Google Hysteria (Part II)
March 4, 2010
So why is Google pretending to be interested in FTTH? Plain and simple—they are going to create data, measure and develop applications so they become an authority and advisor to the government on cyber architecture, applications, security, benefits and open access initiatives (that will ultimately become part of FCC policy). I predict that Google will make a recommendation after the experimentation is complete—that the optimal cyber architecture should be distributed bandwidth to the edge of the metro network and regulated. Linkage back to centralized server farms (I mean cloud computing) will be served by dumb pipes.
“Why do I make these predictions?” you ask.
The most significant reason is that Google (and a few others companies) has a competitive advantage today with tens of billions in distributed computing across local markets in America. If you can get the law to regulate a distributed access architecture, you get a built-in barrier to entry against competition given the billions it would cost to replicate Google’s footprint. Come to think of it, maybe Google’s distributed servers should be regulated for open access, not the network but I digress.
Please don your strategic cap for a moment. If you were the CEO of Google would you really announce that you are going to run super-secret applications that require gigabit speeds? What company in their right mind would signal competition to this possibility? The answer is none.
Google’s authority/expertise effort is designed to penetrate and influence government communications policy and win media coverage. Google the White Knight is here to save America from those big bad ILECs, Cable Companies and the Mighty Mice (CLECs). I can think of at least 20 companies that Google could have gone to without having to build out one inch of fiber and quietly conduct their scam (I mean application/experiment/R&D). They could have easily formed some LLC under another name to buy the fiber or capacity and no one would have known the difference. Come to think of it, with Google’s cash, they could have bought a city of 50,000 people and experimented to their heart’s delight. Or, if this play was really about new applications to blow away the competition, Google could have quietly gone to another country and experimented.
The publicity machine makes it is very smart for Google to position themselves in this visible manner, even though they have no interest in owning and operating FTTH networks. Infrastructure costs a lot of money and they want to figure out how to get that free ride. Again, that word free bugs me. Please observe the politicians coming out of the woodwork when Google announced a request for information (RFI) from communities who would like a Google FTTH laboratory. A RFI—what is the next step—asking for a RFP?
To all of the politicians out there who are chasing this bird, please let me assure you this service will not be free—you will pay for this sooner or later. Make sure Google posts a bond or two especially when they pull the plug on the experiment. Mr. Mayor, you don’t want to be caught as a “partner” holding the bag. Make sure Mr. Google has the proper licenses to operate a network, to gain access to the public right of way and be sure to charge them as you do any other carrier—permits, restoration, relocates, percent of revenue, real estate taxes, sales taxes, etc. No value-in-kind for the RFI consideration—that would be discriminatory. Don’t forget the performance bonds if they are only running an experiment.
As a final point, Google is quietly investing in another G-area and the strategy makes sense if they can get government policy to regulate distributed internet access architecture. This G stands for Geothermal. Yes, that is correct! Those crazy guys at Google have cash spread across various geothermal companies. Why not wind and solar? At the end of the day, it is all about heating and cooling. Much like global warming, wind and solar may not be a good bet.
I can remember my first Blog post, back when I was a Blogging virgin. One of the many things I shared with you is that I don’t believe in global warming—rather, I believe in science. It appears I was right.
Global warming—it starts with the letter G, doesn’t it? Just like Gore as in Al Gore.
Google Hysteria (Part I)
March 2, 2010
Those crazy guys at Google! You have to love them and their fun antics (that keep me entertained). Google begins with the letter “G” just like the government. We have Government General Motors, Government General Electric (who has been behind the scenes sucking up healthcare money with an eye on future nuclear plant opportunities), and Government Goldman Sachs who has its fingerprints all over our current financial crisis and the Obama Administration.
It seems to me as though “G” is the letter of the new decade so far!
Back to Google—sure enough, those crazy guys that brought you satellite pictures of your neighborhood (while getting chased by the police because they were filming the same neighborhoods at ground level) keep the mystique going and going.
