Useful Idiots
July 16, 2010
Have you ever heard of the term “useful idiots?”
Well, just an observation about our friends at Google. You know, the “Don’t be Evil” folks.
Over 1,100 communities have applied to Google for the magical mystery fiber-my-town tour. To date, Google has not chosen a community. Think about this–the Broadband stimulus funds of $7.2 billion are being distributed. This makes the Federal Government faster than Google in rendering a decision. I never thought I would live long enough to be able to say anything from the Federal sector is faster than the private sector. Maybe it’s an omen for me!
So here is the skinny: As I always say, never pay attention to what someone says or what’s in a fancy PowerPoint chart–pay attention to their actions.
In the case of our friends at “Don’t be evil”-Google, they have sucker punched over 1,100 communities seeking 1 Gbps of fiber nirvana connectivity. Instead of rendering a decision, they are using the applicants to do their bidding with Congress. Can anyone say “moral compass?” Google is encouraging applicants to show support for bills Google wants enacted in the House and Senate. This is disingenuous at best. Click here to start your own investigation.
Google believes this effort is in the best interest of all communities–to back Google politically–even before they pick which community will be wired. Since when has Google become an authority on fiber infrastructure, uniformity of standards, telecommunications, data communications and all matters related? Do you believe Google is working for the betterment of America or for Google?
So, of the 1100+ community applicants, how many will serve as useful idiots and end up with exactly what they have today? To current applicants reading this: You have less than a 1% chance of reaching Google fiber nirvana. I would force Google to render a decision before backing them politically. Don’t become Google’s village idiot. Fiber connectivity should be done above board by the transparency and light of the Obama Administration. In this case, maybe not so much light after all, and there is that transparency risk. Well, if there is no light, then we are talking dark fiber, which is better than copper loops or no fiber cable at all.
FCC Loses Again
April 16, 2010
For those of you who regularly read my posts about net neutrality, you know I have been against government meddling. For those of you who disagree, I repeat the famous words of Gomer Pyle, “Surprise, surprise, surprise.”
True to form, the FCC lost yet another court battle against Comcast over net neutrality. Once again, the FCC could not tie its policy to actual law enacted by Congress after they issued a “cease and desist” order against Comcast for managing Internet traffic on privately owned pipes. The word “private” is important—as in “private enterprise.”
Strategically, the FCC had attempted to backdoor the net neutrality issue by applying policy over land line communications to effectuate the cease and desist order upon Comcast. In short, the FCC wanted to regulate the Internet with laws that do not exist.
The FCC lost in the US Federal Court of Appeals. Party on Comcast!
This decision messes with the recently announced Federal Broadband Plan by the FCC to set policy and rules for network neutrality. At the minimum, it will require an act of Congress and a change in the law. Translation—it would take years of lobbying and jockeying inside the beltway and network neutrality is not one of those “hot buttons” for the Obama Administration to push before the November elections (when in my opinion, all hell will break loose for incumbents in both parties).
Let’s daydream for a moment.
Suppose that Congress passes a law giving the FCC the authority to regulate the Internet vis-à-vis network neutrality. My first question is, “How will they regulate it without destroying the economy in the United States as the rest of the world uses the Internet in a manner it was meant for – market access, innovation and unfiltered communications (think Google, think China)? Next, the “law” will be challenged by reasoning of the First Amendment and brought to the Supreme Court. The ILECs, cable companies, think tanks and maybe even the ACLU would jointly petition the courts. (ACLU – I told you this is a fantasy).
As I have told many of my PE friends, never bet against the ILEC or cable companies in serious matters that affect their business because you will lose. Case in point, I had a PE buddy recently send me an e-mail. He was trying to be a wisenheimer by pointing out that, in the FCC’s National Broadband Plan, the FCC desires to have the ILECs and cable companies open their fiber networks for rental to others who did not take the risk to invest in real infrastructure. This is yet another example of Telecom government welfare, if you will.
This scenario is a perfect example of what angers me about PE – they have lots of other people’s money (pension funds, institutional funds, etc) but they call themselves “smart” because they have lots of money. I have no idea of their stories they use to receive this money, but I can surely show more failed investments then real success stories in Telecom over the past ten years. In my opinion, PE firms should act more humbly because it’s not the money alone that protects your investment or returns—and not just in Telecom!
