More Video, Voice Peering Forum, Part 2
January 2, 2009
This is the second half of the interview with TMC’s Rich Tehrani.
Voice Peering Forum Interview 1 of 2
December 30, 2008
Over the summer, I participated in an interview with Rich Tehrani, president of TMC, at the Voice Peering Forum. Here is part one of the interview.
Happy holidays from all of us at AFS. We welcome your comments and questions. Post a message below or email the Straight Shooter. If you’d like, you can see more telecom videos here.
Looking Ahead to ‘09, Part II
December 26, 2008
Here’s the continuation of my recent post on xchange magazine’s blog. You can see part one of this post, Looking Ahead to 2009, here.
Given the credit crisis (and my theory that the current situation will weigh on telecom well into 2010), I believe we will start to see a realization by Wall Street and those that have the capacity to lend, that top-line growth by itself is meaningless without margin/profit growth. If you look at recent M&A, it was driven and debt funded around that testosterone-driven top-line growth. We are now watching many companies struggle with integration, and some may end up in Chapter 11 as a result. The other problem all CLECs face in the United States — none of us are “too big to fail” in terms of our federal government. So as much as the “big” CLECs like to beat their chest in superiority over smaller CLECs — we are all basically a gnat on a rhinoceros’ ass in the scheme of a $3 trillion global telecom economy.
If I were an agent of any sort, I would focus on carriers that have competitive sustainability.  You can first start by looking at who survived the 2001-2003 telecom implosion without going Chapter 11 or Chapter 22. These firms obviously have something going for them, and more than likely it is discipline, cost control and focus. Now, my bias under full disclosure is that I am a fiber bigot. Worse yet, I am a metro fiber bigot. From analyst reports, PE firms with lots of cash and lenders — there is a high interest in enabling established, healthy companies with a track record of organic growth that own local fiber optic infrastructure well beyond the headlines of the global credit crisis. PE firms looking 5-10 years down the road now realize that real broadband is over fiber and that any and all known and unknown applications will initiate or terminate over a local fiber optic network. Some analysts are readily reporting wireless having a place, but it will not come close to the fiber optic infrastructure which is close to the customer.
I believe agents need to reassess their models to serve and transition from a volume driving activity to delivering growth margins to those companies which have great control over their network costs. I have spoken with agents for the type of business we have – all data/IP, 20 megabit or higher enterprise customers with a minimum of $5000 MRR — and I have yet to have an agent show us a model which beats a direct sales force. Below 20 megabits is the traditional low-end game of lowest price, drive-by selling and a costly back office/customer touch where margins are quickly eroding as basic bandwidth demand increases as copper becomes an insufficient medium. There is an abundance of price discounting channels available within this lower segment.
My opinion is that the sales agent of the future is not an agent but a partner — an integral part of the organization. This type of partner is loyal and not waiting for the next best commission deal to come along. This partner understands how to sell into an existing price point to hold it or grow it… not lower it.
Happy holidays from the Straight Shooter. If you’d like to email Dave, click here, or post a message below. You can also subscribe to this blog’s RSS feed.
Looking Ahead to 2009
December 23, 2008
Happy Holidays to you and yours. While we all take time to be with with friends and family, I thought you would enjoy a look into what is in store for CLECs in ‘09. This is an excerpt of my regular series on xchange magazine’s blog.
There’s a question that keeps coming across my email lately, especially from agents. It’s asked in various forms, but the long and short of what people are wanting to know is this: “how long do you expect the regional and national CLECs to keep their heads above water?”
I have no doubts that additional consolidation will occur. Sadly, the next round of consolidation will occur around marginal CLECs. Who are marginal CLECs?
Marginal CLECs will be those CLECs that are faced with pricing pressures as the result of not having an ability to differentiate services or hold a margin due to reliance on ILEC infrastructure. In addition, those ILEC-dependent CLECs carrying debt greater than 3x EBITDA, in my opinion, may be forced into the situation as credit markets remain elusive and expensive. For example, in the State of Missouri, the ILEC has been relieved to raise prices to CLECs. In general, Special Access costs across the United States will increase as the ILECs are no longer obligated to provide volume or terms. The ability for ILECs to raise prices of wholesale pieces and parts via forbearance is not an issue of “if” just when – that’s reality. Most CLECs relying on Type 2 ILEC will not see costs decrease as prices decrease.