Yes, that Google. The Beltway folks who backdoor Telecom under the guise and alleged expertise of “Cyber Security” and advise President Obama. Yes, the same Google that wanted net neutrality and then changed their minds. The same crazy guys that played the last spectrum auction scenario and—get this—tried to get free spectrum access by advocating for public safety. That worked out well!
Hey Google, here’s a sure-fire tip to get your free spectrum. The next time, you should link it with education. No one inside the Beltway has the gonads to vote against something that is “for the children.” Hell, teachers’ unions do it all the time and you might as well steal it from their playbook—it has worked for decades for them. I call it the “No-teacher-left-behind” strategy.” Go ahead and try it. After all, “It’s for the children.”
Google is now buried inside the FCC, trying to influence future Broadband Policy, and win over the FCC Chairman with their recent announcement that they will pursue a Fiber-To-The-Home (FTTH) initiative in order to “experiment” with new applications that require up to a gigabit of bandwidth. Please note Mr. FCC Chairman – gigabit speeds not 768 fiery kilobits like we measure today. However, only 500,000 people will be involved in the “experiment.” How about introducing a “No home left behind initiative?”
Mr. FCC Chairman, I have been advocating a one gigabit policy long before Google showed up and my middle name starts with the letter G. Does that count for anything?
Does anyone really believe that Google is committed to being in the FTTH business? If you do, I have a really affordable bridge to nowhere that I’m looking to sell.
First, the media believes this initiative is based on spurring competition. Great spin by Google but incorrect! That pony left the barn years ago—we have a duopoly in residential services that mirror one another in market behavior as expected. Additionally, the economics of triple play are tough unless you already have a head start by owning a network. I do applaud, however (like the fiber bigot I am), that Google recognizes that fiber optics is the answer. As an aside, how is that free Wi-Fi Google thing going for those of you in California? I can see you turning towards fiber…you can’t resist that temptation of bandwidth can you? Keep coming towards the light, go to the light, the laser light, my friend. Personally, I have never liked a business model that included the name free.
Please join Dave later in the week as he contemplates why Google is interested in the FTTH business and thinks about some other noteworthy names that begin with the letter G.
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!!!!
Special Access and a Smart Policy (Part II)
January 28, 2010
As I read through a recent 127 page FCC filing on special access, it reminds me once again, that various CLECs do not recognize this 14-year-old business model has not worked well historically. Two points in the filing stood out and really irked me—the arrogant CLECs’ demands that ILECs lower rental costs (because the market prices are declining) and that ILECs increase the amount of bandwidth on special access services at a lower price. My response is an enthusiastic, “Hell NO!”
In short, this filing illustrates that demand for organic broadband is growing and the CLECs rental model can’t meet the demand without their largest competitor subsidizing them. This filing is asking the FCC to regulate the costs of ILECs to increase the margins of CLECs in a marketplace where organic demand for bandwidth demand is exploding. A friendly reminder from the cheap seats—it has been 14 years since CA 1996—do we really need 14 more years of beltway gamesmanship when viable non-ILEC wireless and wire line technologies and service providers are available and waiting for the wholesale business? The blight that is portrayed in the filing is not as bad as it is presented. CLECs just don’t like to work with other CLECs and would rather spend money lobbying the beltway. The big picture has clearly been missed for the past 14 years and I ask Congress to stop the insanity.
Think of the audacity of this filing. It is clearly lacks the intention of advancing America’s strategic broadband interests not only in commerce and public safety, but also in national security. In14 years, a carrier could not, did not, or purposefully avoided gaining independence from the ILEC.