I’ve devoted enough of this post to my PE rant. Focusing on the “open your fiber to others” issue, as I told my PE buddy, unless there is a court in America higher than the Supreme Court, this great idea and the reporting of my company’s death is overly exaggerated. This fiber open access concept—the FCC (under Commissioner Martin) lost this fight many years ago to Ma Bell. I hate to burst my PE buddy’s bubble after he thought I was going to be thrown to the lions.
Personally, I enjoyed reading this decision because I am pro-America and supportive of fewer government regulations. That’s why AFS has built our own unique metro fiber optic networks – we are benefactors of such legal outcomes without spending a dime and the fiber keeps us fairly immune to any crazy-talk inside the beltway. What is good for the ILEC or cable companies is good for AFS. Life is good and growing!
Where the government could focus its attention and make a big difference is Internet peering. The government could enable access cheaply by providing peering points with zero cost for IP access and no interconnection fees. This change would quickly change market dynamics—the emphasis would shift to bigger, cheaper bandwidth because the IP access costs of today could be reinvested by private companies into extending the physical network.
Alternatively, the government could simply nationalize Telecom. Does anyone think it could be a possibility? We just need a good crisis—don’t let a good crisis go to waste!
Google Fiber Losers (Part IV)
April 14, 2010
Thanks for joining me for my fourth and final post in this series that ponders Google’s “1 Gbps” fiber test bed, fiber glut, the FCC and many other hot-button topics.
You may be asking, “Great series of posts, Dave. But what is the point?”
Here is my point—don’t believe what the media, investment bankers or analysts feed you. The media does not conduct in-depth research and analysis. To be fair, when recommending stocks over the short term (even though privately they know the wheels will eventually come off of company X), their obligation is to tell clients whether to hold, buy or sell based on the best available information. Moreover, they all like to use apples, oranges, grapefruit and bananas in coming up with an EBITDA multiple and companies that should be valued with given “comps.”
“Comps” is an interesting term—one that is shorthand for comparisons. I have been in Telecom for 30 years and I have yet to run into comparable Telecom firms. After all, no two companies are alike, yet the Real Smart Guys (RSGs) on Wall Street can simplify valuation based upon a set of numbers and multiple spreadsheets—without taking into consideration a host of other factors (hard and soft) relevant to the risk of investing in a stock or acquiring a company. But, after all, fees are fees.
If we had this fiber glut, I ask, “Why FIOS? Why U-Verse? Why DOCSIS 3.0?” In my opinion, unless the cable companies get their copper co-ax networks overbuilt with fiber, they are in for a beating in the long run but that is just a lone wolf’s viewpoint.
Google is not in the mix to own local fiber optic networks. They have realized that they need business models that will develop beneficial partnerships with those who do own local fiber optic networks. I foresee Google leading revenue sharing initiatives, micropayments, event casting, etc. by not fighting with “dumb pipe” providers—and giving us a taste of their benefits because they need us as we need them. Now, this idea does not mean Google won’t try to pick off some strands for certain applications where fiber has been overbuilt in major cities. This much is true—things are going to be very interesting over the next few years and the FCC has an opportunity to facilitate bandwidth explosion—or really screw things up for another 14 years.
I will have another post on The FCC Broadband Plan forthcoming, but I first need to digest what I have read, pontificate and measure it against reality (aka the Beltway).
A special shout-out today to my buddy Gil, former CEO of 4Connections! Get your butt off the beach and call me someday.
Google Fiber Losers (Part III)
April 13, 2010
Last week, I wrote a few posts dedicated to Google’s 1 Gbps fiber test bed and the alleged fiber glut of the late 1990s. My posts this week pick up where I left off—when I decided to do a little investigating on my own and see what facts support the fiber glut.
After a few phone calls, I uncovered some facts that any member of the media or Wall Street analyst could have easily found. The vast majority of fiber deployment capital dollars was being allocated to the 12 largest cities (aka long haul) in America, and within the 12 largest cities (aka metro access) in America.
The media was wrong. Websites were misleading. And of course, lots of charts and analyst reports were jaundiced at best.
Upon further research, in these markets there was a ton of overbuilding and joint builds between carriers to lower capex costs (probably the genius of some bean-counter that can’t see past tomorrow). Moreover, I found in the top 12 markets, 12-15 new fiber entrants building rings, cable companies upgrading kit, long haul carriers building metro networks, caps from the early 1990’s extending their fiber—plus Ma Bell also building fiber! The vast majority of the routes had multiple carriers redundantly built, with some routes having more than several thousand strands of fiber sitting alongside each other (in addition to Ma Bell’s copper facilities). Additionally, I found anywhere from 30-75 CLECs playing the collocation, UNE-P, UNE-L and special access business model and ignoring fiber access!
