My Take on Acquisitions 2010
December 31, 2009
Welcome to a new year of fun and excitement in our ever-evolving world of Telecom charades and misdirection! I do expect our industry to grow this year.
Speaking for AFS, we have about 80% of our new MRR plan booked and awaiting delivery over the next several months. Our sales professionals will pick up the remaining 20% by June or July, and then, we will focus our attention on the 2011 operating plan. For our tenth year in a row, I am happy to say, we are poised for double digit, continuous revenue and margin growth. (Writer’s note: Any monkey can grow a revenue line by cutting prices—the issue of staying in business and providing quality service is a function of the quality of revenue, margin growth, and of course, churn rates).
I anticipate a busy mergers and acquisition year ahead of for all of us. AFS will be participating as a buyer, if and when the right opportunities fit our M&A strategy and financial model. We have a highly defined model for M&A – you won’t see us acting like a kid in a candy store – we have focus, strategy, and discipline.
AFS has completed a few acquisitions in the past and they all have turned out very successful because of our model and restraint. We have lost more opportunities than we have gained because of our disciplined approach. Typically, once we acquire a property, we have it fully integrated and profitable within 60-90 days.
I wanted to share a few tips (in no particular order) about how we view acquisition opportunities and how they translate into benefits for our customers:
1. Business model. We first make sure the property fits our model. If not, we pass…plain and simple.
2. Numbers. We look at the financial numbers to determine if we can make the company work financially. First, before we set a price or price range, we try to determine what needs to be invested into a property to make it healthy. This step is a major factor most people ignore, especially if they are or behave like a financial buyer.
3. Culture. The business is being sold for a reason. Those reasons can vary from bad strategies and leadership to poor execution or an investor’s exit. All of the mechanical challenges can be fixed so we really want to delve into the core values and principles that serve as the center of the business. We look for a customer-centric culture – we avoid the cultures that worship the CEO as some type of deity.
4. People. In my opinion, this step is where many CEO egomaniacs and financial buyers lose it. At AFS, we don’t have a “slash and burn” mentality when it comes to the employees. We recognize, especially in smaller companies, that a lot of knowledge about the business resides in the heads of its employees. This knowledge is a major intangible that should be respected…or you might face losing it entirely if you slash and burn to meet some ill-conceived financial model!
5. Best Practices – Objectivity. If a company we acquire does something better than us, we will “shoot our own dog” and adopt their methodology. Many slash and burners feel they already run a perfect operation and no one could possibly be better than they are – after all they aren’t the one for sale (so their logic goes).
6. Quality of Customers. We really don’t care about volume and low margin customers with zero loyalty (waiting for the next lowest price rabbit). We usually factor them into the financial model as a future forced churn.
7. Network Quality. We only acquire companies that own fiber optic networks with an emphasis on metropolitan services. To elaborate, I mean they own the sheath containing all the fibers…not a “network” consisting of 2-4 strands of fiber that has been IRU’d. So many PR companies will spin M&A announcements to sound like a company has acquired the network from Company X. But, in reality, they bought a company living on an IRU…or in some instances just an IRU with customers on the fiber!
8. Quality of the Sales Team (Part I). We sell network reliability, on-time delivery, on-budget delivery and proactive customer service. A sales team must adhere to these value propositions first as opposed to price. We churn low price sales champions because they are acting primarily in their own interests. This type of attitude ignores the true value proposition of AFS and our culture—delivering reliability each and every day. Telecom network reliability is NOT a commodity and it has not been for over 100 years. Let me repeat, real network reliability is not a commodity…contrary to the opinion of many Wall Street analysts who believe Telecom services are a basic commodity like wheat or corn. For example, when your Gmail is down for 36 hours or your point-to-point network connection is out for a business day, what is the cost of not providing network reliability for the customer? So many people are swayed by low price and believe that all networks are equal…and the behind-the-scenes people (or culture) who support the customer are a commodity as well.
9. Sales People (Part II). We avoid sales representatives that have “rabbit” resumes. They seem to jump from hole to hole every two years and wind up with yet another carrier. For customers or prospects, this sales person is not acting with your best interests in mind. Instead, they are using you for a well-disguised, superficial relationship to advance their own interests of earning commission. They will likely tell you anything to get you to switch to their new employer. We avoid the rabbits and so should a customer or prospect. By the way, the rabbit and other sales people are separated by this truth: the rabbit is simply performing a job whereas the others are sales professionals that have developed skills and business acumen (and place your needs above their commission goals).
10. We Don’t Lie. AFS will not make empty promises or say things a seller may want to hear (staff, business model, etc) only to blind-side the acquisition after the ink dries on the closing documents. A common practice is to say one thing but do another once the deal is inked. This dishonesty hurts the customer base you just acquired.
