So here we are in Oz. A gentleman by the name of Tom Tauke from Verizon is all over the news with the proclamation that the Wicked “Network Neutrality” Witch is dead, and that the Verizon and Google proposal on net neutrality “…would allow President Obama to meet a promise he made on the campaign trail.”  He adds, “It fulfills the president’s campaign promise of non-discrimination and transparency on the Internet.”

I have so many directions to go with this one, I’m not even sure where to start.  (Don’t worry Jules–I’ll get to you my little pretty…just hang on–)

First thing:  Since when are publicly traded companies (and their share owners) in the business of making campaign promise dreams come true?  Also, are Verizon and Google share owners 100% aligned on supporting a campaign promise of any politician?

On campaign promises:  There isn’t a politician that promises the sun, moon and stars when they are running for office. Lots of promises get made. I am not a member of any political party so I won’t pick on all the promises Candidate Obama made during the campaign but I will leave it at this–the blaming-George-W. days are over.

On this new Verizon-Google (VG) network neutrality proposal:  I have not read it, but I can tell you we don’t need it. Okay I lied…I peaked at it.  It’s a vein attempt at volume level pricing. But the facts are, and Congress–listen carefully here, the issue with “access” is at the peering points, not with the “pipe owners.”  Peering point providers are an oligopoly and points-of-traffic flow, balance and control are managed by the oligopoly. This is where Jules should be looking as VG protects their distributed computing architectures and billions in sunken costs with their proposal versus the big pink elephant in the room,  Internet peering points.  Jules, bring a draft law to President Obama around peering points for submission to Congress.  You may want to hurry up–the flying monkeys are leaving the Castle.

But I really wonder if Jules can do something even if he wanted to do anything. Why, you may ask?

As we all know, we have this thing which lately has been ignored. It’s called the Constitution of the United States of America. I think it has been around for a while.  It’s that document with the big signature from that guy that is in the insurance business, John Hancock. (You can tell by now the quality of my public education!)

Anyhow, when Johnny H. and his friends signed this Constitution they came up with this stupid idea that only Congress can enact laws of the land and that the Executive branch, once signed into Law at the Kremlin White House, is responsible for various departments (aka bureaucrats) to administer the rule of law.  My BFF Jules has gone down several paths recently in making up new laws (such as the now defunct option 3) acting as a one person, one vote, Congress himself.  Jules–I am pleased you have backed off this.  It would have gotten ugly again for the FCC and, dare I say, eventually another loss against the ILECs in a court of law.  Sort of like that Comcast thing a while back.  Jules–I hope you consider me a friend in advising you earlier not to pursue option 3.

All this said, how is the VG network neutrality “proposal” going to make it into “law?”  After all, I make proposals all the time in this blog and no one makes them into law.   I think I have had some pretty good ideas, albeit not politically correct or expedient. But then again, I am not on the campaign trail writing checks with my mouth that my @$$ can’t cash. Some of our politicians should start a business with nothing–like I did.  One quickly learns, by way of your investors, about writing checks with your mouth that.

So far, and to President Obama’s credit, he has pretty much neutered Congress like a stray cat caught by the ASPCA. Congress can hiss all they want, but pro-creating…not so fast anymore.

You see, they have these people in the Executive Branch called Czars.   In my opinion, these Czars are nothing more than replication in the Executive branch of committees (and the like) that make up Congress. The big thing our man from Chicago has done a thorough job on is shifting the power from Congress to the Czars.  And, from a political point of view, it is brilliant.

You see, power inside the beltway is all about who spends the money (or debt). Keep in mind–it is taxpayer money from us worker bees which they seem to forget inside the beltway.  Maybe a few bee stings are coming this November.

Anyhow, the Congress has been used to approve all sorts of spending bills “campaign promises,” and get this–the Czars in the Executive Branch choose how, and to whom, to spend it.  Something tells me Johnny H. and the Boys back then were sort of trying to get away from things like Kings, Monarchs, Czars and the like.  Call me crazy.  In my short life span, I always thought all appropriations were clearly made through Congress and that only Congress could pass laws. That public education I received sure didn’t teach me a lot about history.