My Seven Point Policy Plan for Congress and the FCC is outlined below and designed to advance America’s strategic interests in broadband deployment. Sorry FCC and Congress—I don’t agree with your measure of broadband:
1. Recognize the goal of 100 megabits of connectivity synchronously where economically feasible within five years and 1 gigabit in ten years for 80% of America. The technology and capability already exists but the capital does not. For remote rural areas, try a USF based satellite service because building out to the most rural of rural areas makes zero economic sense. A satellite system will work—call Matt Desch, CEO at Iridium or look at what they are doing in Australia in serving the Outback via satellite.
2. Attract private capital into expanding fiber optic networks by offering a clear concise policy. Private capital learned a nasty lesson the last time following Wall Street and rental models. By showing certainty of direction and discipline, the funds will flow.
3. Put a sunset provision on renting pieces and parts from the ILECs after five years (I am being generous after watching the last 14 years). After five years, ILECs still must make the pieces and parts available but they would be free to set prices and volumes for an additional three years. That gives clarity and the CLECs eight more years to contemplate their strategy. In total, CLECs will have 22 years to figure things out—I think that is long enough.
4. After the eight year provision outline in #3, the ILEC can withdraw rental pieces and parts from service with 90 days notice. It is unfair an ILEC has to endure the costs of running a legacy rental network and state-of-the-art fiber networks (i.e. FIOS).
5. On special access, leave the regulations as is and set a two year sunset provision on special access pricing being regulated and two additional years before the ILEC can withdraw the service with 90 days notice.
6. Grant a two year window on the consolidating companies that are facilities based where they get 100% Net Operating Loss (NOL) credit. This window would be conditioned that, upon taking the 100% NOL, the buying party must make the acquired assets open on a wholesale basis for dark fiber leases, waves, last mile access and other wholesale services on a non-discriminatory basis. Why does this one make sense? It will attract capital from the private sector for network infrastructure expansion, get customers off of Ma Bell…and force the FCC and Congress to admit that what we have today is a duopoly between Ma Bell and the Cable Company (based upon a concept of “modal” competition).
7. I have more … just give me a call.
Let me tell you again, I really don’t like being that broken record but enough is enough! I believe the 22 years under my proposed plan is more than fair.
Just thinking aloud…could you imagine if I became an FCC Commissioner? I can’t but it could be fun. As a Commissioner I would write my own daily posts, laying things out as I see and hear them. Perhaps, they would call me Mr. Transparency and my “Not for Sale” sign outside my office would be a reminder, too. So much for fantasy!
# # #
One final thought for the day—something I noticed while writing this post. Did you know that “ILEC” under Microsoft spellchecker returns a typo with the suggestion, “Lies?” I wonder if Bill Gates had his hand in this one for all you conspiracy theorists!
A Broken Record (Part I of II)
January 26, 2010
Here we go again. I really don’t enjoy sounding like a broken record but the constant badgering of the FCC and ILECs by the CLECs needs to stop.
My posts this week focus on the recent petitions filed with the FCC about regulating special access, and include my response and “Sensible Seven Point Policy Plan.” But first, let’s go back to the Communications Act of 1996 and have a quick history review.
It has been 14 years since the Communications Act of 1996 was passed into law—an attempt to bring consumers greater choice and lower prices as the result of increased competition. In theory, CA 1996 would offer pieces and parts of the incumbents’ networks for rent so new entrants could enter the market through various business models ranging from collocation to building one’s own network. No one that I know of had their arms broken by choosing their business plan/model based upon CA 1996…no one.
What we have watched unfold over the past 14 years iss Wall Street stepping in to promote companies with co-located DSLAMs or T1 IADs, but no revenues, cash flow or profits were valued in the hundreds of millions (if not billions of dollars)–and the IPO flood began. The same went for leasing UNE-P or UNE-L ILEC platform components. Special access in and of itself is a transport service also made available albeit regulated.
In theory, Congress was trying to encourage the idea that reasonable business people would enter the local market, build a customer base by renting pieces and parts from the ILEC network (until such a time a customer base was built) and the ensuing profits could then be invested into new facilities to gain independence from Ma Bell. The logic was that no one wants to continue to pay their largest competitor, because eventually it just won’t work. Well…so much for logic.