There are more points but following these basic rules seems to work well for us.
2010, no doubt, will be an interesting year. Demand for local bandwidth will continue to grow because the economy has caused a pent-up demand bubble where many customers need more bandwidth and access. I believe recent economic woes and tight budget constraints forced many companies to delay certain IT aspects of their business. Each year, reliable network connectivity becomes more important than it was in the year prior, and I predict, this trend will continue for years to come. Historically speaking, economic hardship and “doing more with less” has resulted in a bandwidth boom as economic conditions improve. Doing more with less places pressure and demand on communications networks…the networks rethink expenditures and save money on expenses such as travel, inter-company communications, intra-company communications, mobility, document management and knowledge-sharing.
Think about this nugget as we enter 2010 – how long could your business survive if your communications provider has service outages of 2 hours, 4 hours, 18 hours, 24 hours or maybe 3 days? These major downtimes have occurred in recent years.
Just make sure you know who actually OWNS the network your business uses…and don’t be fooled by branded resellers, asset-light carriers or IRU’d strands someone may tell you is a “network.” You need to see the physical network map and proof that your carrier owns the infrastructure. And, lastly, stay away from those sales rabbits!
Happy New Year
December 29, 2009
As the year draws to a close, I would like to wish many of you a happy, healthy and prosperous New Year!
To the carriers who simply compete on the lowest price, I hope you finally hit rock-bottom in 2010 to protect the health of our industry and the strategic broadband interests of our country. Try an economic concept to sell by: comparable differences. It’s a little more sophisticated than, “I have the lowest price” or “Just tell me what price you want.”
To enterprises, institutions, healthcare, government, hospitality, education systems, etc, I propose that you do your homework in 2010. The lowest price does not translate to network reliability, network diversity, on-time delivery, service availability or customer service. I submit that anyone with the lowest prices is cutting corners – caveat emptor.
I will and shall remain a bigot in 2010 – that is, a fiber bigot.
To a few of my favorite CEOs, may you find the following in 2010:
For Carl Grivner, CEO of XO Communications – some definition and clarity from Carl Icahn.
For Jim Crowe, CEO of Level 3 – a scratch-off lottery winning ticket that helps you pare down your debt so Wall Street can focus on your assets and potential.
For Dave Schaefer, CEO of Cogent Communications – a price increase to enhance your margins and increase shareowner value.
For John LeGere, CEO of Global Crossing – reparation payments and psycho therapy reimbursement for pre-LeGere Global Crossing./Frontier employees that were financially screwed by Gary Winnick and Co.
For Larissa Herda, CEO of TW Telecom – a new calculator that goes past two digits in the display and a better valuation by analysts.
For Bill LaPerch, CEO of AboveNet – more on-net buildings, you have the perfect business model (just like AFS).
For Randall Curran, CEO of ITC DeltaCom – the Civil War is over, head north.
For Jim Geiger, CEO of CBeyond – another year of growth. You have an algorithm, but be mindful, copper has its limits
For Arunas Chesonis, CEO of PaeTec – some more fiber in your diet.
For Danny Bottoms, CEO of Cavalier Telephone – a vacation trip to Dubai, I hear real estate prices have dropped substantially recently.
For Ivan Seidenberg, CEO of Verizon – another great year with FIOS…outstanding strategy – kudos to my Zen Master that made FIOS a reality.
For Randall Stephenson, CEO of AT&T – copy Verizon with a look-a-like FIOS, the regulators just might make you share your FTTC with others. See what they did in Britain as a clue.
For Glen Post, CEO of CenturyLink – a successful integration of Embarq…at AFS, we’ll miss you Embarq.
For Carmen Perez, CEO of FPL FiberNet – getting out of Florida for some network diversity and adding more women CEOs in 2010.
For Dan Caruso, CEO of Zayo – more pieces for that puzzle you are putting together.
For Howard Janzen, CEO of One Communications – more reliance on the knowledge and experience center in Rochester, NY. Most successful CLECs have CEOs, CFOs and senior execs from Rochester (Frontier Corporation).
For Peter Aquino, CEO of RCN – less cable TV and more enterprise.
For Ed Mueller, CEO of Qwest – a target of sorts … that’s what the Wall Street experts say.
For John Scanlon, CEO of Reliance GlobalCom (Yipes) – getting a 3x return on the $300 million for which Reliance bought Yipes a few years back, I know you can do it!
For John Purcell, CEO of FiberTech – just like AFS, another boring year of double digit growth in all categories.
For Mike Miller, CEO of FiberLight – larger pipe enterprise sales and a drink at MetroConnect in January.
