Trends
February 24, 2010
Let me begin by stating this post is a relatively short one. We are halfway through Telecom earnings reporting and I wanted to share a few underlying themes or trends I have heard and identified:
1. Top line growth is struggling, and in some cases, moving backwards except for metro fiber owners. There is lots of single digit growth for metro fiber owners.
2. There is a general movement away from T1/IAD/DSL customers as price pressures and organic bandwidth needs are outgrowing the capability of copper. This movement is churning out low-end, low margin and slow growth customers. “We would rather give them back to the ILEC or someone else.”
3. The focus is on the quality of customer, not quantity.
4. Another emphasis is to improve gross and EBITDA margins.
5. Companies are grateful to have financed further debt given the above reasoning. (But will they squander the gift of time?)
6. There is a general shift toward upper middle and large enterprise market.
7. Usage billing is proving to be unreliable and necessitating the need to move to an IP platform.
8. Companies need to lower costs and the ILEC is not the answer.
9. Companies need M&A to improve margins or add applications. (Issue: how do they pay for M&A? In the current marketplace, there is nothing left except healthy firms performing in double-digit metrics.)
10. There is increased discussion about self-reliance with less emphasis on regulatory reliance.
I am looking forward to Data IP, fiber-based/focused AboveNet and Cogent Communications to report and deliver comparative growth metrics. I submit you may hear all about double-digit growth metrics!
Metro Connect Consolidation (Part IV)
February 22, 2010
Without further ado, I will now unveil the Consolidation Theory. Again, I must give the disclaimer that this theory is not necessarily my own but one I have heard many times.
If certain companies elect to run a process or auction, expect the Private Equity sector to outbid the strategic buyers for the companies and their assets. You may be asking, “Why?”
The logic is as follows:
1. A strategic buyer cannot get past their low multiple (4x-7x) and possibly offer a premium for a better performing company or assets.
2. A strategic buyer can’t look down the road any further than a year, especially if they are a public company.
3. A strategic buyer gets painted with the same brush and color of the last consolidation round where integration competency was called into question.
4. Investment bankers give advice to strategic buyers. For example, how can someone keep a straight face and approach a company with 80% of MRR booked for the following business year yet only value that company on trailing twelve months? By June of any given year, infrastructure companies have that year’s EBITDA budget met and are looking forward as opposed to backwards.
5. PE firms like to speak directly to the infrastructure companies without an Investment Banker in sight. Stealthy!
6. PE firms, after studying the space for years and visiting local infrastructure companies, reviewed their historical year over year performance become very comfortable with the future.
7. PE firms are not looking at next quarter or next year. They are looking 3-4 years down the road at companies who are on a steep growth trajectory with real demand. Companies that, even if you own them and do nothing, will continue to grow at double digit rates. Add some capital and the demand is there.
8. PE firms want to consolidate local infrastructure platform companies but not change the model. Historical organic performance is a good indicator of future organic performance. An initial acquisition or two to serve as an M&A platform to further consolidate the short supply of local fiber assets seems to be the vision.
9. PE firms are more active in approaching infrastructure companies while strategic buyers are nowhere to be seen as drivers of the consolidation effort – 2010 is the year as rumored.
As an example, examine how a PE firm looks at valuation per input it received at Metro Connect. Let’s say you have a local infrastructure company for which you can easily examine performance for the last 3-4 years. The PE firms are inquiring because they like hard assets, especially unique assets (even analysts are starting to see a difference). Organic growth for the company for the past years has been double digits and will continue so long as the local infrastructure company continues to do the same things it has been doing previously.
The PE firm recognizes that the high fixed capital costs the company incurred have created a barrier to entry; thus the capital invested to grow any of these infrastructure businesses will generate significant returns in the future and high IRRs due to the sunken costs of the fiber optic infrastructure being levered. The PE firm looks at the sales funnel demand and recognizes that real demand exists and that companies with limited capital are rationing the capital to customers who produce the best margins and long term contracts. The PE firm considers, if they add a little more customer capital to the rationing, maybe triple digit growth is possible. The PE firm looks at two things—the business and the fiber assets—for their investment purposes. Fiber assets are distinguishable and in limited supply. In contrast, most IBs that are advising strategic clients do not distinguish between a company with local fiber infrastructure advantages and one without.
The debt markets are open.
So, given the aforementioned profile, Company A is producing annual EBITDA of $10 million at a 40% margin. AboveNet shows a category trade in the 9-10x range—in a simplistic valuation, an enterprise value of roughly $100 million. Given historical performance, and let’s be conservative, without funding from customer capital (the company is self-funded), the company grows EBITDA at 30% per year and in typical PE fashion, you plan about four years out. At that growth rate, the EBITDA will be approximately $30 million. Given our example, based on the 10x multiple today, the PE firm has bought a company at a 3-4x EBITDA rate— and that math is based on adding zero customer capex or consolidating as a platform for even greater returns. Play with the numbers—12-15x makes sense for local infrastructure companies when you look towards the future based on historical performance and the fact local fiber infrastructure is in short supply and organic bandwidth demand is growing. You are not faced with a price war problem if your assets are unique and located in markets with limited competition (but not markets that are too small with limited upside).