Here is the kicker—when it came to rental CLECs back in those days, all of them pretty much used the same business model and each had a break-even in market share of 12.5%. Let’s do the math. If you have 50 CLECs (excluding the fiber owners) and each requires 12.5% market share to break-even, it would require a market of 650% (even in upstate New York you can’t get share any higher than 100%). Yet, the “dumb money” kept flowing.
Guess what my favorite CEO oxymoron was at the time? Hearing the sentence, “We have a fully funded business plan.” Maybe on paper you did, but not in reality.
What did I learn from this experience? Everyone was going after the “low hanging fruit” in the top 12 cities so why would I want to be the 16th fiber network builder? The oversupply, joint built routes and my business acumen made me think, in the long run, capacity prices would be very difficult to maintain in overbuilt, crowded routes.
Yes, I have this soft spot for strategic and tactical planning beyond next quarter. I was a contrarian to popular belief and the lone wolf. In other circles, this scenario is called going against the lemming mentality or not following the herd. These days, we’d call it, “too big to fail.”
Eventually, the business model evolved for AFS. We were now going to grow by incremental funding success, focus on second-tier markets (a somewhat overlooked market segment) and we would look for an anchor tenant (aka “demand”) to justify our entry into a second tier market.
Instead of the “build it and they will come” model, the lone wolf contrarian said, “If demand comes, we shall build it.”
In addition, we would build our network routes uniquely and not joint build with anyone to preserve our long-term competitive advantage on those routes. Even after a few acquisitions, about 98% of our fiber routes remain unique today with no built-in competition to our wholesale business model.
We have also avoided fiber in the third tier markets, especially rural. Typically in a wholesale business model, to build a metro network for a small market, there are only a handful of big bandwidth users. Once you enable another carrier to take out these big pipe customers by a wholesale dark fiber or capacity model, for the most part, you are left with T1, DSL or DOCSIS business in these small communities. The economics of this model make little sense to me over the long run. I am not saying these communities should not be served, but the demand profile strategy of AFS dictated that we focus on second tier, under-served markets with unique fiber network placement.
I had many “expert” PE firms that specialized in Telecom tell me that I had a few screws loose when I unveiled the AFS plan. I watched them lose billions of dollars, yet they said AFS did not have a clue.
Read David’s wrap-it-up post where he comes around full-circle and shares his conclusion and takeaways…
Google Fiber Losers (Part II)
April 9, 2010
In continuing my thoughts from yesterday’s post, I dedicate Part II to the two words: Fiber Glut.
I ask you, “How quickly do we forget and how quickly does the media fail to apologize for Wall Street?”
During the great fiber land-grab of the late 1990s and early 2000s, the phrase we heard from the media after Wall Street stoked the fires with unprecedented demand for bandwidth was “Fiber Glut.” I knew then as I know now: it was not a fiber glut, just an hysteria of investment into companies and celebrity CEOs and CFOs (who know how to spend money as opposed to growing a local metro business). In addition, the celebrity CEO/CFO’s were learning as they went with on-the-job-training. It is true that local fiber optic networks are 10x more complicated to build and run than some long haul network running through a cornfield or alongside a railroad bed. As a result, our industry had over 1,200 bankruptcies and lost tens of billions of dollars in capital investment with even more lost in market capitalization.
Back then, I was a lone wolf howling into the wind, so it’s not like this is “hindsight”. I can’t begin to tell you how mad I became when I read a headline describing a nationwide “fiber glut” and “over capacity.” The media who covered Telecom had a problem—they did not want to perform investigative research. Rather they just wanted to write headlines. As we know, Americans have such a short attention span that headlines like, “National Fiber Glut” create a whole new set of believers. Media outlets have taught Americans to become passive believers of whatever is told to them and critical thought-analysis has become a lost art.
I can’t begin to tell you how many fiber-glut-refuting letters I wrote and sent to various publications. I sent these disputing articles only to be ignored—I felt like I was writing to someone inside the beltway.
I had a credible story and I had facts. I wrote the AFS business plan in 1999. Being a die-hard cynic and fiber bigot, I could not believe what I was reading in the media or on websites of many carriers. If you believed what the carriers were writing on their websites, it seemed just a matter of time before Sheriff Andy, Opie and Aunt Bee would be getting the triple play. Most carriers reported that they were building fiber in hundreds of markets.