For Jeff Gardner, CEO of Windstream – continued consolidation of the Tier 2 markets that translates to a high margin, low churn business with a national facilities-based footprint presence.
For my friends, Wall Street Bankers – more and better creativity on valuing companies … someone needs to look and act differently. You all look the same…why pay a fee without differentiation?
For my Venture Capital friends – avoiding ordinary income gains from the Obama Administration.
For my Private Equity friends – could one of you step up and buy a platform company to drive consolidation? You are all talking about the same thing yet no one is taking first mover advantage. (Please see Wall Street Bankers above)
For FCC Chairman Julius Genachowski – a Ouija Board to figure things out. Start spending time with the backbone of telecom…small companies. Simplify, simplify, simplify.
For Joe Nacchio, former Qwest CEO – a Hawaiian shirt to go with those khaki pants and a pre-paid calling card to call home.
For Bernie Ebbers, former CEO WorldCom – continued memories of better days gone by when things were simple and honest running a motel.
For John and Timothy Rigas, former CEO and CFO of Adelphia Communications – a basic channel package from Direct TV in your cells.
Finally, I’d like to wish a dose of reality for all the non-ILEC public communication companies and privately-held communications company for 2010…learn to partner. Our answers are not found by relying upon the government and FCC or by renting pieces and parts from our largest competitor – the ILEC – regardless of price or copper ubiquity.
The combined market cap of AT&T, Verizon and Qwest is over $262+ billion. Some brilliant, superstar Wall Street banking firm could orchestrate a super-mega-merger of the three and the rest of us won’t come close in market cap. What’s the lesson here? There is not any room for arrogance or condescension. The better focus is tackling ILEC market share instead of each other. The ILECs enjoy when the termites fight each other instead of eating the foundation out of their house.
Happy New Year! And cheers to a great start to the new decade!
Best Churn
December 22, 2009
‘Tis the season to be jolly so I wanted to share one of my favorite “real life” stories with you. I have disguised the actual names to protect the innocent and the corrupt–the usual suspects. In my mind, this story is a Christmas great.
My subject today is churn. One aspect of the Telecom business is managing customer churn. Churn from customers can be the result of many factors including bad service, contract expiration, lower price offers, bankruptcy, customer consolidation, network grooming, etc. The very worse type of churn is when the customer leaves you after many years of loyal service.
Once again, I’d like to remind you that this story really occurred…true life.
Our churn rate at AFS runs at 0.7%. There are several reasons we have such a low churn rate. First, the type of customers we serve is important. Most of our customers are big bandwidth users that value network reliability and diversity over low price—they recognize what we do is the life blood of their business from a communications perspective (and we take that responsibility as seriously as they do). The second reason we maintain low churn is because we work really hard to understand the customer’s needs – we like customers that are looking for an honest relationship as opposed to a transaction based solely upon a price point. As I have written before many times, in deregulated Telecom you have lots of choices but you also get what you pay for…caveat emptor. Network reliability is not a commodity.
Today, I am going to share one of my favorite customer churn experiences…what makes it especially sweet is that I happen to believe that cheaters eventually get the bad side of Karma (or coal in their stocking).
Here is the situation– a few years back, one of our top customers was up for renewal. This customer was in the banking business, focusing on real estate. They had been a customer for years.
When our sales person approached them about a pending contract renewal, we were informed that they had decided to conduct a RFP. They hired a consulting firm to identify the requirements and drive the RFP process. Shortly thereafter, we were introduced to the “consulting firm” that consisted of recently retired or laid-off ILEC employees. Employees that would have a vested interest in their old haunt for pension and benefit reasons. In the world of ethical conduct, this scenario is commonly known as a “conflict of interest.”
The RFPs are generated, and low and behold, can you believe the only party capable of meeting the requirements of the RFP is the ILEC? Imagine that! A bid being wired for a particular carrier! Much like the Police Chief that Claude Reigns played in Casablanca, I was shocked, just shocked, to learn such things go on in our industry! Shocked!
Not surprisingly, we lost the bid to the ILEC…in industry terms, the ILEC “bought the business.” At AFS, our approach to business is that if a customer is not profitable (and I don’t mean exploited profitable) then we are not going to “buy the business.” If you win enough non-profitable customers because you are “buying the business,” before you know it, it’s Chapter 11 or Chapter 7.
Now for the fun part, the Karma…enjoy and happy holidays!
Because this company was a large business with lots of tentacles, we had to meet with the RFP “winner” and develop a transition plan for customers to the ILEC.The soon-to-be former customer’s contract wrapped in 90 days, and according to the ILEC, they should have everything cut over by then based upon the award date and their proposal.
All of the enterprise customers who are reading this post should pay extra-close attention.