So, this theory explains why PE expectations are considered relevant if a 2010 consolidation trend emerges among local fiber optic infrastructure M&A—and why strategic buyers may play second fiddle.
PE firms have been talking about this segment for years and are active with various platform companies. Meanwhile, strategic buyers are asking the IBs, “What are you hearing?”
First mover advantage? Auctions driving multiples if you are not first or last? A nice PE multiple theory—there is no reason why a strategic buyer can’t view it the same way. Debt is cheap (at least for PE firms).
Two facts are certain:
1) The local infrastructure companies are operating in good health, and
2) Who knows what 2010 is going to bring in M&A.
I guess we’ll wait and see. The analysts and industry media think this year is going to be an interesting one. In the meantime, I’ll just stick to my knitting and start planning for 2011 around July!
Metro Connect Consolidation (Part III)
February 19, 2010
A recent change that has been helpful to IBs and PE firms has been the emergence of AboveNet trading in the stock market. AboveNet is a pure play, data IP fiber-optic infrastructure company that is very similar in profile to many of the healthy companies who are alleged targets for consolidation in 2010. The good news is there is finally a company with public metrics that clearly distinguishes the performance and robust growth of data IP horizontal fiber infrastructure ownership versus the various rental models and hybrids of Telecom companies. I say, “Benchmark AboveNet against anyone – the proof is in the numbers.”
I am bullish on AboveNet and recommend the stock for these two reasons: they have great leadership and management and I know the business model works. From a multiple perspective, they trade 9-10x EBITDA depending upon the market fluctuations. I view this multiple as a floor.
Bill LaPerch and I usually get together at Metro Connect and exchange barbs, compare notes and ask each other questions about the state of all things Telecom. Both of us were so busy at this Metro Connect that we could not spend our quality time together so we just passed each other in the halls with a wink and a nod.
So why am I bullish on the metropolitan fiber optic infrastructure model? I’ll share my experience. Most of us (if not all) are experiencing double digit growth rates, ILEC-like gross margins and EBITDA margins climbing through the 30’s and into the 40’s. A 40-50% increase in EBITDA growth year-over-year is common and historical. Why? It’s what infrastructure owners sell—data IP connectivity—everyone needs it and the organic growth rate of demand is 50% a year.
At AFS, by calendar year’s end, we typically have 80-85% of the next operating plan year of MRR in backlog. By May or June, we have filled out the MRR order rate for the remainder of the billable year and we can begin to focus on the next year. This pattern has been a constant, predictable cycle. Moreover, we have a churn rate of 0.7% due to our services and customers. We could not do this planning and execution year-in and year-out without owning the local fiber optic infrastructure.
I am certain that if you dissect AboveNet’s cycle or talk to the remaining companies on the same metropolitan data IP non-legacy infrastructure ownership model you will hear similar performance and predictability. We are often asked about offering applications and we politely decline. Why? Applications will dilute our growth rates and margins. 90% of business buildings still don’t have another physical network provider serving them (outside of Ma Bell) and why should we change something that is working well and lacks the complexity of balancing between a legacy, regulatory and IP world?
These points are the perfect segue to sharing the Consolidation Theory bounced around at Metro Connect 2010 this year. Disclaimer: this theory is not necessarily my theory but one I heard many times.
Tune in on Monday when Dave concludes his Metro Connect posts by unveiling his 2010 Consolidation theory.
Metro Connect Consolidation (Part II)
February 18, 2010
If this round of consolidation occurs, with the last round’s trend of quantity over quality, the remaining companies are healthy and growing quite well (often at double digits). When these companies are approached, the message is simple, “We are healthy, outperforming most public companies organically and have no compelling need to sell unless the right offer is made.”
The underlying tone has been, a strategist behaves as a bottom feeder (perhaps due to past lessons) without recognizing the limited supply—or my favorite, a buyer can’t possibly pay more than what the going multiple may be! As you see, lots of ego comes with strategic buyers.
Before I disclose the Consolidation Theory of 2010 supported by various CEOs and analysts, let’s talk about limits of multiples. I’ll keep it simple, “If my company is trading at 6x and I can’t possibly pay more than that for yours, even though you have a history of double digit growth in all categories, you have lower costs (because you own fiber), you have more demand than capital to lever and have better operating performance.”
In summary, “If I am paying a premium, how do I explain that to my Board and/or Wall Street?”
