Gomer Pyle: Part Deux
December 15, 2008
Page A18 of the December 11th issue of the Wall Street Journal, The headline read: “Political Favors at the FCC.” Sub heading: “Kevin Martin orders up another rigged spectrum auction.”
Surprise, surprise, surprise … yet another game of Beltway insiders and money-people playing do as I say, not as I do. We have a two tier society in America. The top tier is for the greedy Real Smart Guys (RSGs) and politicians with perceived power and money and the second tier, for us common folk. It is rare a top tier villain goes to prison, but us second tier folks, don’t jaywalk or you will end up in jail.
The Readers Digest version of the story is that FCC Chairman Martin (R) and the venture capital RSG John Doerr of Silicon Valley fame Kleiner Perkins, worked back channels to place terms on the spectrum auction whereby the spectrum in an auction would not be attractive to dominant carriers. The article mentions under the “conditions” placed on the spectrum at auction it would sell for $50 million. However, economists estimate the value to the federal government coffers of $3 billion without said conditions.
Kleiner started a company to pursue this spectrum auction called M2Z. As the articles states:
“M2Z and Mr. Doerr are essentially asking taxpayers to subsidize their attempt to start a new telephone company. Mr. Doerr will have profited from what amounts to a government subsidy via a rigged auction. And if the start-up fails, don’t be surprised if M2Z attempts to sell licenses that it has acquired for a song and reap a windfall.”
For those that want to point political fingers, I suggest you read the article. Both parties are just as guilty as they are in our credit crisis. And, by the way, a company called Frontline also funded by Kleiner Perkins and headed up by former FCC Chairman Reed Hundt(D) failed in a similar scheme this past January.
Now for my soapbox. There will be no outrage over this. There will be no criminal charges. Why? This is top tier money play of influence and power at the expense of the second tier of our society. This is about greed. It’s not about fairness, transparency and equal opportunity. It’s a classic “non-nod, wink-wink inside the corrupt beltway” event.
My advice to CLECs: stop lobbying Congress and the FCC — they don’t give a rat’s ass about what is best for America. Sure they will meet with you and your highly paid lawyers to act interested, but unless you are driving party politics by stature and cash, you are nothing. By the way, what may be good for America may also not be good for CLECs, for the record. But in my naĂŻvetĂ©, I actually fantasize that our elected officials and their appointees like Chairman Martin can be objective and not deal in dishonest dealings or dollars.
My fellow CLECs, spend your beltway dollars on infrastructure to gain your independence from ILEC infrastructure (UNE’s, Special Access) and the FCC.
What do you have to say about it? Let Dave know. Email the Straight Shooter or add your comments below.
Don’t Get Mad, Get Fiber
December 8, 2008
In the last post, Broadband for Regular Folk, I admonished our friend who wants broadband to his home to check with county authorities and arm himself with information about who actually has fiber in his area. His final question was, “Do you know of any user groups or vendors who can help a very small cooperative run a few dozen strands from their neighborhood towards civilization?”
If you have an entrepreneurial bent in all this, your timing could be good. The FCC is changing the rules on rural funding programs. Starting I believe in December, the government will no longer fund (subsidize) traditional voice TDM services to RLECs in a phase-out program. After a few audits, the FCC has determined some RLECs have used government subsidies to pay shareowner dividends. In short, the traditional “cash machine” model as subsidized by the government for the RLECs is being phased out along with intrastate and interstate access charges much to their displeasure. Reality bites.
Where the FCC is aiming future funding is for the deployment of broadband infrastructure to rural areas and has fiber optic infrastructure at the top of the list. The place to inquire about these funds is not the FCC. Contact the Department of Agriculture. They issue the funds and can provide you the rules of engagement to receive funding. There is a capital (cash) component you would need to bring to the party if you choose the entrepreneurial route. If you choose to go entrepreneurial and if you are not personally wealthy, try contacting local businesses (large enterprises), municipalities, school districts or an RLEC or two for funding or a consortium business model.