The 90 day switchover period came and went. AFS was never on the critical path of the project timeline but the ILEC had obvious difficulties meeting the deadline of 90 days to transition such a complex network (although the specifications of the bid were a perfect fit). The ILEC came clean with our customer on approximately day 80…that they would require another 30 days.
Our customer contacted us to ask if we could accommodate the missed cutover by keeping them on our network for another 30 days. We said yes but we put them on a month-to-month contract at a higher price because it was no longer a term contract. In addition, we knew that the ILEC was not going to make the 30 day extension as well.
Call us the AFS Psychics but we just had this strange feeling that the pre-ordained winner of this RFP was going to struggle.
From this point onward, it took the lower priced ILEC an additional six months to complete the transition. We collected on our month-to-month contract as we waited for the ILEC to execute… keep in mind we were ready and waiting for over 10 months. Finally the cutover is complete and our former customer with its low price is now part of the ILEC network (based upon the “above the table,” honest RFP bidding process).
You are probably thinking I am going to say that after the cutover the ILEC’s network reliability faltered badly and the customer ran back to AFS. No, that did not happen. It’s even better…
Within 45 days of the cutover, our former customer declared bankruptcy – something about credit default swaps – and filed for Chapter 11 reorganization. For those of you not familiar with the intricacies of a bankruptcy, once a customer files for Chapter 11 protection you cannot cut their service for non-payment or payments in arrears. In addition, within the constructs of the bankruptcy proceedings, the customer can renegotiate contracts as part of their reorganization plan subject to the court’s approval or order upon the supplier. Because Telecom is such an important part of any business, the ILEC had to maintain services as an unsecured creditor for a nine month period. At that time, bankruptcy court finally decided that our churned customer needed to file Chapter 7 for dissolution because there was very little interest in another real estate banking firm.
Our friend the ILEC had to maintain service for several more months as the dissolution of the company commenced.
You can’t make this stuff up, can you? When you lie, cheat or bid-rig, it is my opinion that sooner or later you will get bitten in the ass–if not on one deal, eventually on another.
For those of you reading this post from an enterprise view point, please don’t facilitate this type of behavior. Be sure to conduct due diligence on any consultant you engage to make sure your needs are advanced over the desires of a consulting firm (possibly creating a serious conflict of interest).
I really, really like this true-life story because it reminds me that the good guys do win every now and then. I did feel sorry for our former customer but I believe they knew exactly what cards were being played, especially given several of their internal employees in IT were former ILEC employees themselves.
Every time I think about this experience, it’s just like Christmas Day!
The Cost of Doing Business (Part II)
December 18, 2009
Earlier this week, I started a conversation (aka tirade) about America’s two-tiered justice system. Today, I am going to go one step further and say, “We don’t need Sarbanes-Oxley. What we need is aggressive criminal prosecution of greedy C-level executives and their Boards that lie, cheat, manipulate and steal.”
We have already established a plethora of criminal laws that cover fraud, embezzlement, etc – now we just need to enforce them. If you put these high profile criminals in jail/prison, and they know writing a check won’t work, you will elicit a different behavior. These wing-tipped bandits do not want to lose their status, toys, self-hubris, and most of all, their freedom. Their self-image and alter ego know going to prison is a game-ender.
So you may be asking yourself, “What do these observations have to do with Telecom?”
In short, my answer is, “Quite a bit.”
It has been my experience over the years (although I can’t prove it directly) that when an ILEC draws up annual operating budgets, they actually factor in a certain amount of money for fines to-be-determined on a go-forward basis. I truly believe they knowingly expect to be fined for cheating the system, not playing by the rules, USF violations, bid manipulation and the like. If they get caught, the FCC or a state public utility authority ultimately intervenes and issues a fine.
I am sure many industry veterans share this same belief — getting fined by the FCC or a State is just a cost of doing business for an ILEC or Cable Company. And, by the way, those hidden budgets for fines are ultimately paid by the customer as rate payers. In reality, making an ILEC or Cable Company pay a fine today is not going to change their behavior because they fully anticipate and have planned for this type of outcome.
Here is the remedy in my fantasy world. Since it’s the Holiday Season, let me use a timely example ripped from a children’s classic Rudolph the Red Nosed Reindeer. I am referring to the popular version with the Island of Misfit Toys, the elf that wants to be a dentist and the snow monster (aka the Bumble). Remember “Bumbles Bounce?”
The FCC and State Utility authorities are like the Bumble at the end of the program. Herby the Elf, who wanted to be a Dentist, successfully removed the Bumble’s teeth so he is no longer a threat to society – and everyone loved the Bumble when he placed the star on top of the Christmas tree at Santa’s workshop. Herby, in our case, is Congress.