The IBs should excel at explaining the premium, but instead, the only explanation they provide is to run the same numbers of valuation ranges and come out with the same answer. However, there is a vast difference and growth security in the valuation between a company that has no infrastructure (they rent) and one that does. Moreover, the value and competitive advantage is even higher if the local fiber routes are unique. The IBs’ logic seems to be valuations are based on the average of Telecom companies although no two may be alike. Additionally, such valuations are based upon EBITDA and cash flows and place zero value on the strategic importance of metropolitan fiber optic infrastructure physical assets.
Let’s look at valuation and multiples in the context of childhood parable. Suppose a company was smart, like the smartest of the 3 Little Pigs, and built their business of bricks (owning infrastructure). They are valued the same as the other Little Pigs that built their business out of straw or sticks (renting, collocating, UNE-L, Big Iron switches, etc). The Big Bad Wolf (ILECs or Cable Companies) blows on the straw or stick businesses, the advice is to go to the FCC and whine. Or to buy that brick house which is impervious to the Big Bad Wolf, but tell the owner that their brick infrastructure is not greater in value than the straw or stick built business. Meanwhile, the Big Bad Wolf is squeezing you in the market on price and costs, and ever so slowly, bleeding certain pigs to death.
Join Dave on Friday as he moves from a childhood story to the very real example of AboveNet. Don’t worry—these points will all connect as Dave outlines his Consolidation theory.
Metro Connect Consolidation (Part I)
February 17, 2010
Today I plan to elaborate on the Metro Connect Conference 2010–the general discussion, meetings and buzz regarding metropolitan fiber infrastructure company consolidation. With my long history in attending and speaking at Metro Connect events over the years, I noticed there were many more investment bankers (IB) and private equity (PE) firms in attendance than in previous years.
Let’s focus on consolidation: If the trend of consolidation is as dynamic as reported at Metro Connect and in analyst reports, there are two types of buyers interested in consolidation. The first category is referred to as strategic buyers—these can be wire line operating companies (CLECs), wireless companies, ILECs, and cable companies. Also in the mix are international PTTs and, as some speculate, a crazy move by Google or Microsoft to have unimpeded access to unlimited bandwidth via local fiber.
There are many potential reasons why a strategic buyer would purchase a metropolitan fiber infrastructure company including present day margin squeeze where fiber can lower costs, competitive differentiation, overlap, network extension, ILEC independence, regulatory independence, the ability to increase gross, operating, EBITDA margins by not being capped by ILEC rental fees, control over strategic assets (to cut off others from using it while forcing competition to build or exit a market)…there are plenty of other reasons—these were the first ones that came to mind. Allegedly, a strategic buyer should be willing to pay a higher multiple than a financial buyer because the recurring operating synergies are included in the value.
What is a financial buyer? A financial buyer, for example, may be any one of several PE firms with billions of dollars looking to invest those dollars in well-established businesses depending upon sector focus. Typically, this type of buyer is unwilling to pay a premium unless there is some type of market imbalance. Moreover, a financial buyer typically has an exit strategy of 3-4 years, either by sale or IPO. In most cases, a financial buyer will invest capital to make the returns 3-4 years in the future even more lucrative if presented with the right opportunity, market cycle and supply imbalance.
I would not lie to you, my loyal readers. Additionally, what I am about to write is not unique because I network with other CEOs in our industry. Various PE firms have been eying the metro infrastructure segment for several years and conducted lots of phone calls of interest and meetings with the same vision—there is an opportunity to roll up these remaining metropolitan infrastructure companies into a nice package and take advantage of the limited supply of local fiber optic infrastructure. The recurring theme is the consolidation of local metropolitan fiber optic platforms to create greater value at a future date.
The last round of consolidation was a few years ago, driven by large strategists. In my opinion, most of those transactions came with a lot of warts—it is not a secret that the integration and performance issues post-acquisition have been documented and followed quite closely by analysts. That particular generation of consolidation was driven by distressed assets or distressed investors. Moreover, the last round of consolidation had investment banker-syndrome written all over it. The prevailing advice to strategic buyers was to purchase large companies and drive quick contribution to top line revenue. As we know in some cases, revenue growth by M&A was realized but margin growth suffered, organic growth struggled, and overall, many of these buyers found themselves growing at single-digit rates for a variety of reasons.
The reason for this quick history lesson is that I am teeing you up for the consolidation theory of 2010. I could continue writing about the last consolidation period and its impact to shareholder value, but rather, I am trying to establish the context. The last time around, you couldn’t get an IB or strategist to look at anything “small” although the vast majority of buyers in the last consolidating round were small themselves when compared to the ILEC (and remain so by today’s comparison). The last consolidating round was quantity over quality.
Join Dave for his next post where he jumps headlong into his thoughts and opinions on the 2010 consolidation buzz.