Those companies that elected to go a mile wide and an inch deep with the business model of renting ILEC parts were pretty much destroyed when the Internet bubble burst. High-yield debt became callable, and of course, the Telecom accounting shenanigans were flourishing. This opinion is not hindsight–going a quarter mile wide and eight feet deep would have been a better strategy to pick ILEC low-hanging fruit and build a customer base (and eventually build your own network to port these customers onto it while lowering your operating costs and increasing margins). The results, however, were rampant bankruptcies with few survivors.
Alternatively, after the CLEC had built a base of customers, they could have begun to rent or buy services from companies that build fiber networks and offer wholesale services that do not compete with a CLEC on a retail basis. AFS is one of those companies along with a handful of others. Speaking for AFS, here is the pushback we would get from CLECs: Unless we are priced 30-40% below the ILEC, they would stay with the ILEC. Now how dumb is that? A reasonable business person might expect that I would rather pay the alternative to the ILEC the same price as my largest competitor. Why? Because the CLEC becomes meaningful to a company like AFS while the CLEC, in comparison, is a pimple to the ILEC.
What we have at play in the non-ILEC sector is more about egomaniac CEO’s and which King or Queen CLEC was bigger amongst the CLEC fleas. As I have suggested before–and this should be sobering–is to first add up the market caps of public CLECs and private valuations of companies (like AFS). Then, envision a super-mega, double-secret merger IPO of all non-ILECs. We would still be lucky to have a total market cap approaching 15% of the ILECs.
Some CLECs continue to believe that other CLECs are the competition. So, they continue to badger the FCC and ILECs for renting pieces and parts plus special access because prices have fallen and they are squeezing margins for carriers still relying on Ma Bell for infrastructure. Ma Bell’s infrastructure rental prices are regulated so the squeeze is on…big time!
Now that we’ve brushed up on the Communications Act of 1996 and the state of ILECs, CLECs and Congress, please join me in a few days as I dive into what really ticked me off—-this 127 FCC filing on special access.
Quiz Show!
January 19, 2010
I try to avoid politics unless they are related to Telecom. Today I am providing a two part commentary…the first part is a Telecom quiz question and the second one turns its attention to Wall Street greed and our tax money.
Part I: Telecom quiz question (the answer follows at the end of the post)
What percentage of market share does the Apple iPhone have based upon the entire base of all wireless subscribers?
Why ask this question? Everywhere you turn these days, the iPhone is touted as the greatest invention since sliced bread. The iPhone allegedly is the dominant wireless device – it dances, makes coffee, slices, dices, and predicts the future. The iPhone’s surging popularity and ever-growing demand has caused major wireless network bottlenecks due to its popularity. Furthermore, the iPhone has no competition. And I could go on and on, based on what is written in the trade rags and analysts’ reports.
# # #
Part II: On to the next subject – it was above the fold in Friday’s (01/14/10) Wall Street Journal.
The first: “Banks Set for Record Pay – Top 38 Firms on Pace to Award $145 billion for ’09, Up 18%, WSJ Study Finds”
The second: “Haitian Rescue Stymied Amid Chaos”
Last I had heard, our tax money had bailed most banks out of default… like Chapter 7 default with children yet to be born owing on the debt. Why? Because they are greedy bastards and could care less about America – the focus is, and has always been, on financial narcissism for this year’s Wall Street bonus. I’d like to hear from you if you believe I am mistaken.
The $145 billion is, essentially, fat bonus pay after we bailed their asses out of bankruptcy. It has been reported the average bonus is in excess of $600,000.00. The Big Shots (aka Really Smart Guys) received bonus bucks to the tune of tens of millions of dollars.
Too big to fail? More like a bonus pool too big to hand out…
The American tax payers now own a significant amount of these banks on an equity and debt basis. Where is our voice? Where is the transparency?