Congress has made it such, in my opinion, that they have practiced dentistry on various regulatory agencies ranging from the FCC to the FTC to the DoJ – these agencies don’t really have any teeth and the ILECs and cable companies know it.
As part of the ongoing development of a national broadband strategy, it is my hope that the government retrofits the FCC, FTC and Department of Justice with strong dental implants. Now, armed with “real” teeth, the agencies can be more aggressive in administering the law to ILECs, cable companies and CLECs. Limiting these agencies today by how much they can fine a carrier results in budgeting fines as a “cost of doing business.” When a carrier gets fined, it should hurt…it should hurt to the price of pennies per share…not a measly $500,000 drop in the bucket.
The FCC needs the ability to not only fine but also to add punitive monies to a fine – for example, cheating the USF. The FTC needs to have more investigative authority and the ability to fine carriers that misuse their market power.
I was just speaking with someone the other day who is engaged in RFP cycle…if this company bids a certain way, a very large ILEC will no longer do business with them. This scenario is extortion – plain and simple. The FTC should be able to address this issue, and if needs be, include the Department of Justice. I encouraged this person to have the small carrier go to the DoJ with an extortion complaint. More than likely they won’t because the pursuit of justice could bankrupt them when the ILEC stops doing business with them (for making the extortion and a bid manipulation complaint). Plus, it takes years for the DoJ to act on matters and the legal fees are outrageously expensive.
The DoJ needs to get more aggressive in situations such as bid manipulations where they don’t look to simply settle—they look to place civil and criminal penalties on offenders and hold officers of a company accountable for their culture if it is corrupt. Carriers and customers alike that collude to manipulate competitive bid situations should be criminally charged. Anyone who is reading this post that has a few years of Telecom industry experience knows this stuff goes on daily.
In summary, small carriers are simply not protected if they complain to the authorities. If the authorities are not aggressive, lack teeth, or look to just settle matters on a civil basis, the small carrier ends up the loser. Why? The large carrier in question will do whatever they can in order to avoid doing business with the small carrier or to make their life difficult. Who’s the other loser in this scenario? The customer–they no longer benefit from a competitive marketplace and pricing.
Someone out there with years of experience in Telecom, tell me I am wrong about this…please!
And Herby, I hope you are listening.
The Cost of Doing Business (Part I)
December 16, 2009
Hello loyal readers. I read something yesterday that ticked me off (once again) and I have decided to apply self-therapy to the matter by sharing my thoughts with you.
America has a justice system that, when challenged, responds with endless talk about equal treatment under the law…you know, that statue in the N.Y.C. harbor that represents how justice is supposed to be blind?
Well, I think “justice” sometimes peeks through that blindfold.
To restate, I am of the opinion that our present justice system is two-tiered – whether criminal or civil. It has less to do with social injustice conditions and more to do with money. I believe that if you have wealth, you are treated differently than if you do not. So, to those folks who claim injustice, I would focus on the “wealth factor” as it relates to our judiciary system. Do NOT confuse this with the idea of “redistribution of wealth”–that is un-American.
Yesterday I read an article where a few clowns were caught in a “pay or play” scam with the New York Pension Funds. Basically it was a game of referrals, advisors and fees getting kicked back to those holding fiduciary duty and power over who gets funds from the NYS Pension Fund for investment.
Without going into great detail, a co-founder of a company called Riverstone Holdings agreed to pay back $20 million in “restitution” for the benefit of the NYS Common Retirement Fund. An earlier agreement had him kicking in an additional $30 million. He also paid a fine under an agreement with the NYS Attorney General for his misdeeds to put an end to this civil matter.
Here is the rub and it’s not new: Criminal charges have not been filed against anyone in this matter and they will not be filed. Yes, that’s right. If you are caught stealing and you are someone important who can write a check, then you are pretty much free to go. Sure, you may suffer a little public embarrassment but people have short memories.
On the flip side, examine the scenario of a poor inner city black kid getting caught stealing a pair of Nike sneakers. He can’t afford to write a check to make his problems go away so he is booked and criminally prosecuted.
Here is the raw deal: Do we really want to stop corruption in America? If so, then civil deals should not be made, and instead, criminal charges should be filed. To me, when a civil “settlement” or “restitution” is negotiated outside of a judge and jury, that is a cost of doing business. And when a prosecutor can solely elect not to pursue criminal charges, I am sorry to say, but the entire matter is nothing more than a third world country shakedown for cash and political news coverage. A great example of “fine but not a crime” – was Eliot Spitzer former NYS Attorney General (and he’s looking pretty good these days compared to Tiger).