What is going to be interesting to watch is how VG is going to attempt to get their “proposal” in place without Congress.  I think Jules is a pretty smart guy and has the lay of the land.  It is clearly not a Czar issue or an Executive Order issue.  Watching how VG (especially the V) finesse this going forward is going to be fascinating.  It’s also interesting how, a few months back, the G was anti-ILEC on net neutrality, but recently had a change of heart.  Sorta like changing Frankenstein’s heart.  A used heart, but a replacement never the less. (This epiphany in change of heart came about once G figured out what they thought G wanted in network neutrality would hurt their search business.  I wrote a previous blog about this–I think G is in some anti-trust situation over in Europe for monopolizing equal access, open access “search.”)

I can’t see anyway but through Congress on this one.  And I am sure after the November mid-term elections that, come January, 2011 Congress will be chomping at the bit to keep another campaign promise by President Obama. I just feel it in my bone marrow.

Speaking of promises:  Hey G–how is that big one town or City fiber-to-the-home contest coming along?  No winner announced yet?  Or, are you playing off of FIOS now as positioning to go to Congress with some data in support of your proposal? Meanwhile, you played a bunch of people for fools using them to say to Congress “look at the outpouring for bandwidth we received?”

Come to think about it, I may have written a blog about this as well.  I think I used the term “useful idiots” for the applicants.

If today is the first time you have run across this blog, welcome.  No, you are not dreaming–it is, in fact, WYSIWYG.  And I do walk on water as well.  I’m happy to show you–just come up to Rochester, NY in February to see.

Now it’s time to go home.  Everyone, close your eyes, click your heals three times and then say “There is no place like home…there is no place like home…there is no place like home…”

So what do I read? A letter dated July 21st to the FCC; Re: In the Matter of Special Access for Price Cap Local Exchange Carriers WC Docket no. 05-25.

The following is an excerpt by image from the letter:

Any idea what the data rate of a DS1 is? At full duplex it’s 1.54 Mbps.

Any idea what the data rate of a DS 3 is? At full duplex it is 44.736 Mbps.

You don’t have to be a telecom genius to realize we are living in a gigabit world with table stakes starting at 100 Mbps. Within 5-years, perhaps 10 gigabits!  Silicon chip manufacturers have already announced 100 gigabit chips?

Jimmy–as much as I like your assets, what the hell are you doing? As I have pondered in my past blogs, you should want what America needs: the death of copper-based transport such as DS1 and DS3.  Continuing the insanity only puts more cash into the ILECs pockets? Step up, Level 3–take on “legacy special access” with your own superior offerings!  Asking for more FCC legacy porridge is not a good idea in my opinion  You have a great opportunity to squander away–don’t do it!

In the FCC letter second paragraph–I am not a lawyer (nor would I ever become one given my moral bearings), but why are you telling the FCC that the ILECs have some monopolistic hold on you?   First, with your assets, you should be keeping the ILEC CEO’s awake at night. Secondly, my friend,Chairman Julius of the FCC–what’s he going to do?   Nothing.  He has no enforcement capabilities.  Commercial contracts were decided years ago.

(Jim, between me and you, I think Jules has stopped reading my blog – he was coming along well for awhile, but then he fell off the wagon and onto this “third option” jargon that will be ruled dead by a court within a year or two.) Jules, come back to this blog–just follow the light…keep walking towards the light…

If what you say is true in paragraph 2 above, I would get over to the Department of Commerce and/or the Department of Justice. We allegedly have laws against monopolistic or market leverage dominance. What you should be looking for, if what you say is true, is facility separation placing special access and last mile components of the ILEC’s networks into a separate highly regulated entity where traditional regulatory rates-of-return apply. The ILECs could simply spin the separated assets out to shareholders as a separate company. I would think this would be a good thing for anyone that owns serious metropolitan fiber infrastructure. Imagine offering a 100 Mbps megabits to an enterprise at a regulated DS3 rate of 45 Mbps–you would have a competitive advantage and the fiber infrastructure asset-light CLECs living off of legacy special access and copper loops would beat a path to your door.

As you take away more of the special access and last mile highly regulated copper business, the costs get worse for the ILEC spin-off–not better. Of course, this assumes no one goes nuts competing on price but delivering more bang for the bandwidth buck. And think about this, eventually the highly regulated spun-out legacy company will ask the FCC for permission to build last mile fiber or die! And, like in the United Kingdom, it should be granted–but remain highly regulated, equal access, open access to all and with no volume contract designs.

