that price and we did that a couple of times in the quarter. We’ve actually seen a decline in the rate in which we’ve had to offer those very aggressive prices. If in fact, a customer provides us a price and it is not documented we will push back on them and request that they provide us documentation under a non-disclosure agreement because we have no intention of being in the business of negotiating against ourselves. Then finally, we are looking for networks that can provide the service so it really comes down to the locations in which the service is requested and the scope of the network. But, we remain the lowest cost provider and in fact, we have seen less competition as we’ve seen the number of companies that we actively compete with continue to decline.”
Here is what I can tell you about AFS: we quote a customer and we will use sales tools to accommodate the prospective customer on a price conversation. We can offer longer terms to lower a price, declining scale pricing, forward pricing or a larger NRR payment or combination thereof. We do not however, tell a customer to show us the written quote from a competitor under the guise of an “NDA.”. If we had any, and I mean any, sales person conduct such behavior, they would be fired immediately. It is my opinion that you compete on your merits, value, differentiation and network reliability strength and not act as a used car dealer.
Conversely, a prospective customer is just as guilty of such behavior for turning over what any common sense
person would consider proprietary information disclosed in good faith by a competitor to a competitor while giving a perception you are running a purchase decision/process allegedly on an equal playing field. Turning over such confidential information tilts the perceived level playing field unless the customer doing this is willing to turn over the Carrier response in return and continue to play the game of “pricing” chicken.
We have, on many occasions, given a prospective customer all sorts of pricing configurations. At a certain point, our sales people will say “no” and walk away. You would be surprised how many prospective customers come back months later when the competitive price was a bait and switch, the carrier never delivered on time and/or the network reliability of the connection was garbage. It is okay to say “no” to price shoppers. One would think with a massive network, that price alone is not your only value point or point of differentiation.
In my opinion, I find the conduct and policy in the above transcript unethical and not necessary.
No one needs dishonest business or a dishonest customer. No customer needs a dishonest carrier. What both parties need is a relationship not a transaction solely based on price.
Surprisingly enough, no analyst called Carrier out on such a practice during the call. I guess the almighty dollar trumps any ability to question such conduct by Wall Street analysts … why am I not surprised?
On the service proposition, what we are dealing with here is what is often referred to as a “commodity.” Calling IP services, in my opinion a “commodity” is a misnomer. Quite frankly, it’s a “commodity” based on price until it breaks or does not work. Last I knew, network reliability has yet to become a commodity. You get what you pay for in deregulated communications – and don’t forget this fact.
In summary, if this is how the game is played by some, I suggest competing carriers insert language on each and every quote that by a prospective customer accepting this quote certain confidentiality and disclosure rights are created and as such a violation may be subject to damages inclusive of consequential damages.
I just found the disclosure in the transcript telling and interesting.
I am not picking on this particular Carrier–I am sure a few others play the same game. To make it a matter of fact, in an upcoming blog I will share with you a multi-year process AFS just went through after discovering bid-rigging by a major carrier which was processed through the Department of Justice. Yes, a gazillion dollar carrier, in this case, caused AFS to lose a bid only to be flushed out in rigging the bid in compliance with the customer. More on this in a future blog.
In another future blog, I will share with you how the “consultant” game is played to rig the deal also and how in the case involving AFS, the gazillion dollar carrier ended up burnt in the end. Though we ended up with one of our largest customers churning, we came out on top. If you believe in karma, you will enjoy the blog.
I am not naive, but America has to start showing something else to the world about who we are beyond greed at any cost …
The Beltway Visit
November 3, 2009
I have to confess, I entered the abyss last week.
I walked the streets beyond the looking glass. I was somewhere between the Wizard of Oz and the Twilight Zone, with some Homer Simpson on the side.
Yes, yours truly was inside the Beltway last week … Haz-Mat Suit and with Oxygen Tanks strapped to my back. I was not trying to avoid the swine flu, I just did not want to breathe or drink whatever it is inside the Beltway. Once people get outside the Beltway, they seem to have commonsense but once they are inside the Beltway breathing and drinking whatever … commonsense just goes out the window, in my opinion.
I was on a secret mission … but that is not what this blog episode is about.
It’s about an observation on Net Neutrality while visiting our Nation’s capital.
I flew into Dulles airport outside of DC and my Zen Master picked me up for a commute into the Beltway. Something funny I noticed on the way in …
Did you know the roads into DC are not all net neutral? They have public roads for anyone equally which get backed up nicely because all vehicles have neutral or the same access – they do have a commuter lane as well … for two plus people in a vehicle.
My Zen Master took me on a privately owned toll road that zips you right into Toon Town provided you are willing to pay the toll for the less congested route. In addition, and can you imagine this, depending upon the time of day, given traffic demand – the cost of the tolls fluctuate as demand peaks and stretches resources. You pay a higher price if what it is you are doing is important enough to justify so. I think it’s called the free market system.
I don’t know if they charge more for tractor trailers (bigger loads) versus an automobile … but it would make sense. It’s not just the distance; it’s also how heavy of a load/occupancy.
I wonder how many of our lawmakers commute over the net neutral road versus the non-net neutral road for expediency.
I’ll leave you with this thought: I was reading a few articles on IT Healthcare – lots of Federal money pouring into this sector. This IT stuff for decades has been referred to as “Telemedicine.” It will be nice when all these health facilities have better IT infrastructure. But what left me pondering was this: Let’s say someone in Colby, Kansas is in need of emergency cardiac surgery and the best practicing cardiologist is needed to guide a local surgeon through a very delicate procedure.
This expert cardiologist is located in Chicago. Will “net neutrality” provide a reliable, high definition video pipe and voice connection between Colby and Chicago?
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