Last night, President Obama announced that the United States has committed immediate aid to Haiti in the amount of $100 million. Do you see the dichotomy in this scenario? Yes, Haiti is an odd place and corrupt. But to quote United States Attorney General and tax cheat Eric Holder, “Never let a good crisis go to waste.”
If I was the President, I would issue an executive order to cut these bonuses in half (or more). Then I would take $70 billion and place it into private sector hands to restore Haiti and actually build infrastructure and buildings that are designed to withstand earthquakes and hurricanes. I think $70 billion would go a long way – maybe even far enough to help a legitimate government formed along with policing power to root out the warlords and rampant corruption in Haiti.
Do not give a dime of it to the United Nations – they will want a “taste” (to borrow a phrase from Tony Soprano). Additionally, allocate $1.5 billion of the $70 billion and hire two reputable accounting firms to track every dime and oversee all disbursements and budgets. These firms would also be in charge of the infamous “change order” construction scams that accompany any change in funding or funds granted for a given project. Why would you need two accounting firms? Just take a look at how our banking system got screwed up – you need at least two to keep each other honest.
I am not affiliated with any political party. But somehow, there is an imbalance of priority and moral obligation staring us in the face. It’s above the fold on the front page of the Wall Street Journal today.
# # #
Now, without further ado, here is the answer to our quiz about the Apple IPhone market share and media hype. If you said 50%, you are wrong!
From The Nielsen Company:
1. Apple IPhone 4.0%
2. RIM Blackberry 8300 series 3.7%
3. Motorola Razr VS series 2.3%
4. LG VX9100 2.1%
5. LG Voyageur 1.7%
6. Samsung SPH (Rant) 1.5%
7. RIM Blackberry 9530 series 1.4%
8. LG VX9700 1.3%
9. LG Vu series 1.3%
10. RIM Blackberry 8100 series 1.2%
How do you like those Apples?
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!
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…
I’m Not Picking On Anyone…But…
November 12, 2009
I typically try to listen in to the quarterly calls of publicly traded carriers just to benchmark AFS and see what underlying trends are being identified. Since I was on a secret mission last week, I missed a few calls. When I miss the calls I get a copy of the call transcript, read it, and mark it up for internal distribution to our leadership team at AFS.
I missed the call last week.
Before I go further on an observation I made, let me tell you what we believe in at AFS: The Golden Rule. Business is business, and applying The Golden Rule suffices in most situations if all parties are objective. In addition, in competing for business, we don’t deal in dishonest dollars or unethical conduct. Winning business at any cost requiring an employee to trade off their moral beliefs, ethics or soul to gain a deal is business we would rather not have. Questionable conduct takes two parties–the buyer and the seller.
I want non-carriers reading this to also pay close attention to this blog and ask themselves, “how would I respond in this situation?”
To start, I want to quote exactly from the transcript for accuracy:
“Analyst: Just a question on the pricing environment, if you could give us a sense of how we’re positioned today in the NetCentric base specifically? Some of the [inaudible] some more aggressive pricing there as well as some updates this quarter in terms of benefits that we’re seeing from some of the content players in the market. The secondly, if you could just delve in to the lowest price guarantee a little bit more for us? I wanted to understand the mechanics of this and in particularly trying to get a sense of the extent to which you have some flexibility there to reject some of these lower prices on the basis of non-comparable networks and how that’s determined? That would be very helpful. Thanks so much.