I like the recent Level 3 focus on penetrating local metropolitan markets.  It’s leverage. But I think asking for more legacy ILEC product rights is not the correct strategy.  You should want what America needs: fiber optic access.

Assuming the mid-term elections are going to bring “change” to the Beltway, perhaps a window of opportunity is opening!

Go ahead, make some noise at the DOJ, Commerce and Congress.  Make it an early 2012 election issue. If I know lawyers like I know lawyers (and with which Congress is loaded) and if the 2010 elections becomes upsetting to both parties as I believe, you just might want to consider leading an effort to–once and for all–addressing America’s commercial/consumer dietary need for fiber in a compromise legislation breaking up Ma Bell further while declaring a bipartisan victory for all in America!   If Jim or maybe even Julius, were to lead this, either could end up on a box of Wheaties!  The first non-sports super heroes!

Let’s forget the fat kid fight for a fiber diet against fast food chains which is going on inside the beltway today.  Jim–you and Jules can lead the way!  Think about it!

To those that are new, read some of my past postings and you’ll see my Pro-America stance when it comes to making any decisions relative to US Telecommunications networks or Telecommunications Policy.

By my own admission, I am a fiber bigot and favor less–not more–regulation from the government in matters that concern telecommunications. I am not a “do as I say, not as I do” type of person.

Today, just for fun, I want to profile a company after reading a recent letter filed with the FCC by this company.

Can you guess who this company is?

• Owns over 54,000 intercity fiber route miles

• Owns over 27,000 metropolitan fiber route miles

• Has over 8,000 buildings “on-net”

• Has a presence in over 125 metropolitan markets.

• Over 100,000 enterprise “near net” buildings are less than 500 feet from their metropolitan fiber backbone (That’s about, on average a $5,000 lateral build per Enterprise

• Services over 300 Fortune 500 Companies

• Services thousands of mid-market enterprises

• Services 13 of the top 16 US-based cable companies

• Services 19 of the top 20 telecom carriers

• Services 5 of the top 5 wireless carriers – that’s close to 100% of the market in America.

• Services more than 35 Federal Agencies

• 90% of their business generates from the United States, 10% from Europe

Have you guessed?

Is it TW Telecom? Cogent? AboveNet? Global Crossing? Or, Level 3?

Answer: Level 3

Pretty impressive, you have to admit.  Especially 100,000 enterprises less than 500 feet from their back bone. Imagine 1000 feet? 1500 feet? At least at AFS, we have found stronger margins and double digit growth in Enterprise, more loyalty and less churn.

Now, the rub with Level 3 has always been their debt load.  But give credit where it is due–they manage their debt load well and creatively. Actually, the next big chunk of coming-due debt of significant relevance is $2.9 billion in 2014. If history is any indicator of past performance, this too shall be refinanced by the time it is due. So all you “Level 3 is going to get crushed by their debt” experts, I say more than likely not, just managed out into the future.

As I have written before, call CEO Jim Crowe whatever you want–mad genius, expert financier or just plain lucky–but Jim was smart enough to load up with debt on Day 1 of Level 3 launch which helped Level 3 avoid what 1200+ telecom companies did not avoid over the past ten years:  Bankruptcy.

That aside, personally, in my opinion, I like to refer to Jim as the “Bus Driver.”  This is the result of a few years back when Level 3 threw Sunit, their CFO, under the proverbial bus when integration after a wild M&A spree was not coming together quite well. I never liked this move given Sunit had saved Level 3’s butt on more than one occasion working his financial magic. In addition, I think after throwing him under the bus, it soon proved hard and difficult to find, hire and retain a new CFO given what had happened to Sunit even though there were well over 1200 CFO’s probably looking for work!

One would think, with that with the profile above, this company should be a crazy growth engine, even if focused upon the basic data, transport and IP. Their asset position is compelling and for all intent and purpose, the networks are sunken costs and we should be experiencing explosive growth and in my opinion, some fine whining from CLECs being crushed by Level 3.

Check in on Thursday for Part 2 of Dave’s “Stop the Dancing” post…

What is really being adopted–and not by Congressional law–is adjusting the process of forbearance to non-regulated broadband services instead of focusing on legacy facilities and competition as subscribed under CA1996.  It’s this aspect of the “Third Way” where the FCC is going to (once again) touch the third rail.  The CLEC whiners are for the “third Way” because Wall Street has yet to punish them for not being enabled to handle organic bandwidth demands beyond 1.5 megabits, bonded pairs or regulated special access (transport) prices.