Question from Reader: 2/10/10
February 15, 2010
Dave: Do you think that LVLT (Level 3) will ever prosper due to the growth in the use of fiber. Will ownership of the “pipe” put them in a position to increase prices and gain leverage over customers? Your thoughts would be appreciated. Thanks. Richard
Dear Richard:
Thank you for reading and especially for asking a question.
Level(3) has an interesting history and you do have to give them credit. On the one hand, they are survivalists. On the other hand, for shareholders, it is an entirely different matter. In hindsight, Jim Crowe must have had a crystal ball when they started by loading up with tons of debt, enabling him to anticipate the 2001-2003 Internet meltdown, the ILEC dominance in the Federal Courts v. the Communications Act of 1996 (with whiny CLECs) and our latest banking crisis.
Level(3) is still with us but it is always given a hard time because of its debt. I would guess that if Jim Crowe decided upon the inception of Level 3 to incrementally obtain debt, the company would have gone bankrupt when banks pulled back on the sector in 2001-2003—much like the 1200+ bankruptcies back then. Call Crowe what you want—genius, psychic or mad man, but Level(3) is still in the game while 1200+ others are not.
I am having difficulty writing this response today because I have been laughing so hard that my ribs actually hurt over Google’s big FTTH announcement yesterday. Google is playing politics – calling it an experiment. I discount the announcement altogether and so will anyone who owns fiber optic infrastructure. I’ll elaborate more on this announcement in a future post. But my ribs do hurt so much from laughing that typing is almost painful.
I digress—back to Level(3). Level(3) met God a few years back—fortunately, they met in the marketplace and not prison (unlike many white collar Telecom convicts). Whenever I am asked about finding God, I reply, “I think God is in prison.” In my opinion, once a white collar crook finally has criminal charges filed against him and goes to the Big House, he finds God there. So follows my theory, just like regular criminals, it seems if you can’t find God and a moral compass on your own, you can always find God in prison as so many do. God is definitely in prison.
Pipes—a word that I both like and dislike. When Level(3) found God, they finally understood what I have known for years—all applications will originate and terminate in a metropolitan market with local access along with their associated revenues. Long haul pipes are in vast quantity with plenty of inventory buried in the ground. In all fairness, however, if you are going to build a long haul network, you don’t undergo the expense to put only one pipe in the ground. Many critics of Level(3) don’t understand this fundamental aspect of building any network, and when I hear the illogical point and criticism of installing multiple pipes, I discount the critics. If your favorite broker or analyst provides this logic, I suggest finding a new broker or following a different analyst.
All of the money is made in the local markets by origination and termination of services. With data IP and Ethernet dominating installations, there is an agnostic aspect of what applications run over the local pipes. In addition, customers can’t figure out why a 100 meg connection in a metro market may be priced 3-4x more than the same 100 meg between Washington, DC and Miami. It’s an apples and oranges type of answer. Metropolitan markets are 10x more expensive to build, operate and install than a long haul network. You actually require more fiber to be deployed in a metro setting in order to support stuffed, long haul dumb pipes from long haul networks dumping packets at a carrier hotel for metro distribution or third party interconnection facilities. Think about it—it makes perfect sense.
When Level(3) found God a few years ago, they went on a buying spree of metro assets because they realized they need a local and a deeper presence as opposed to just a co-lo interconnection point. So I characterize the last round of consolidation as a blessing because the larger CLECs such as Level(3), who are still puny compared to the ILECs, bought larger holders of metro assets and removed a lot of junk, bad investments, poorly run companies, and in some cases, inept CEOs.. I think they acquired eight companies and TW Telecom bought one after bottom-feeding for so long that it lost the first eight opportunities. Due to Level(3) and TW Telecom buying up some of the junk, my business (as well as others) improved immensely because the low price champions were removed from the game. Rational behavior relative to staying in business has prevailed in for the most part (although a few occasions you get a nutty CEO that thinks the low, low price/volume play will work).
The integration struggles have been well-documented and disclosed—and were not unexpected to me. The good news is Level(3) found God and is trying to find success by focusing its efforts in metropolitan networks. In fairness on their last call, TW Telecom spoke about the M&A deal they did with Xspedius Communications. Out of 18,000 customers they acquired, they have purposely churned out 14,000. A lesson for Level(3) and all carriers—it is about the quality and loyalty of customers as opposed to the top line growth. And yes, owning the local infrastructure is the key to margin growth. I’d rather grow margins and profitability than acquire marginal customers or unprofitable customers to please some analyst. Level(3) really needs to take this lesson to hear—it’s not about low price but about selling reliability and saying no to business that is not profitable. A stringent credit check is crucial to avoid churn. Finding and retaining salespeople that can say, “No” to bad deals and move on to better opportunities will also help Level(3).
Level(3) has its focus on the right target–metropolitan access—but the junk customers, systems and processes make it hard to clean up.