Keep giving me questions as you progress. I am happy to give you information as you go along, but like I said I could respond with a book on the ins and outs of deploying fiber optic networks.
For inspiration, I was on a board of a company before the telecom meltdown of 2001-2003. This company provided fixed wireless connectivity. We sold the company months before the telecom crash to the advantage of shareholders. This business was solely founded as the result of the founder/entrepreneur getting pissed off over the local phone company turning away his requests for high-speed bandwidth. He said enough is enough and tapped some friends and family for cash. He started with two nodes and over a period of three years served cities from Boston to Albany to Buffalo… all because he was pissed off and those that funded him were sick of the phone company as well.
Don’t think big. Think about incremental entry and selling service reliability.
Have a comment or want to know more? Type away below or shoot Dave an email.
Broadband for Regular Folk
December 3, 2008
This question on “do-it-yourself” broadband, came in on the blog recently, and it’s right up my alley.
Call me crazy if you want, but I want fiber so bad I can taste it. I’m just a middle class guy living on a road with a bunch of other middle class guys in rural upstate New York. I know that it will be a cold day here before Verizon or Time-Warner run fiber down my road. Thus … my desire to run my own fiber. I haven’t asked the first person yet, but I’m pretty darned sure that I can beg a right-of-way through the woods and wetlands at the back of people’s property. In exchange for which, of course, they get to buy a strand (or two, depending on termination equipment). By myself, I would be crazy to afford it, but as a group, it’s reasonable, and it’s the only way we’re going to get broadband.
Why the end of my road? Because it’s a New York State highway (56), because Time-Warner has hardline cable there, because we’re within shooting distance of Verizon’s CO, because both of the above plus DANC have fiber runs down 56, because SLIC (Nicholville Telephone’s ISP) is slowly fibering 56.
I have a gazillion questions about pedestals, fiber (singlemode to go 2.75 miles, obviously, but direct burial, aerial, or conduit?), termination, patch panels, splicing, permitting, trenching or cable plowing (if buried), etc. I’m leaning towards trenching because there’s practically nothing in the ground except rocks. Nobody to worry about amateurs with a ditch witch.
But they all fold down to one question:
Do you know of any user groups or vendors who can help a very small cooperative run a few dozen strands from their neighborhood towards civilization?Haven’t found any users groups, and vendors all seem to be selling to the same ten companies. Don’t even need a website to do that — just send a salesman around to take them out to dinner.
Thank you for the questions, my fellow fiber bigot. I could write a book in response.
Because it sounds like you are rural, I would check with your county permitting authorities to determine if there have been any other fiber builds that have occurred in your area outside of the usual suspects. Sometimes municipalities, private companies or Rural Local Exchange Carriers (RLEC) consortiums have built networks. With RLECs, I would not give you much hope. If they have a consortium, they would sell capacity long before fiber. Bottom line: you need to figure out where actual fiber is today before you go begging private landowners for anything.
More on this very soon — and keep these great ideas coming my way.
Do you have feedback or a question for Dave? Shoot him an email or post a comment below.
More on Backhaul
December 1, 2008
Thank goodness it’s Monday… as we all come out of our food-induced comas of last week’s feasts. Here’s a question to volley to start the week off right:
Dave,
What sort of backhaul deals do you see nowadays. Market-wide, or one tower at a time, or mostly in between?   Are they supplementing your fiber to some towers with copper from other providers to other towers where it is not justified, or are they using wireless backhaul to the towers you bring on-net?
We have seen and built market wide fiber-based solutions to cell towers. RFI/RFPs indicate this trend will continue as well. Typically, the densest of towers are addressed while leaving the less dense towers to ILEC legacy T1 copper facilities. We have yet to experience piecemeal one at a time tower requests. Starting bandwidth serving towers we have built to have ranged between 100 Meg and 300 Meg … sure says T1 is dead.
No, we do not supplement our tower builds utilizing legacy copper or bonding legacy copper. Why? We have been there and done that for land based opportunities, and we have found the copper facilities to be extremely unreliable, assuming the ILEC even has extra copper pairs to begin with. In addition, starting bandwidth levels of 100 Meg renders copper inefficient and so passé.