So, my prediction is that the ILECs will play paddy-cake with the FCC because every day of  paddy-cake that goes by is just another day of more CLEC rental money pouring in on rental infrastructure that was paid for decades ago and continues to get reinvested into ILEC fiber optic platforms.  Once, the FCC makes a move and the paddy-cake game stops,  expect 18 months of court battles and, based on the law covered under CA 1996, the ILEC to once again prevail.

It’s a nice try to modify forbearance to extend the gravy train to rental type 2 and special access CLECs but it has limited legs and the FCC knows it.  And if things this November turn out the way pundits are predicting in the mid-term elections, we are talking endangered species for those whom have done little or nothing after 14-years to become ILEC infrastructure independent.

With all that said, here are my solutions:

1.    Recognize we need more infrastructure deployed for transport.  Unbundled transport regulation will be a deterrent to private investment into non-ILEC controlled infrastructure.
2.    Instead of giving away $7.2 billion in grants, why not take another $7 billion and create a 50% government matching bond pool for 10-year bond issuance in the public markets for infrastructure investment.  The 50% match gives the bond a high rating provided that those that qualify are known performing entities, prohibited from over-building an already open access network, and the infrastructure deployed by these bonds are required to be open access infrastructure.  Dominant carriers like Cable Companies and ILECs are ineligible.
3.    Take my idea in #2 a step further and create a 25% government-matched bond for ten years–but make those bonds tax free.  Dominant carriers like Cable Companies and ILECs are ineligible.
4.    The FCC needs to start behaving differently and should ask for a new charter from Congress.  That charter is to stop the rhetoric about “protecting the consumer” and move on to a charter that is focused upon what is “Good for all of America in a Global Economy.”  Fiber optic transport is the new oil.
5.    Bill and Keep–get it over with.  It’s a digital IP world, the terminating access game is over.
6.    Sunset copper loops in 5-years whereby the ILEC can charge whatever they want to whoever wants them.  Give the ILECs a tax incentive to sell loops to CLECs that want them with title–sort of like an IRU, but requiring yearly maintenance charges.
7.    Sunset regulations on special access in 5 years.  Leave it alone for now.  After 5 years the ILECs are lightly regulated on special access for two more years.  After 7 years–no regulation.  That gives the Type 2/Special Access crowd 21 years since CA1996 to figure things out.

I actually believe these seven starter items are will create new investment into infrastructure–along with all sorts of new jobs–and facilitate resurgence in the IPO market for service and technology companies associated with the infrastructure.

Get the horse (fiber optics) ahead of the cart (applications).

Before closing out my diatribe: where we need FCC neutrality-issue focus is not on unbundled transport.  We need network device neutrality, network protocol access neutrality, peering-point neutrality, application programming interface (API) neutrality and any other neutrality to further the advance of investment into wire line and wireless infrastructure for new market entrants.

Finally, for my friends in the Beltway: America was not built on an equal playing field.  When the Beltway or State regulates for an equal playing field in burgeoning areas of technology, they destroy innovation, economic expansion and global competitive advantage.  America was built upon innovation, but not always by competing on a level playing field.  We need winners and losers when it comes to entrepreneurial risk and undertakings–not a level playing field catering to the lowest common denominator–where we can declare everyone a winner due to a lack of political will and leadership.

America is getting too close to the third rail in more ways than one!

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.

Here’s the latest buzz this week–the headline reads: “BT will have to share last mile fiber with competitors.”

I’ll bet you a few American CLEC CEO’s who rent last mile copper (aka Type 2) from Ma Bell had a Chris Matthews-like leg tingling moment reading this headline …

I have written about this subject before in the UK and, like everything else–the devil is in the details …

What UK regulators are proposing is “virtual unbundling.” Translated, “virtual unbundling” is the equivalent of a UNE-P in American terms … and we all know how well that worked out.  There are no plans on the horizon for physical access to BT’s last mile fibre (I wrote fiber like “fibre” – because that’s what they do in Europe and since America is trying to become more like Europe, I thought I would endear myself).

Anywho, it’s not law in the UK yet.  But, if you understand the constructs under UK regulator OfTel with FTTH – where H means “Hut” in the UK, BT is pretty much granted a dominant franchise for backbone traffic. Translated for the Chris Matthews-like CLEC CEO’s:  BT is in a great position to control price, tiers, terms and volume.