In my opinion, Level(3) needs to position itself better as a solutions company and not a network company. Customers buy solutions that are reliable! Selling them on the fact you own infrastructure is a confidence-builder but the true consideration is that you deliver on-time, on-budget, reliable service.
Regarding prices, Level(3) doesn’t need to increase them or decrease them—keep prices at the same level as the ILEC and just outperform them on quoting, on-time delivery, speed and reliability. That’s our focus and I’ll give you a few internal AFS data points to illustrate that this formula works:
• On-time delivery success rate to customers over 10 years of 98.5%
• On-budget success rate over 10 years to customers of 98%
• All-all optical customer service affecting failure rate less than 1% over 10 years
• Customers than have never experienced a service affecting outage in 10 years
• Margins continue to grow at double-digit rates annually for 10 years (quality top line by double digit growth annually excluding business we turn away for not meeting our disciplined financial hurdles)
• A churn of 0.7% per month.
How or why does this model work for us? It begins with hiring the right talent, having a culture of customer inclusion and focusing on constant improvement in all areas of the business with an emphasis on efficiency (without going overboard).
If Level(3) tries the same formula, given what they now have (and cleaned up to a certain extent) I think they will be on the road to riches. Simplicity, less layers of management, decision-making tools for those closest to the customer are required.
Did I answer your question? Oh, my painful ribs!!!!
Metro Connect (Part III)
February 12, 2010
Let’s go beyond the take-or-pay prerogative. Let’s talk about demand—real demand and the timing that will trigger towers to have a need for 100s of megabits (if not gigabits) of bandwidth. I am a student of demand. I like to understand demand, demand drivers, macroeconomic underpinnings, regulatory constraints and timing of events. One of the reasons AFS has survived the recent Telecom and banking industry meltdowns is that we have never spent a dime speculating against future demand unless a customer was with us. Yes, we are quite conservative and contrarian. We also believe network reliability is important to customers—oh, crazy AFS!
You can’t deliver oodles of bandwidth wirelessly for last mile until the technology is available and deployed to towers. This technology—WiMax, LTE, 4G, etc.—is several years away from reaching a tower deployment point where carriers can switch customers between wireless networks to provide the user with a good, rich bandwidth experience. For example, going from EVDO today on one side of a link to a WiMax solution spilling out 40 megabits on the return side of the link may cause a customers experience to be somewhat limited, to say the least. Technology ubiquity, reliability and interconnectivity are underlying gateways to demand growth, but not the major factors (albeit important ones).
Riddle me this one, Batman. As LTE, WiMax, 4G, femtocells and whatever else gets deployed, what is going to happen to the demand for towers themselves? We have a lot of towers today because of wireless coverage technology distance limitations. When a 4G technology can reliably shoot 100 megabits 40 miles, how many towers do you need in between? Or, orthogonal in an urban area? I would not want a lateral to one of those towers that is no longer needed or have built a lateral based upon a promise of future business.
My last point regarding tower demand is about what makes the world go around for many of us—money. In order to understand demand growth (beyond video or iPhone), there is an upcoming phenomenon that will accelerate wireless bandwidth demand beyond comprehension today. What will really drive demand? Content. That’s right, content. Less than 2% of known content today is in a digital format for distribution across wireless or wire line networks. You must ask the question, “Why and when will the other 98% get turned loose?”
Understanding this scenario means you have to stop thinking about technology and don a business cap. There are standards being negotiated as I write this post and they may take several years to solidify. These standards are centered on a topic called Digital Rights Management (DRM). In short, owners or creators of valuable content do not want to release their content in digital form until the systems are in place to ensure:
1) Copyright protection
2) Preventative piracy of the content
3) Payment for how and when the content gets used
DRM is the event that will cause demand for wire line and wireless capacity to shoot through the roof. In my opinion, it’s several years away. Keep in mind, however, that money rules the day. Once content is turned into ones and zeros, the proverbial pony is out of the barn and the creators or licensees will want to get paid for usage.
If you don’t believe me, take a minute to study how much R&D Microsoft has put into micro-payment systems meta-linked to content or IP addresses for the Internet over the past decade.
The last subject we debated at Metro Connect was cloud computing–the hype, and indirectly, SaaS. Let me position it as I did to the attendees—we are at least a decade away from launching cloud computing platforms that are as reliable as they need to be. Fortunately or unfortunately (depending upon one’s perspective), in the early days of my career, I was neck deep in fault-tolerant computing platforms, communications and related technology. The idea of fault tolerant computing is that the application and associated data never goes down or gets lost—it is a very complicated subject matter and area of expertise. I hate to burst Google’s bubble, but a bunch of blade servers in an N+1 configuration built upon client/server machines at the network edge is not going to give you the reliability needed for a commercial business to place all its eggs in one basket. Gmail crashing for 36 hours is just one example of what I am talking about—take a business down for a day or two and the economic costs, loss of goodwill and diminished brand credibility are incredibly large.