We are seeing a few “wireless backhaul” businesses out there trying to compete with fiber. Of those companies that are public, a quick check of their financial information indicates a stressed business model. Customers need to factor risk of bankruptcy in conducting business with these companies and of course the service reliability factors.
As I have said before and will state it again: you get what you pay for in this age of digital convergence. No such thing as a low priced, high quality lunch.
Have a comment for the Straight Shooter? Leave your thoughts below or email Dave now.
Latest Meltdown a Blessing?
November 24, 2008
In my last post, Consolidation in an Unstable Economy, I talked a bit about the choices open to AFS given the economy and that we’re not compelled to sell for anything other than optimal value. That said, we are also pursuing acquisitions as I am most certain the latest economic meltdown will push a few gems to the surface sooner or later.
Some think I am nuts in viewing the latest meltdown as a blessing. I thought I would never see M&A deals like the dot-com bubble pushed to the surface again in my lifetime. But here we go again … marginal companies with highly levered debt are suspect targets as the global economy reels in pain for the next two to three years. I would prefer not to have this blessing as the collateral damage of this meltdown and its innocent victims will be substantial and very unfair. However, I believe Karma wreaks havoc on people involved with over-the-top greed lacking any type of moral compass.
What I do believe will be different this go around is value being placed on hard assets. This meltdown has demonstrated the inability to hold value if you are light in assets and/or primarily paper pushing. Debt lenders have learned a valuable lesson of lending purely against paper-based cash flows. Paper-based cash flows can disappear overnight!
As one with American Indian ancestry, I have often said that those utilizing the ILEC infrastructure have the shallow root base of a willow tree. AFS has built a mighty oak with deep roots. Sure the oak does not grow as fast as the willow, but when the strong winds blow, the soft wood of the willow breaks and falls while the mighty oak remains. When hurricane winds blow, the willow will be ripped from its shallow roots, yet the mighty oak remains. I will have passed from this earth and the mighty oak networks we have built at AFS will remain for decades beyond my departure. The economy can blow its harsh winds at AFS, and this mighty oak stands.
Wall Street has little patience for growing oaks over willows. I will let you decide if the oak or “Wall Street willow” is more reliable, predictable and enduring.
Shoot Dave an email or share your comments and opinions below.
Consolidation in an Unstable Economy
November 21, 2008
With an unstable economy, we’re going to see more consolidation. Who do I see partnering and conjoining in all this?
I am expecting more M&A to emanate from foreign entities such as Reliance Telecom, Deutsche Telecom, T-Mobile, etc. What you will see, given the financial mess the world is in, the consolidation will be driven and valued on hard fixed assets. Carriers of the rental or co-location genre will get heavily discounted as broadband demand continues to grow and outstrips the need for or carrying capacity limitations of copper loops, T1, DSL, coax and SONET/ATM.
So what does that mean for AFS? What are AFS’s plans in this arena?
I have come to find that those out looking to acquire travel like lemmings. For example, if all the EBITDA multiples are 7x, then everything must sell at 7x. I am sorry to point this out to public shareowners, but this is as sophisticated as due diligence gets with some Investment Bankers. So a company like AFS that is growing, profitable and has probably the lowest churn in our industry can afford to wait until the lemmings move back up the scale. Companies not similarly situated, you get what you can when you can get it.
AFS is somewhere between a number of options, and as I write this, the option I prefer is management buying AFS from our existing investors and moving forward from there. We have often received unsolicited offers or inquiries of interest on a regular basis. Any decisions made will always be made in the optimal value interests of all our shareowners. As I stated earlier, there is no compelling reason to sell for less than optimal value in our case.
More to come on all this…
What’s your take on consolidation and the state of the economy? Shoot Dave an email or post a comment below.
Growth in Backhaul and Data Centers
November 18, 2008
I was asked to speak to the growth in backhaul demand as well as what we’re focusing on at AFS relative to that and other areas of opportunity. With the economy in a state of flux, we are seeing two areas of continued growth for all optical services: wireless backhaul and data centers.