So how will things play out?  In my opinion, BT will have a lower cost advantage by owning the fibre, an install advantage and content advantage.  You can’t have access to virtual fibre until the fibre is installed … who will be selling their services first to the target customer before the physical fibre is installed?

That’s correct – BT!

So from my perch here in upstate New York (but with extensive International business experience in my past) I see the “virtual opportunity” as one of a competitor of BT being limited to price competition only. And, just like in America, if your largest competitor controls your operating costs and as market prices compress due to “virtual” competition – what is it that you end up with?

You end up with thin and declining margins which, over time, results in consolidation of the weak rental carriers and in some instances bankruptcy.  BT has its cake and gets to eat it as well … I love the fibre business.

I look at the regulatory model in the UK with this “virtual last mile” apparatus and can only think, as BT prices virtual access by the amount of bandwidth required–perhaps by tiers–the cries for network neutrality will be heard throughout the United Kingdom.  BT should not be required to price virtual bandwidth on a cost-plus basis but on the value it delivers.  And, in my opinion, any hogs using gobs of it should pay for its consumption.

I don’t believe a little old British lady who takes her daily tea at 3pm and uses minimal bandwidth for e-mail should have to subsidize some “gamer” with a Freon-cooled computing gaming computer that sucks gobs of real time bandwidth to play games.  (I purposely used “Freon” to drive the environmentalists crazy)

Thoughts?

I just finished reading an article in the Financial Times about British Telecom (BT) and a relationship they have with Carphone and Sky. Carphone and Sky have been asked by BT to make a buy commitment of ₤1.5bn ($2 billion+) as potential customers for wholesale broadband products that BT is planning…the subject is investing into fiber networks – not wireless. I discovered, however, that this nugget is not the real story.

The really interesting part of this story is the regulatory influences on BT. OFTEL (which is the equivalent of the FCC in the United States) had BT split itself several years back into basically two companies – a retail and a wholesale company. The wholesale company is called Openreach and it controls/owns the backbone and copper access networks. They treat BT retail like any other customer under an open access model (I have written about this concept previously–open access at the curb to any premise). Openreach maintains a quasi-regulated, monopoly-like wholesale business for wholesale access services yet open to competition.

This model has been in effect for several years now. According to the article, BT retail has a 30% market share in retail, and is now a dwarf in relative terms, to other Euro-based fixed line providers that were not split like BT.

The numbers really caught my attention. Openreach, in the first six months of its current operating year, has posted revenues of ₤2.6bn ($3.6 billion+) with an operating profit of ₤586m ($980+ million). The numbers and results are really interesting, especially in relation to the whining in the United States about the ILECs.

Once again, as I have admitted in previous posts, I am a bigot – a fiber bigot. Fiber is first and, in my opinion, anything else is a waste of money until the fiber is installed.

In regards to splitting up the ILECs in the US in a similar fashion as BT, that horse has already left the barn due to laws such as unlawful seizure of property and FCC agreements.

The whining continues while the FCC is formulating a broadband policy over the next few months. Based on what I have read, we still have the same whining going on relative to the ILEC and future broadband policy. My favorite – lower prices on special access!

Here is my opinion. If you are a carrier that likes the ILECs infrastructure so much (yet claims the ILEC is ripping everyone off), why won’t a CLEC or a consortium of CLECs or a consortium of CLEC’s and Cable Companies make a cash offer to the ILEC to buy the equivalent footprint of an Openreach? Think about the benefits: lower prices, full last mile access control and, most importantly, you would get the ILEC as a built-in customer right out of the gate. Sounds like heaven to me!

Wall Street can put a value on the ILEC Openreach equivalent assets, given the Openreach results. So call your favorite Wall Street Banker and hop to it. Have I mentioned that I am tired of the constant whining about the ILECs? Debt markets are open and I am sure your banker can advise you accordingly. The ILECs have already demonstrated a willingness to sell off these types of assets just this past year. So what is stopping you? Or is it just easier to complain and blame than adjust your business model (that may have been flawed in the first place)? Free will, free choice – you don’t need government intervention. Pardon the pun – you just need to get a “backbone.” And the fastest way to get one is to buy it out from under your supplier the ILEC.