Stay tuned for Part II later this week where I connect-the-dots between a kid’s Christmas classic, SOX compliance and Telecom…
You Just Can’t Make This Stuff Up
December 10, 2009
Remember Ed Whitacre?
He was formally the Chairman & CEO of AT&T. He retired a year or so ago after trying to put Humpty Dumpty (Ma Bell) back together again as CEO of SBC through a series of ILEC acquisitions, the last culminating in buying AT&T and changing from SBC in name to AT&T.
So, here is “Uncle Ed” with a career of monopoly management–I’m not saying that’s a negative–it just is what it is. Uncle Ed would fight through all sorts of legal maneuvering to keep AT&T/SBC from opening up their networks or new fiber optic builds to facilitate real broadband, choice, and that four letter word Uncle Ed dislikes: Competition.
To spare you the history, let’s just say that while at AT&T/SBC, Uncle Ed was not too fond of labor unions. He was especially not fond of the Communications Workers of America (CWA).
Uncle Ed was a typical ILEC CEO; he primarily remained hidden behind the brand without undue outward retail exposure or risk-taking from a marketing perspective. I ask you, “Who other than those in Telecom or certain Wall Street firms would even know Ed Whitacre if he showed up on your door step tonight?”
Not many. But stay with me…the irony of the story is developing.
To summarize, we now have a guy with penchant against government regulatory matters concerning competition and a less than cordial relationship with labor unions. A person who is relatively anonymous outside of the telecom-centric world—no one really knows much of him, his track record or opinions.
So, our hero Ed is sitting around the house one day, retired…probably watching Oprah, and the phone rings. It’s the United States government, his former arch enemy! They have a tantalizing and mind-boggling proposition—to get his assistance as the Chairman of General Motors. General Motors was clearly headed for failure but the government wouldn’t allow it to fail primarily due to its lumbering size.
Ed openly admits he knows absolutely nothing about the automobile industry but didn’t let that small fact stop him from accepting the offer. This counter-intuitive thinking makes perfect sense if you think about it in Beltway terms…with a staggering 10.2% national unemployment rate, our government could not find anyone else with experience in the automobile industry! A used car dealership owner knows more about the auto industry than Uncle Ed…
The stage is now set.
One night a few months back, I am indulging in a little late night TV with the hard-hitting interviewer Charlie Rose, or someone similar, and all of a sudden what pops up on my giant TV screen? Yep, you guessed it—Uncle Ed hawking GM cars in a retail commercial. I almost fell out of my chair. Ed’s commercial can be viewed here in case you have missed it or didn’t recognize Uncle Ed.
The man speaking with a slight Texas twang in the clip is Uncle Ed, with no auto experience, telling us to buy from General Motors. Just like at AT&T – he knows what’s good for you. In the 30 years I have been in Telecom, this commercial is the first time I have seen Uncle Ed in a broadcast environment trying to peddle his goods. Ed was usually the man behind the curtain, not out front when it came to selling or speaking with customers.
Also, did you spot something else that I found hysterical? Ed pitches that you can buy a car from GM, and within 60 days if you don’t like your purchase, you can return it without any questions asked. Now, I know he did not steal this “60 day return policy with no questions asked” from the AT&T play book. AT&T has never shown such affection towards its customers…they typically fight tooth and nail if you try to cancel service that didn’t work and lock you into a contract. I suggest you look at the fine print on this 60 day no questions asked offer…you’ll see why I almost tumbled off the couch.
But wait…it only gets better.
In short, the government (taxpayers) and the United Auto Workers union (UAW) basically own and run GM. So you have Uncle Ed working with one of the largest share owners, a union, to save GM. The irony of it all!
It may be the lack of consumer ad recall or that a multi-millionaire touting GM to a blue collar crowd doesn’t fly well but I have noticed that Uncle Ed’s commercials have not been running recently.
Something tells me that Uncle Ed’s retail stardom has come to an end. More recently, I have noticed that former NFL Oakland Raider defensive line man and 8-time Pro Bowl player Howie Long has become GM’s pitchman. Seems to me that, regardless of the channel or how quickly you are speeding through a commercial on your DVR, there is Howie…dressed up very nicely and selling automobiles.
Just a little more irony: in 1987, the NFL players union went on a 57 day strike after negotiations failed. NFL owners continued the season using non-union players and union players wishing to “cross the union line” also known as a “scab.” Howie Long is a scab because he broke from the NFL Players Union strike and reported for practice. Later that same day he recanted and flipped back so his scab-dom was extremely short-lived.
I don’t know about you but most unions don’t take to kindly to scabs, scabs of any sort, no matter how short of a time you scabbed. Howie Long is a scab.