Wireless backhaul continues to grow at double digit rates as more and more data IP applications get deployed wirelessly. We are building fiber to towers for wireless carriers. Outside of the demand, the fiber to the tower by AFS does two things for wireless operators. The first, we are not the ILEC, so you are not funding AFS to steal your customers. The second, fiber access is the most prudent, reliable and future proof way to go given escalating demand. However, what I am finding amusing is that certain carriers are getting snookered by believing copper bonding is a solution.
My reality check: AFS has done copper bonding as a test in one of our markets. Bottom line: we have ruled copper bonding out. It is only as reliable as a copper loop is until the next rain storm, signal dispersion ratio and its distance limitations. At AFS we go out of our way to avoid copper Type 2 anything. Some data: on our networks where we have some copper Type 2’s, over 95% of our service alarms per month are from these Type 2 circuits. Our end-to-end, all fiber enabled customers have had 100% service reliability since our inception eight years ago. At AFS we deliver on-time, and our networks are highly reliable. I see no use changing to copper bonding and risking our business reputation on ILEC copper pairs.
The second area of substantial growth is data centers. Enterprises and data center owners are recognizing the importance of having diverse optical network connectivity coupled with ring-protect fail over, circuit-protection and card level redundancy. Enterprise customers have learned that fiber to the data center which is diverse is a necessity to even enter a data center. It wasn’t long ago where the assumption was that the transport already exists at a data center placing the cart before the horse. On-time delivery, network reliability/diversity is very important to customers of data centers.
Shoot Dave an email or leave a comment below.
Difference Between Wholesale Business & Enterprise Business
October 29, 2008
Continuing our discussion on our reader’s main question:
I wanted to see if you would comment on the differences between running a wholesale business vs. an enterprise business. It has been my recent experience that the next gen companies that have tried to combine the two models have had only marginal success. An analogy that told to me is that it’s like running a corporate bank versus a retail bank. The skills of the executive team has to be different with different philosophies on how to build market share taking into account off-net strategies, empowering local sales managers to expect lower margin or longer payback on companies with great long term potential, and how much to invest in SG&A etc.
The issue of retail v. wholesale business management skills is a matter of segmentation and focus. I do believe that you can be a better retail provider if you have wholesale network operating skills and experience to be applied. Someone with purely retail skills, well, there just isn’t much differentiation — the retail side has become a “me too” value proposition. The other nuance and trap of retail is the lust of revenue growth for the sake of revenue growth. The real smart guys on Wall Street seem to focus their attention on a company’s revenue growth and growth prospects and think everything else is secondary. Then there are the CEOs in retail growth for the sake of testosterone/estrogen buzz of having a big revenue business with a wish of reading about themselves in the Wall street Journal with a dot matrix photo of themselves.
Silly us at AFS, we focused upon long term sustainability and profitable growth — one building at a time.
Why we don’t like retail at this time is simple. There are no barriers to entry. Anyone can get a CLEC license and start reselling, ILEC renting or what have you doing nothing more than competing on price. Retail means lots of customers, lots of small ARPU’s (we average $6000 ARPUs), lots of sales people, lots of back office complexity, lots of customer hand holding and lots of churn. Very costly and risky.
Eventually this will change as bandwidth demand outstrips copper facilities rendering most retail models obsolete. Having direct building or residential access is the long term game. Most retailers today have no long term position or underlying staying power. The more a competitor to an ILEC is dependent upon the ILEC, the greater the risk of not being here in the long run. Anyone relying on the Federal Government by way of the FCC or Congress is, in my informed opinion, a fool. As we are learning via the financial collapse we are facing, Congress is for sale and non-ILECs don’t have the cash collectively to be noticed. This is a reality of which so many are in denial.
The bottom line: if I were an investor in a “provider” that is trying to straddle retail and wholesale — I would rethink that investment, refocus the business on a winnable, defensible niche or change out management, or at least have management get a drug test.