Carrier: The NetCentric market is one in which we and other providers are selling a commodity based service. We offer the greatest amount of connectivity and capacity operating on a network on a non-oversubscribed and non-blocked basis. We have a standard pricing policy that prices services anywhere from $4 to $10 per megabyte depending on contract term and length. Occasionally we do offer special promotional programs either on a given period of time or in a given geographic region. We remain the lowest cost provider. We believe that our price at $6.33 for our install base is at about 50% of where the market is. In addition to that, our average new sale in the quarter at $4.82 we believe is less than 50% of the average price in the market. We have seen situations a couple of times in this most recent quarter where we have offered lower prices in response to discounts from others. We have a policy where if a customer shows us an invoice from another tier-1 network operator, some other network operator that is offering global connectivity, we will beat that price and we did that a couple of times in the quarter. We’ve actually seen a decline in the rate in which we’ve had to offer those very aggressive prices. If in fact, a customer provides us a price and it is not documented we will push back on them and request that they provide us documentation under a non-disclosure agreement because we have no intention of being in the business of negotiating against ourselves. Then finally, we are looking for networks that can provide the service so it really comes down to the locations in which the service is requested and the scope of the network. But, we remain the lowest cost provider and in fact, we have seen less competition as we’ve seen the number of companies that we actively compete with continue to decline.”
Here is what I can tell you about AFS: we quote a customer and we will use sales tools to accommodate the prospective customer on a price conversation. We can offer longer terms to lower a price, declining scale pricing, forward pricing or a larger NRR payment or combination thereof. We do not however, tell a customer to show us the written quote from a competitor under the guise of an “NDA.”. If we had any, and I mean any, sales person conduct such behavior, they would be fired immediately. It is my opinion that you compete on your merits, value, differentiation and network reliability strength and not act as a used car dealer.
Conversely, a prospective customer is just as guilty of such behavior for turning over what any common sense
person would consider proprietary information disclosed in good faith by a competitor to a competitor while giving a perception you are running a purchase decision/process allegedly on an equal playing field. Turning over such confidential information tilts the perceived level playing field unless the customer doing this is willing to turn over the Carrier response in return and continue to play the game of “pricing” chicken.
We have, on many occasions, given a prospective customer all sorts of pricing configurations. At a certain point, our sales people will say “no” and walk away. You would be surprised how many prospective customers come back months later when the competitive price was a bait and switch, the carrier never delivered on time and/or the network reliability of the connection was garbage. It is okay to say “no” to price shoppers. One would think with a massive network, that price alone is not your only value point or point of differentiation.
In my opinion, I find the conduct and policy in the above transcript unethical and not necessary.
No one needs dishonest business or a dishonest customer. No customer needs a dishonest carrier. What both parties need is a relationship not a transaction solely based on price.
Surprisingly enough, no analyst called Carrier out on such a practice during the call. I guess the almighty dollar trumps any ability to question such conduct by Wall Street analysts … why am I not surprised?
On the service proposition, what we are dealing with here is what is often referred to as a “commodity.” Calling IP services, in my opinion a “commodity” is a misnomer. Quite frankly, it’s a “commodity” based on price until it breaks or does not work. Last I knew, network reliability has yet to become a commodity. You get what you pay for in deregulated communications – and don’t forget this fact.
In summary, if this is how the game is played by some, I suggest competing carriers insert language on each and every quote that by a prospective customer accepting this quote certain confidentiality and disclosure rights are created and as such a violation may be subject to damages inclusive of consequential damages.
I just found the disclosure in the transcript telling and interesting.
I am not picking on this particular Carrier–I am sure a few others play the same game. To make it a matter of fact, in an upcoming blog I will share with you a multi-year process AFS just went through after discovering bid-rigging by a major carrier which was processed through the Department of Justice. Yes, a gazillion dollar carrier, in this case, caused AFS to lose a bid only to be flushed out in rigging the bid in compliance with the customer. More on this in a future blog.
In another future blog, I will share with you how the “consultant” game is played to rig the deal also and how in the case involving AFS, the gazillion dollar carrier ended up burnt in the end. Though we ended up with one of our largest customers churning, we came out on top. If you believe in karma, you will enjoy the blog.
I am not naive, but America has to start showing something else to the world about who we are beyond greed at any cost …
Feeds