My fantasy is that the FCC actually reads this blog…I am fairly confident President Obama checks it daily. Here is the straight deal – since the Communications Act of 1996, decisions have been made. These choices have been made freely based on different business models – no one was Tony Soprano’d into anything. Business models were conceived of free will, free choice and in some cases, knowingly subject to swimming with the ILECs (under regulatory oversight that had never been tried). Many business models were “advised” by the really smart people on Wall Street as well.

It is now 2010 – it has been 14 years since CA1996…and just like a bottle of 14-year aged fine wine, I continue to hear the same 14-year bitter whine. After 14 years, don’t you think a different approach might be justified, especially given where the United States falls relative to high-speed network rates when compared to other advanced countries? This small-scope thinking of copper loops and special access is hurting America. 14 years of ILEC network infrastructure arbitrage has gone on long enough!

Now that I’ve explained and articulated the BT scenario, join me for my next post as I offer my recommendations to the FCC and President Obama for a sensible broadband policy.

For the most part, with the exception of two of my charts, I behaved myself.  But, that’s not the real story coming out of this conference.

Houlihan Lokey did something very different from most banking firms that host these events for the financial community.  They invited a number of privately-owned Telecom and media companies to present their businesses, strategies and outlook.  Similar banking events often only invite publicly traded companies, which basically tell you what you already know by reading their quarterly reports and filings under Sarbanes-Oxley.  The “big guys” mentality
exist at those events even though, in the grand scheme of things, some of the “big guys” are still a pimple in comparison to an ILEC .

I think the eye opener at this conference was for the Private Equity firms attending.  They were able to receive information on companies that, quite frankly, outperform a number of public companies by significant margins and benchmarks.  Albeit smaller companies, but the fact of the matter is, give these same small firms the capital to expand, and they will take many public firms to the cleaners.  Most PE firms, however, wrestle with believing, “I can only invest hundreds of millions of dollars.”  in my opinion, investments should always made on the management team.  It’s like the old saying at the race track – always bet on the jockey.  You can always add money, so why let someone get drunk on up-front cash regardless of business model or razzle-dazzle PowerPoint charts and projections?

Too often CEO’s with too much cash go on ego trips with that cash burning a vicious hole in their pocket.  Becoming a celebrity CEO and using someone else’s money is disingenuous at a minimum!  Our last round of Celebrity CEO’s and
CFO’s using other peoples money resulted in the telecom meltdown circa 2001-2003 … let’s not have short memories.  Fund responsible management – not a story of conquering lust!

Many presenters leading the private companies have in fact previously held executive positions at multi-billion dollar firms, I amongst them.  One reason I started AFS was the waste of capital and human resources at large companies I often witnessed  that could perform much better if utilized appropriately or should have less people as they underutilize their intellectual capabilities either by operating procedure limitations or cultures of control.  The human resource maximization mindset was well illustrated by the low churn rates of customers the private firms disclosed.  Focus on customers is paramount over focus on each other internally was a key repeating theme.

A lunch time panel of various financial firms indicated that things are changing and they see consolidation relative to metro fiber firms picking up as the bid and ask gaps have closed, however, the bid and ask gaps have increased amongst media companies for various risks more related to the evolution of the Internet and uncertainty than anything else.  The favor of metro fiber is the real accelerating growth of organic bandwidth, the need of optic connectivity to enable everything else and the “platform” fiber provides growth and flexibility by owning such a platform.

From a metro fiber platform, you can remain a horizontal provider of services or vertically integrate services — when the markets make sense to do so.  A local fiber platform gives an operator this advantage over the risk of an application provider which is asset-light.

I would be remiss by not saying that I did get to see and say hello to many of my PE friends that have been looking  to get into the metro fiber space “platform” for at least the past four years.  Once again, I believe the performance by the private firm’s disclosed at this conference must make for some interesting PE introspective relative to existing portfolio companies, quality of management and execution focus.

In addition, at the conference, the recent announcement of Comcast purchasing a Chicago CLEC has caught the attention of many.  The scuttlebutt at the conference was the multiple of EBITDA was well north of 10x and to expect more cable companies looking at the “small metro Telecom guys” who are fast, focused and thrifty as future consolidation occurs.

Why cable companies?

As rumor had it at the show, Comcast not only bought the CLEC “business” to go deeper into metro and establish a solid beachhead for business customers but to obtain people that know how to compete in local telecom … kudos to Comcast for thinking diversely, differently, realistically and non-insular.