Today, our (AFS) position in the value chain is one of opportunity. We can inch up this chain toward retail as the economy and opportunity presents itself. Our high fixed costs capital expenditures are behind us and we can lever very profitably as driven by demand.
My opinion, the present state of our economy is going to be brutal on highly leveraged, highly ILEC-dependent retail companies.
Agree? Disagree? Weigh in by shooting Dave an email or sounding off with comments below.
Drinking Your Own Kool-Aid Can Be Dangerous
October 27, 2008
Got another email the other day that I wanted to share. Keep ‘em coming.
I’m an investor in telco, all “next gen” type providers, and I wanted to see if you would comment on the differences between running a wholesale business vs. an enterprise business. It has been my recent experience that the next gen companies that have tried to combine the two models have had only marginal success. An analogy that told to me is that it’s like running a corporate bank versus a retail bank. The skills of the executive team has to be different with different philosophies on how to build market share taking into account off-net strategies, empowering local sales managers to expect lower margin or longer payback on companies with great long term potential, and how much to invest in SG&A etc. Perhaps if you feel so inclined you could post a few of your thoughts in this area? Regardless, thanks for your comments I enjoy them very much (although I don’t agree with all of them!)
Fair enough. I don’t expect everyone to agree with my comments that’s what America is all about – freedom of expression. However, when I do post my opinions, they are informed opinions and typically based upon experience and results. I don’t spend time wishing the way things should be, but rather I deal with the reality of each situation that presents itself to me.
The greatest poison competitive carriers face is trying to be all things to all prospective customers. So far, after 100+ years of regulation, only the ILECs have demonstrated that this can be done. For the life of me, prior to the telecom crash, the thought that a company capitalized at a billion dollars of equity and debt is somehow going to be a national threat to the ILECs was ill conceived to me – but not the “real smart guys” on Wall Street.  The real smart guys poured billions of dollars into hundreds of CLECs after drinking their own Kool-Aid. (My apologies to Kraft Foods, the makers of Kool-Aid.)
Here at AFS we have management very familiar with retail telecommunications. So much so that we purposely have avoided the retail side of the business and have focused on our business – underserved second tier markets, data, IP access, on-net buildings, 10 meg + demand and owning the local fiber optic infrastructure. (Note: given the current economic uncertainty, our model has us positioned quite well in a McKinsey nine-box matrix against most other competitors.) This has been our choice since day 1 and given that we are facing yet another downturn, our position is capable of weathering the worst of storms.
More to come soon on my response to our friend…
Have a question, comment, complaint or otherwise for Dave? Shoot him an email or post a comment below.
Just for Grins
October 23, 2008
Just for grins, when I originally sought funding for American Fiber Systems in 1999, I had a business model that was purely demand driven. The model was based on a fundamental premise that in the long run, if you do not own and operate your own local fiber optic infrastructure but rather rely upon your largest competitor to stay in business, well, it is simply not a smart idea.
Once again, it’s 1999 – my view based on experience, you cannot rent or lease your way to sustainable economic success through the ILEC. The more you depended upon the ILEC pieces and parts, your ability to innovate, time-to-market, provision and compete is limited. When your largest competitor, the ILEC, basically controls your costs and has expertise in regulatory and judicial matters, I don’t see this as a win-win formula … but I could be wrong.
Anyhow, the reason I bring this up is purely for grins. In 1999 I pitched many investment banks, a/k/a “experts,” for funding, Lehman Brothers and Bear Stearns amongst them. Across the board, I was told by the Wall Street experts that my demand-driven, slow role, metropolitan fiber based business model was not attractive and not fast enough. They were critical because I had an incremental, success-based funding model. I was told that unless I was raising $500 million equity and $300mm in high yield debt (heroin), I had no idea what I was doing.
Thank god I had experience, common sense and thick skin. I ignored them and eventually went the venture capital route. So as I watch Lehman Brothers and Bear Stearns fade from our memories … with more to follow … I guess I will let the record speak for itself alongside the business moral values of some CEO from upstate New York who had no idea in 1999 how to build a business according to the big Wall Street firms.
Shoot Dave an email or include your insights and questions below.
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