As I have said before, nothing happens as fast in Telecom as one would think after reading our trade press, websites and PowerPoint presentations.
In closing, these are the topics examined and debated when you attend Metro Connect or other Capacity Media events. You don’t get a CEO commercial. You listen to knowledgeable and experienced C-level executives who lack any of the tendencies of a large company’s white tower CEO (who probably had someone write them a speech).
God, do I love America!
Metro Connect (Part II)
February 10, 2010
Consider the history of the Telecom industry–going back about 30 years. We have a tendency to create buzz about a service or technology that is many years away from day-to-day reality. If you don’t believe me, just think back to the Telecom meltdown of 2001-2003!
I believe tower backhaul via fiber will become increasingly important over time. But I disagree with the generally accepted notion that the demand rivals that of the 2001-2003 land grab. It is true—the wireless carriers are talking to fiber infrastructure owners about building fiber to towers. At AFS, we have deployed fiber to some towers, but it was based on financial return requirements we have internally…after all, we want to stay in business.
We have seen the same RFIs, RFPs and contracts that wireless carriers have issued for services. More often than not, we have replied to these opportunities with a resounding, “No.”
“Why?” you ask?
In certain situations, the wireless carrier wants a fiber infrastructure carrier to act like the fire department – be ready for our call. Wireless carriers want fiber built to a tower today to replace the equivalent of a few T1 TDM circuits. The prevailing logic is that you are first to the tower and the spoils shall be yours as the demand grows.
If you build to a tower from a backbone you already own and you replace three T1’s, the law of averages says that if nothing else happens your payback on that capex is 60 months, 72 months even greater. We have told a wireless carrier, “No!” because the wireless carrier is unwilling to sign up for a minimum usage guarantee (MUG) under a take-or-pay provision in the contract. Once again, I have seen the same RFP’s, RFI’s and contracts from these carriers although I have been told they will commit to the take-or-pay! If wireless carriers in major markets are not willing to commit to a take-or-pay, why would they do so in smaller markets?
Even if the wireless carrier is unwilling to agree to a take-or-pay provision, the logic follows that the non-ILEC carrier is at the tower and in the position to take advantage of growing demand. In my simple world (and with 30 years of experience), I am certain that ILECs, (especially those who own wireless licenses and serve towers with copper today) ,—will replace the copper with fiber to specific dense towers as they see demand rise—and they will see it first. This scenario creates something interesting—it’s a wholesale play by the ILEC to the tower, to other tenants on the tower, once they have installed their own fiber.
Anyone want to guess what is the cost of this wholesale service? Pretty much zero—it’s found money. The ILEC will build fiber to towers they already serve and they will offer fiber capacity to others on the tower as well. Unless you have a take-or-pay provision, a non-ILEC carrier could wind up being the price whipping boy against an ILEC with zero incremental costs (outside of marketing) to compete at that tower.
Let me put it another way—if AFS ever squandered capital without a secure bet on capital return, it’s possible you could find my body in a dumpster. I joke, but gambling should not be part of any business plan or execution style.
Join me for Part III as I go beyond the take-or-pay provision to connect-the-dots between my points and circle it back to Metro Connect.
2010 Metro Connect (Part I)
February 8, 2010
I recently attended the 2010 Metro Connect annual event in Miami, Florida. As long as I can remember, I have been a speaker at this event. In my opinion, this event is better than many others at providing substance over rhetoric. The team at Capacity Media, producer of this annual event, works diligently to ensure the topics are timely and relevant and the speakers are insightful.
To my Blog readers that are from Enterprises, Education, Government, Hospitality, Financial, Healthcare, etc. – please do not think it is Telecom-only event. On the contrary–by attending this event you will learn the ins and outs of Telecom because large propaganda-spewing Telecom firms (like Ma Bell) aren’t the dominant force at this event.
For example, FiberLight (Atlanta, GA) was a leading sponsor this year. FiberLight is a service-oriented, responsive carrier that has major metropolitan fiber infrastructure in the top 10-12 markets in the United States. Sure, they might not be a household name, but you can glean invaluable knowledge from listening to a panel or speaking directly with Mike Miller, CEO of FiberLight.
Capacity Media produces various events similar to this one throughout the world. By attending one of their events, I can promise you that it is virtually impossible to attend/leave one without obtaining quite a few “gold nuggets” of insight. You can meet C-level executives who are well-versed in Telecom issues such as regulatory filings, big carrier issues, etc. and are genuinely pleased to discuss these topics candidly. These are CEOs that stay around for the event as opposed to speaking for 60 minutes and then hopping on a private jet.