So, I’m going to summarize the bones of the situation in one long-winded paragraph…GM is now run by a former Telecom-practicing monopolist that legally fought the government (tax payers) on a regular basis (and won), openly admitted knowing nothing about the automobile industry and gave up his couch-surfing Oprah habit because he was probably having a difficult time making ends meet on a multi-million dollar retirement pension from AT&T. The new GM Chairman is now joined at the hip with the UAW labor union as, technically speaking, his boss. The UAW, a significant shareowner in the new GM, stands idle while a former scab (that is probably getting paid gobs of money to be in commercials) seems perfectly content. I wonder if any UAW workers have lost their jobs.
All this rhetoric amounts to a hill of beans, but you have to admit, the irony of it all is exceptional.
The BTOP Blues
December 8, 2009
The BTOP blues…my song goes out to those really singing the blues–AT&T and Comcast.
It seems that AT&T and Comcast are filing protests on just about anyone seeking broadband funds under the Federal Broadband Technology Opportunity Program (BTOP). It seems they believe, wherever they are, consumers and businesses are already served well by them and that any BTOP money should go to proposals that bring wireless and fiber optics to the most remote areas in America. Affectionately, they are telling our government they are serving everyone (lie), that they have competition (lie) and that they are concerned about those receiving funds building in their markets. They use the term “building over us.”
I do hope–and this is a big hope–that the NTIA and RUS see right through this garbage and such a blatant act of protecting their monopoly presence. If what AT&T and Comcast say is true, then they are telling the President and Congress, “you are a bunch of idiots for even entertaining urban/suburban proposals unless they are targeted towards fiber to the barn (FTTB) or WiMax to the chicken house (WiTTCH).”
I am a fair person. I can agree with AT&T and Comcast–if they open up their networks for access to others to further enable broadband penetration and competition.
And what I mean by “opening up their networks” is that they lease dark fiber and wholesale capacity to any and all comers at the same rate it is costing them. This creates a level playing field, maximizes capital infrastructure efficiency and allows competition to occur based upon applications and bundles by eliminating the high fixed cost barrier to entry they each have and each enjoy today.
BTOP Blues … it’s been 13 years since the Communications Act of 1996 … the ILEC and able companies after 13 years still dominate their markets ranging anywhere from 85% market share to 100%. If you measure it on physical network competition, they are well above 95% market share and going as slow as possible and filing against carrier BTOP submissions that can and bring open access networks to anyone, including AT&T and Comcast.
AT&T, Comcast and a few others have those BTOP blues a-playing…should be interesting to see how the NTIA and RUS react to their lyrics…
History Repeats Itself
December 1, 2009
Today’s subject is something I have been want to write for awhile and, given the government funding of the “Broadband” NTIA/RUS program BTOP/BIP, it’s time to share a few thoughts.
Do you believe that if you don’t learn from history that history will repeat itself?
If yes, keep reading. If no, get on the next bus to the Beltway.
Regarding municipal Broadband, or Wi-Fi: It is well documented that there were, by factors, more failures than success stories over the past 10-years. Even the King Daddy of them all, a private/public partnership attempted by EarthLink, failed miserably.
So, why such misery? Why the lack of success?
First, let’s try to understand where the spark of an idea comes from for a municipality, or if a municipally owned power company decides to go into the “communications business.” The spark typically has come from someone holding an elected political office–who, after hearing all sorts of complaints about the ILECs putting their community on the backburner for fiber optic connectivity, decides that something has to be done. After all, the rest of America (and the world) is passing your constituents by.
The spark becomes a very populist issue. Who wants to say no to broadband after all? And, if the ILEC or Cable Company is treating us as second or third rate customer, we should take matter into our own hands. And that’s then the mistake begins …
The first thing the political champion of building, owning and operating a municipal-owned communications networks will do is what they always do–call a consultant. (My personal disclosure: I am not a big fan of consultants as they tend to bleed out their clients)
Now, think about this for a moment: You hire a consultant. You tell him or her what you want to do. What do you think the consultant, after some feasibility analysis and fee collection, is going to tell you? They are going to tell you that it is the greatest idea since sliced bread. Why? Answer: because consultants don’t make additional fees by telling someone “that’s a bad idea.” So, in my humble opinion, it’s in the consultant’s interest to make the idea, strategy , and numbers “work” via a feasibility study. Always remember that once the consultant is in the door, they will do what it takes to stay there.
Here’s an open offer–and it’s free: Any municipality or politician reading this who gets the idea to go into “communications” give me a call. My office number is 585-785-5801. I’ll sign an NDA. You tell me what you are thinking and I’ll give you an opinion and a quick report with further questions for you to ponder for free. I have been in communications for over 30 years. I have some pretty good experience and bone marrow in matters such as these. If you are already in deep doo-doo, feel free to give me a call as well. Worse case–I light a candle for you.