Using common sense and my cynical disposition (as opposed to hiring some research firm), I made a few phone calls. I called 4-5 of the largest national construction firms in America and asked what was being built—and where. Having the right credentials as former President of Frontier Communications, I would tell the folks at the construction companies that I just raised $300 million in equity and another $200 million in debt to build out metropolitan markets (yes, it was a white lie but I won’t burn in hell because I know plenty of C-level folks and commercial bankers who are way ahead of me).
Spend a little time with Dave next week as he unveils just what his sleuthing uncovered plus many more insights into the fiber glut.
Burning Eyes – Part II
April 5, 2010
I want to begin with a shout-out to my buddy “Lou” – I hope you are reading this post. It is focused on the value of owning local fiber optic infrastructure. Yes, you have to have fiber before the spectrum game can become effective.
Just ask Eric and Ivan. Google has figured it out, even with their publicity stunt about running gigabit services in two or three cities (out of 1,100+ that applied). What does that tell us about demand? How about the value of local fiber access? What about one color valuations?
New BFF’s (my teen daughter Leah keeps me hip), Eric and Ivan, genuflect to the FCC, “The FCC underscores the importance of creating the right climate for private investment and market-driven innovation to advance broadband. That’s the right approach and why we are encouraged to see the FCC’s plan.”
My take-away from the “Unleashing American Broadband” article is as follows: always bet with the ILECs (as Google knows). The value of FCC policy versus dragging FCC policy to court and winning based upon the law (when they disagree with policy) is priceless. Plus, the FCC Broadband Plan as written is not policy, it is a framework written by staffers. It is not a near-term focus of Congress. In layman’s terms, the FCC Broadband Plan debate will continue after the November 2010 elections and I have a hunch some things will change within the party we have in power. Google is not dumb and they see what is coming because they are embedded well in the current administration.
You may wonder, “Do we like two superpowers getting cozy?”
My emphatic response is, “No, not by any stretch of the imagination!”
But you have to give credit where credit is due – they published their thoughts for all to see. I won’t share it now because this post is long enough. But the strategic dynamics of Google and Verizon combining sandboxes may keep a few other big ILECs awake at night. Those CLECs who think they have a Shrek Kingdom have become even smaller in the scheme of things to come.
So, as things get “debated” on the FCC Broadband Plan over the next few years, the inoculation for any outcome is simple – get off the ILEC facilities. And those that own and operate unique, local fiber optic infrastructure by the sheath can operate their business as usual–with double-digit growth.
My advice to the CLEC’s burning legal dollars over the next few years trying to “influence” FCC Policy and Congress: Your money will be better spent on leasing fiber, building unique fiber and getting off the ILEC infrastructure.
Then again, what the hell do I know? It has been 14 years since CA 1996 and not enough local fiber facilities-based competition per the GAO. We’ve seen over 1200 Telecom bankruptcies circa 2001-2003 by depending upon the ILEC pieces and parts. Do the math—especially as strategic buyers and private equity firms continue to line up M&A strategies.
Since reading this opinion piece, I have to wear sunglasses to ease the stinging in my eyes…and also because the future of AFS is looking bright!
USF Increase
March 25, 2010
I am writing this special post because the government wants my company to hide something from my customers.
The FCC has announced an increase in the Federal Universal Service Fund (USF) Assessment rate to 15.3% effective this quarter. The USF rate is up from 14.1% last quarter and up from 9% a few years ago.
Being the America-first person that I am, I asked our billing department and regulatory folks if we should send a nice letter to each of our customers specifically identifying this increase in taxes.
Low and behold – what did I learn?
The Federal Government wants my company to be a tax collector for them but discourages such blatant notifications of a tax increase. They “encourage” a carrier to add the tax into their rates or just increase the USF line item on the bill (without too much fanfare, notice or attention) in hopes that the customer does not notice.
An interesting aspect of our tax code…
Distressed Debt
March 23, 2010
I have just finished reading a book and I suggest you read it in order to better familiarize yourself with the mechanics of Wall Street. It is about what certain people do on Wall Street—and how they make millions of dollars doing it.
The book details credit default swaps, distressed bonds and the sinking of America by a handful of greedy bastards on Wall Street. In my opinion, a garbage collector contributes more to the advancement of society and mankind than the mechanics and apparatus of distressed debt and credit default swaps that this book covers reasonably well.