But I digress—back to this year’s event. The big buzz, and it’s not limited to Metro Connect 2010, is the expectation of another round of Telecommunications consolidation–this year with the focus on metropolitan fiber optic infrastructure. Believe it or not, contrary to the Real Smart Guys (RSGs) on Wall Street back in 2000, there is a shortage of fiber optic infrastructure in metropolitan areas. I know it’s hard to believe! Bandwidth demand is growing at 50% each year which is outpacing the infrastructure supply and creating an imbalance. There is an even greater imbalance of metropolitan infrastructure supply outside the top ten cities in the United States. For those owning infrastructure that is highly unique in footprint, there is even less of a supply! With these facts in mind, the consolidation buzz was inevitable.
I am not the type of person to take everything I read or hear as Gospel, but I do observe things, and I believe the consolidation buzz has more strength than anyone may think. Why do I feel this way? I will go into a deeper discussion in subsequent posts, but I can tell you this fact based on my personal observations—in nine years, there were more investment bankers and private equity (PE) firms per square foot in attendance than I have ever witnessed at any conference. When I speak of the big PE firms, I mean the big “players” as opposed to the wannabes. For years, PE has been talking about consolidating and driving data IP fiber infrastructure platforms. 2010 just may be their year. As I chatted with a few of my PE acquaintances about the buzz around data IP platform infrastructure consolidation, I had to rib a few by joking, “Imagine if you actually did first mover advantage three years ago like we discussed–you would look really smart today.”
At the conference, I metwith Investment Bankers, PE Managing Directors, Bank Managing Directors, Wall Street Analysts and other CEOs in attendance. As you can imagine, my schedule at the conference was packed with private meetings. I only saw the light of day as a panelist examining the topic, “Does the dominance of industry giants spell the end for the small metro wholesale provider?”
Andy Lipman from Bingham McCutchen–industry notable and legal scholar in all regulatory matters–moderated the panel. I enjoy being on a panel when Andy is the moderator because he gets to throw a few barbs and I am able to share my “love” for lawyers and certain aspects of the legal profession such as the Vortex. Our panel members consisted of: me (an out-of-the-closet fiber bigot), Bjarni Thorvardarson, CEO of Hibernia Atlantic and John Scarano, COO of Zayo Bandwidth. It was quite a lively panel filled with personality and character.
We dispelled the notion of “dominant industry giants” fairly quickly. In summary, as long as there are industry leaders who are not customer-friendly, slow to respond, one size fits all and bureaucratic, there will always be a healthy competitive wholesale segment. Although the idea is impossible for Wall Street to understand, even if you look 20 years down the road, network diversity is a necessity not an option.
After thoroughly writing off the dominant player theory, we moved on to the Google threat—and we dispelled it as well. Then Andy moved on to another hot topic—backhaul to wireless towers. This discussion was fairly interactive because we all did not agree on certain things, but because this is my Blog, I’ll share my perspectives just as I shared them during the discussion.
Join me later this week as I provide a quick Telecom history lesson and then dive headlong into the topic of tower backhaul.
IT Expo
February 4, 2010
I am occasionally asked to speak at various industry events or submit a form to suggest topic. This year, I have decided to focus more heavily on non-Telecom events and turn my attention toward IT or vertical market-focused speaking opportunities. My messages of achieving (purchasing) network reliability and understanding the games that are played (to outsmart you) are universal.
With this new speaking focus in mind, I ventured into an IT setting about a week ago and I wanted to share this experience with you.
I was initially invited to speak about network reliability at the IT Expo in Miami at the Miami Convention Center. This conference, along with similar conferences, was presented by publisher TMCnet.
Less than a week before the conference, I received a call from the event coordinator asking me to participate on another panel titled, “How to Manage Customers During a Catastrophic Event.” I had to give it some thought—the topic is very important but I had already locked in my airfare so I was hesitant to commit to an earlier arrival. To make a long story short, I said, “yes.” I also enriched the airlines by paying $150 to change my flight.
As an aside, the IT Expo (in my opinion) is focused on IT hardware and applications. The usual buzz topics include: smart grid, cloud computing, VoIP hosting, etc. These topics attract a range of IT professionals and exhibitors, the latter of which I will touch upon later.
So, I made my early entrance to the Expo and spoke during the session, “How to Manage Customers During a Catastrophic Event.” The attendance for this event was very light. Honestly, I was a little surprised. Perhaps this event is so application-focused that the people who need to worry about customers and how you handle them in a catastrophe is not a relevant concern? I am certain these IT people do care, because after all, customers pay their wages! To reiterate, I was surprised by the lack of interest.
The next day, I was pleased to see a much better turnout for the Network Reliability session. In a nutshell, my message was, “Stop putting the cart in front of the horse.”
Industry specialists can spend time pondering the cloud, grid, hosting, data center, etc until they are blue in the face but the reality is simple. No matter how highly you think of your cloud, grid application, hosting platform or data center, if customers don’t have reliable connectivity at bandwidth rates they require, you’re not going to progress. Gene Laykhtman, Vocal IP Networx, was also on the panel. He shared, within my concept of network reliability, the session level transport and mirroring that needs to be accomplished in order to connect a customer reliably.
