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.
Written by Dave Rusin - Telecom Executive
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I believe the Cable MSO’s have a better chance of economically reaching the FTTT market than an AFS-type telecom company. The MSO’s FTTN plant already reaches out to many of the metro areas where a large portion of towers reside.
If you would try and build a greenfield network to only service the FTTT business; I agree that this would be a recipe for extremely long payback periods and significant risks.