Anyhow, back on point. Let’s assume that somehow a politician gets the community to vote to take on such a project and raises capital by issuing municipal bonds. Now, I won’t go down the list of reasons why not, but if I were working with you, this is how this type of project should be approached (which, though not popular, is reality):
First, you do not start deploying a network to residential areas, especially low income. Why? Answer: because you want to generate early cash flows and do something that is going to garner the immediate attention of the ILEC and Cable Company.
The first segment you build a fiber ring to are the local businesses. Why? Answer: They have the greatest need for high bandwidth and you can enter the market with simple data/IP offerings, especially Ethernet. You start taking business away from the ILEC and Cable Company and this will get their attention–not only by what you are doing, but also why. It will also drive them nuts because you are taking a smart approach to deployment by cream skimming their best business accounts to generate cash flows and slowly proving in a model.
At this stage, it is possible that you will get a reaction from the ILEC or Cable Company and they may actually start building broadband in your community. You can then stop the initiative. You got what you wanted them to do. Sell what you have done to another company.
My second segment, if the first has not awoken the giant, is to now extend the network to the high cream areas of the residential footprint. I can hear a few liberals yelling, “but that is red lining!” Once again, if I were your consultant, I am giving you a road map to success not failure. So why do you start in the more affluent areas first versus blighted neighborhoods? Answer: they have higher disposable income and will buy all sorts of bundled packages with high margins. This results in more cash flows into the project. Picking off the low hanging fruit in this area will garner the attention of the local cable company for sure.
My final segment is expanding the network to middle and low income neighborhoods. This is simply a logical progression in my mind with the least economic risk to the tax payers and overall project. By this stage you should have substantiated cash flows, operational efficiencies, processes and high margins now flowing to support the business operationally as you enter a larger, lower margin, bad debt, high churn customer segment.
Doing this as a not-for-profit is the model. A problem or obstacle will be following this model from a political-will stand point. Attracting votes across middle and lower voting classes by promising broadband is one thing, but many doing so have failed by reaching out to this segment first. In the end, the lower income lost, the project failed and taxpayers were on the hook for the debt. My proposed model is what can drive success and get a municipality what it wanted in the first place for residential customers, which is fiber access and competition in the worse scenario of full deployment. However, it may also get the cable company and the ILEC to the table to thwart such a deployment because they know it will work and be profitable while hitting their income statements in a bad way.
If and when the ILEC or Cable Company got serious about upgrading your community, this is the exact path they would take to be ahead of them. It’s about rolling out sectors of network, taking from the rich so you can subsidize the poor. If you start with the poor and go the other way, you will be under-funded and go down the path of failure, as many before have gone.
A few things I would include along the way: get a management team from Telecom that knows local competition to build and run it. Local networks are complex beasts. You can hire people or partner with companies such as mine. Transferring the head of some municipal department to do this won’t work, though it has been tried many times. The ins and outs of Telecom take a good 10-years to learn. Go find a veteran or an established mid-size company with a proven track record. Do not grow this by transferring the head of the Water Department to your new initiative to run it, for example.
Also, forget the “free” model – free wi-fi for everyone. Free basic broadband for everyone. The “free” model does not work. We saw many “free” municipal models fail over the years trying this approach. As I always say, free is a four lettered word starting with F.
Why I am writing about this now? I have been wanting to plus as I watch the funding process by the Federal government for broadband, I worry history may repeat itself. In the process, the Federal government is allowing states to provide feedback or rankings of proposed projects made to the Federal government affecting their states. My concern: many states have come back recommending submissions by their own state agencies pushing aside private/public proposals. If I were at the Fed weighing the states input and receiving only state agencies as qualified, I would question a conflict of interest as well as lack of proven successful experience which is a fundamental requirement of the statute.
Alternatively, say you award a state agency $20 million to do Project X. The state is in financial trouble and decides it is going to “borrow” $15 million from the agency project. Knowing what I know, odds are that money is gone forever. So who at the Federal level is going to criminally and civilly sue at the state level the misuse of funds? Don’t tell me it can’t or won’t happen – a state owned Telecom firm in Vermont recently had its coffers robbed by the state needing cash elsewhere. So state authorities literally transferred (stole) $10 million from the Telecom company to shore up a budget deficiency elsewhere leaving the state owned Telecom firm in a financially distressed position.
If a private company working as a private/public partnership were to use funds inappropriately – you know damn straight people will go to jail. At the state agency level–good luck!
So, BTOP/BIP funding–will history repeat itself? Will NTIA/RUS funds provided directly to states be held to the same standards as a private company?
It’s going to be interesting to watch over the next few years…
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