I believe we opened a few eyes to the concept that magical pipes and reliability does not exist everywhere and one should take this fact into consideration. I judged the Network Reliability panel a success because my 30 white papers were gone in a flash at the end of the session. If you’d like a copy of the same white paper visit, please visit the AFS website to download it. Please be sure to share it with peers, friends and family. It also makes a great bedtime story if you have small children.
After observing another event in progress at the Miami Convention Center, I made a special announcement during the Network Reliability session. The event, billed as the worlds largest indoor Antique Show, had over 800 exhibitors. Being the fiber bigot I am, I told the audience that I would be attending the Antique Exhibit in search of 125-year-old antiques to see their price—those antiques, of course, were copper loops.
So, I set out on my Antique Show adventure. Admission cost: $10 for five days! The aisles were numbered in increments of 100, beginning at100 and ending around 3500. Each aisle was at least 125 yards long. There had to be tens of millions of dollars in antiques, gold, silver and collectible items. It was fascinating—I saw a tabletop Cinderella made out of gold with crystal figurines inside a measly $75,000. I have no idea how much such an item appreciates but I do know this fact—AFS can build 5-8 laterals into multiple buildings with a very nice IRR for $75,000. I was tempted to buy this trinket for my office but I know my VC investors occasionally read this Blog!
The most interesting sight to observe, and a good lesson to all our carrier readers, was watching people negotiate/haggle the purchase of these items. It was easily worth the $10 admission price. Let me tell you something—whether it was an antique thimble for $1,000 or jewelry from the Middle East for $125,000, no one (and I mean no one) sold anything at a loss. The value of an item, and subsequent price haggling, was amazing and hearing a seller say, “No!” was quite common. Sometimes the exchange was polite, sometimes with a laugh and sometimes with disrespect! To repeat myself, no one sold anything at a loss—no one. I suppose that’s how they stay in business—a willing to haggle for a fair price but not to lose money!
As I strolled through the Antique Show, I did get to meet Jeff Bridges who was haggling over antique post cards. In my travels, I have run into many celebrities of all sorts and I usually don’t bother them. Although, I do feel compelled to share one short story about Rodney Dangerfield. I sat near him in an Admirals Club back in the 80’s in Los Angeles, waiting for a flight to New York City. If you ever have seen his schtick with the constant shuffling of his body, pulling of his collar, stretching his neck, etc—that isn’t an act—it is how he was programmed.
If you run into me some day, ask me about my flight to Tokyo with Andre the Giant (of Professional Wrestling Entertainment fame). That’s another interesting story!
Anyway, I digress…back to the Antique Show. I never did find any copper loops. My instincts tell me that there was a special aisle for the legacy, unreliable, antique copper loops. Possibly located in aisle 666?
I returned the next day to the IT Expo exhibit floor to check out the scene. In my opinion, the best booth trinket giveaway was from Polycom. They gave away stress-reliever foam Sumo wrestlers. I now have two Sumo wrestlers parked outside of my office as a reminder to not shirk problems but to tackle them. Another booth, who I don’t remember by name, gave away green screen pictures with various celebrities. I had my picture taken and inserted with the band, the Black Eyed Peas. My teen daughter knew who they were; I just thought it was something to eat. She believed that I had actually met them for about two minutes, until her mother (the commercial photographer) busted me. Impressive Photoshop, though.
In summary, I still believe that many techie types in IT and Telecom need to understand that things do not happen as fast as what is published or presented in a research report. For example, think about cloud computing. Just ask any two people what the definition of cloud computing is and you will get three answers. Last week, Larry Ellison of Oracle fame came out and stated cloud computing has been around for 20 years! His definition of cloud computing? Precisely what Oracle sells!
I also had a conversation with a manufacturer of telephones that come with a built-in camera and screen for conferencing. I could not understand the value proposition. The screen function for this $1,800 device works ONLY on internal conference calls. There isn’t an ability to use the phone outside of the LAN. I asked the manufacturer, “What is the value of seeing an employee’s smiling face at your desk?”
That’s all this device could do. The screen is about half the size of a small laptop screen so it could not be used for graphics. Thus, I would still need a PC with WebEx or Charts displayed as we spoke. As I said before, I just did not see the value. You can always pull up an employee’s headshot if you really want to see him/her that badly. I can see the value if you can see a person from outside your organization as you speak—observing body language, facial expressions, demeanor is important. Even so, the $1,800 price tag, before network costs, is a tough one to swallow. I struggled with the value proposition as it exists today.
Finally, I believe the secondary thought is reliability and it not receiving the attention in early design phases of cloud, grid, data center, device, etc. A virtual world will require physical, non-virtual network reliability.
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