I suggest, if given the opportunity and if Houlihan Lokey repeats the private company invites at their next Telecom & Media Conference, it could be well worth your while and eye-opening to attend.

I was hesitant to participate when invited, I am glad I did.

One of my haunting places on many, many occasions was the United Kingdom.  So, I keep a watchful eye on the comings and goings within UK telecoms and Europe in general, plus South America, plus Asia, plus Australia/New Zealand .  I affectionately refer to the UK, when it comes to things like healthcare, horticulture, cuisine and telecoms, as the land of “That’s Good Enough.”

I just came across a report called Digital Britain published under Lord Stephen Carter, the first Minister for Communications, Technology and Broadcasting.  Just Google or BING “Digital Britain” and “Lord Carter” and you to can download this 245 page report as well. (I put BING in here just in case Google reads this…).

There were two things that caught my eye, though I have not read the report cover to cover, that I would like to share with  my loyal fiber bigot readers…and of course the few copper loop loving Oafs.  Don’t worry–I love my loyalists and copper Oafs equally.  It’s all about the love at American Fiber Systems.

In the land of “That’s Good Enough” it’s nice to see not much has changed.  Though Telecom is a £52 billion a year economic driver, the British government has in its sights a goal.  That goal is this:  by 2012, for all of Britain have broadband speeds of 2 megabits.  This is classical British authority – the government establishing what’s good enough for the British commoners.

In fairness, they do recognize the value of fiber optics to the home and businesses per the Digital Britain report.

So, beyond 2012, they want fiber and they want it everywhere.  Per the report, they pretty much figured out that 2/3 of the country can be served by just letting private Enterprise compete in an open market with limited government involvement but regulatory oversight of British Telecom by Ofcom (aka their FCC) to succeed with last mile fiber deployment.

Lord Carter, through Digital Britain, has concluded that there needs to be the ambition “to accelerate the rate of growth, and cement the UK’s position as a world leader in the knowledge and learning economy.”   Note to Lord Carter and the Queen of England:  You are not going to cement anything at 2 megabits per second – I can swim the English Channel faster – I told you I am a mystery man of International intrigue.

So our friend the Lord, has proposed an idea to address the remaining 1/3 of the country that can’t be addressed by the private sector due to rural economics.  He has proposed a tax of 50 pence per month or £6 per year on each and every copper loop as long as they are in existence.

The collected tax will be centrally collected, controlled and disbursed by Ofcom to subsidize the private sector to service and build out rural UK with fiber optics.  Lord Carter believes this scheme will in 4-5 years time provide fiber access across 90 percent of the UK.  Estimated tax proceeds from the copper facilities of £175 million per year will be the source of public funds to achieve rural fiber access by matching it with private funds.  I am sure eventually that reality will settle in and that wireless 4G, LTE or WiMax will also play a subsidized role in the hinterland.  I have been to Scotland – I don’t see running fiber cables from glen to glen.

What I like about this approach, is the British government trying to stay out of the mix as much as possible (translated – no government authority or entity trying to be in the communications business.)  Maybe by watching America, they wish not to repeat our mistakes of municipal or public utility participation on a tax subsidized basis, not being required to make a profit, let alone have the appropriate core competencies or burning desire of an entrepreneur.

Now, for a few of my readers that may be from the UK, or conduct business there or just follow things like this as I do, you may be thinking: “But Dave, isn’t the push on for Fiber-to-the-Curb (FTTC) in the United Kingdom leaving the access to copper?”  And my answer to that is yes!

That’s the beauty of the tax.

Today, British Telecom is the national wholesale backbone provider and for this privilege is regulated by Ofcom.   BT is required to place at various intervals along the backbone cross-connect huts with power and get this – non-discriminatory, equal access to the copper from the hut to the residence or building. If a hut runs out of space, BT is required to build another hut adjacent.  Most of these “huts” are underground. No volume discounts or any of those last mile “special access” games – competitors pay the same for the last mile copper as BT uses it for itself. (I am trying to keep things simple).  BT is the wholesaler – the technology push is last mile for all.