Why do I pick on distressed debt? I read another article today on distressed markets for “mid-sized restructurings.” As simple as this question may sound, I ask, “Does anyone in America build anything anymore? Have we become so utterly clueless about building a business as a bunch of paper-swappers and spreadsheet-jockeys that our only market is distressed paper? Moreover, is there anyone who actually funds companies that grow?”
In a nutshell, this distress debt betting is nothing more than two teenagers playing a game of drag-race chicken back in the 1960s. One bets on acquiring bonds at a reduced price due to bad management (which makes them distressed) and hopes to flip them to some fool when they rebound ever so slightly. It’s a lot like the hot potato game.
The book, “A Colossal Failure of Common Sense – The Inside Story of the Collapse of Lehman Brothers” was written by Lawrence G. McDonald. I am not picking on Lehman Brothers (although I will tee-off on them) but this book illustrates the mechanics, hubris and the extraction from reality that a handful of people have had in destroying our global economy. This story is not unique to Lehman Brothers—there is plenty of criminality to share.
For the record, and in my humble opinion, Goldman Sachs is a dangerous player today having so many former Goldman Sachs-types buried in the Obama Administration.
Let me detail my past experiences with Lehman Brothers – and the hypocrisy. Of the banks I have met with over the years, Lehman had, by far, the best minds relative to telecommunications. What I mean by the “best minds” is that they understood telecommunications beyond the spreadsheets and the proverbial “comps.” In one meeting, we discussed everything from fiberglass Bragg coefficients in the manufacturing process to the tolerance and challenges of high bandwidth lasers and regeneration. I truly enjoyed these intellectual discussions, beyond the normal banker spreadsheet jargon focused on comps.
That being said, what frosts my ass in hindsight (no pun intended) with Lehman, was their leverage. In the case of AFS, I had a growing and prosperous business that was not close to distressed, based on a contrarian fiber build strategy, and the Real Smart Guys (RSGs) at Lehman, felt a 5x of EBITDA was “risky.” I only want to contrast this “risk” assessment by Lehman because they leveraged anywhere from 32 to 64 on credit default swaps trading and packaging junk mortgages. So that is what frosts my ass—someone in risk management at Lehman, and other banks similarly positioned, need to stand in front of Congress and/or go to jail. While Congress is investigating Lehman, they may want to bring in the bond rating agencies that, for a “fee,” rated these credit default swaps at AA levels knowing differently.
These days, we have a flurry of refinancing in telecom. Some people claim they are doing it for increased runway on the principle, some for lower interest rates and some to exclude certain covenants. These latest financings have ignited speculation by industry media and Wall Street that we are entering another era of M&A consolidation. I say, “Hog wash!”
Aside from spreadsheet synergies, I don’t see anything of strategic size or importance that is worth putting together. The $1 to $4 billion revenue class of companies would have such culture clashes—success would be greatly limited and highly risky. Keep in mind, this class of companies are still tiny “fleas” in the grand scheme of things although the leadership of these firms might indicate otherwise. The ILECs and Cable Companies still reign supreme and the newly proposed FCC Broadband Plan is not going to change a thing. Hope, without owning unique fiber optic infrastructure, can be a real bitch!
The latest hype surrounds high yield (HY) bonds—allegedly credit markets have thawed and this warm-up will drive M&A. I believe HY bonds for the “sake of a synergy play” is not the best use of capital although it may be a nice testosterone boost for a few egos who like to see their names in the news. For example, assume you have a company with senior labor, cheap financing and growing at double-digit rates—why on earth would you use a HY bond to retire such a senior facility (unless there is something more to the story that isn’t being told)? If I stretch my imagination, I can see a HY play if the M&A results in synergy AND a strategic competitive advantage. However, I foresee those opportunities on a scale that is not palatable to the RSG’s issuing the bonds because they receive commission on the size of the bonds, not the results. There’s that hot potato scenario again.
All in all, I encourage you to read the book and educate yourself on the sleight of hand that occurs every day—small groups of people making millions of dollars by swapping spreadsheets yet doing nothing of importance to advance our society or to benefit the overall economy. It is clearly a case of pigs at the trough with a lot of culprits—government, banks, non-banks, rating agencies, etc. This book is a great study of business ethics (or lack thereof) with no moral compass relative to the pursuit of dollars at all costs—with a blatant disregard to the consequences globally.
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.
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