The incentive over time is for competitors and BT to build fiber from the hut to the premise to displace the copper and the tax that goes along with it.  Nothing prohibits a competitor to build their own backbone in and around the huts.  This makes for an interesting mix of diverse last mile options that could range from a neighborhood to multiple kilometer area coverage.  The key is the equal access, non-discriminatory and same cost interconnection in the huts.  To a certain extent, it can rationalize the deployment of capital expense whereby a last mile fiber owner has a sharing incentive for access (i.e. waves) or take the risk of getting built over for trying to be a last mile monopolist.  If a competitor has an equal access backbone from BT, it becomes a more level playing field for rational access deployments.

There is a very nice Layer 2 access model in all of this as an option for private investment.

BT as a wholesaler will get regulatory relief as networks and options evolve, but as things evolve they have every incentive to deliver reliable, diverse and equitable bandwidth to those huts.  If they don’t, besides Ofcom, competition with open access to the huts can usurp their wholesale position.

It will be interesting to see if the tax gets approved.  I am not one for taxes; however, copper loops are like kryptonite to me, it makes a nation weak.

I have found a few more oddities in the process that I’d like to share with commonsense America.

Before I start, have you noticed something that has been going on over the past 4-6 weeks?  It is very pertinent to the BTOP process and how a proposal may be challenged after submission by an incumbent wire line or wireless carrier–or any carrier for that matter–anonymously, of course, and without due process.

There has been a flurry of press releases from all major wire lines–wireless and cable companies claiming to offer service speeds on an advertised basis in excess of  10, 20 or 50 megabits in some cases, some as high as 100 megabits.  All sorts of new high-speed advertised services!

Keep the above in mind …..

According to the BTOP folks, a proposal receives points on 5 parts of a submission form.  Each part gets 20 points, so the highest points a submission may receive is 100 points.

In one of the sections, based upon the USA’s definition of broadband of 768 kilobits, an initiator of a proposal has to go through all sorts of census data machinations and mapping in defining areas of a proposal that qualify as being unserved or under-served.  Respectively, no service is un-served and under-served below the broadband service definition of 768 kilobits per second.  It is plausible that a proposal may be eliminated at this stage by not meeting these criteria by supportable quantifiable analysis, though in a different section of scoring, if your proposal offers megabits or gigabits of broadband you can get extra points.

Think about this for a second. The two points contradict each other.

That said, a proposal may also be challenged for elimination – get this – if the advertised broadband speed by a provider in an area is greater than 3 megabits per second.  Thus, all the recent announced advertised speeds greater than 3 megabits are dripping all over the place.

Think about it – not an installed speed of 3 megabits with 90% coverage, but an advertised speed greater than 3 megabits.  Advertised!   It gets better.

If a proposal gets rejected because some carrier did a press release and updated a tariff to a new advertised speed above 3 megabits the proposal submitted gets called into question of the quantifiable analysis of unserved and underserved per the rules, assuming you get a hearing on the matter; and guess where the burden of proof falls?  Yes, on the company that submitted the proposal and quantified census research must prove that the advertised speeds are not available, limited, etc.  Now, can someone out there in blog land please tell me where you are going to find such information?  Think about this for a second – you are guilty of a quantifiable census analysis according to the BTOP rules as required if someone advertises a speed greater than 3 megabits across a region wire line or wireless.  The burden should be exactly the opposite – a carrier or Cable Company advertised certain rates of speed greater than 3 megabits per second, especially the last 4-6 weeks, should prove the penetration rates on a map by actual sales via their billing records.

It gets better.

In the BTOP rules, with the definition of Broadband at 768 kilobits, there has been a sector excluded from consideration because they not only deliver at least 3 megabits of service but they can serve 100% of America today.  Satellite companies as an industry group and platform are excluded from BTOP as a viable measurement for unserved and underserved.  Why?  Because the satellite broadcast companies by the Federal Governments own definition of broadband makes America 100% served at 3 megabits or above … how convenient.  They not only advertise it today, they are doing it today.  Why the discrimination against this sector?  I can’t tell you why and I am surprised satellite carriers are sitting by idly.

The straight talk here is simple: it’s about politics, the beltway disconnect with reality and protecting the interests of campaign contributions even though America is woefully behind in broadband access and speeds overall.  I filed my opinion at the start of the process calling for a minimum standard of 100 megabits as the definition of broadband with a goal of 1 gigabit within a decade with the global economy as a backdrop.  According to “advertised” announcements recently, my 100 megabit broadband definition suggestion seems plausible and achievable.