If the telecom meltdown of 2001-2003 is any indicator of how the current market conditions may force behavior, the squeeze could be on. It is important to note that the current downturn is not network-centric as in 2001-2003, but it is deeper, wider, sinister and global.
Some unsophisticated CLECs will make an attempt to survive by lowering prices believing that lower prices will stimulate growth and cash flows. I agree with this somewhat but only to the extent you have 100% control over your network operating costs and by increasing volume you get economies of scale for better margins. However, the more a CLEC relies on the ILEC for pieces and parts, the more likely the CLEC in a price lowering market cannot achieve margin sustainability. The ILECs are not benevolent and will not lower their wholesale pieces and parts unless the law says to do so. We saw many companies go bankrupt 2001-2003 by lowering prices as a single, unsophisticated strategy.
Season’s greetings from the Straight Shooter and the entire AFS team. If you’d like to receive Dave’s posts direct to your inbox, click here. We always welcome your questions and comments. Email Dave or post a message below.
It all comes down to parenting
December 17, 2008
I just finished reading the US Securities & Exchange Commission (SEC) release in fining Siemens AG $1.5 billion for a string of briberies of government officials totaling $1.1 billion. (Read the press release here.) The release said that Siemens was caught “engaging in a systematic practice of paying bribes to foreign government officials to obtain business” and that those dishing out the cash came from all levels inside the Siemens organization.
For those of us conducting ourselves in a fitting manner by actually winning business the hard way (by competing without bribing anyone), on our behalf, this is what really pisses us off. This story, in my opinion, is yet another “too big to fail” situation. But in this case, the $1.5 billion dollar fine is just a cost of doing business which, by the way, gets passed along to customers of Siemens/Nokia. Getting too big is just like our politicians, all of a sudden you think you are above the law or the law does not apply to your title or stature.
Where is the accountability? I am growing tired of the “too big to fail” writing checks to get out of situations or someone writing a check to keep them in business. Where are the criminal charges? Who were the recipients of the bribes? Who is going to prison?
We already have laws on the books to remedy this; we don’t need a global Sarbanes-Oxley. We have corruption laws, extortion laws, fiduciary duty laws, embezzlement laws, conspiracy laws and recent trends in America tell me we have prison space readily available. And, what I mean by prison space is real prison, not Club Fed.
Sit back for a moment and think about all the people who were cheated by this activity. Think through it.
Those that delivered the bribes and those that accepted the bribes, all I can tell say is that your parents failed. Your parents did not provide you with an adequate moral compass and ability to reason right from wrong. Those that refuse to criminally prosecute the culprits — ibid. Fines are not the only answer, putting clowns like this behind bars sends the appropriate message to the “too big to fail” companies and the “too small to have fairness” – the risk is loss of freedom and all your worldly possessions that you so much coveted. I hope it isn’t too late for your children or grandchildren.
Am I the only one ticked off at this type of garbage and all the underlying corruption? Believe me this is not unique to Siemens or telecom, but when is enough is enough?
I would enjoy hearing from you.
Tell Dave what’s on your mind. Email Dave or post a comment below.
Guess Who’s Coming to the xchange magazine Blog?
November 14, 2008
You guessed it. This month I started a guest blog feature for xchange magazine on xchangemag.com. I posted my second xchange blog entry today entitled “Two Topics, One Conclusion” in which I wrote about how forbearance can help solve the fiber glut myth that exists. It also continues my commentary on the case for forbearance and answers a recent question I got:
“If all such forbearances were granted and the government stops watching, what will stop the ILECs from doubling prices where there isn’t competition and cutting prices in half where there is - thus ending the business case for anyone else to hook up more buildings with fiber? In other words, does granting forbearance necessarily lead to more choice?”
Here’s an excerpt from my post on the xchange blog:
Forbearance is the right tool to increase investment into local fiber optic infrastructure. This local fiber infrastructure is much needed to surpass today’s basic copper broadband to make the U.S. globally competitive in an array of industries.
As a result of being granted forbearance, ILECs will likely raise wholesale prices, as they should. This will generate profits for some, and for others, grant a timely death or consolidation. But as profits rise and regulatory certainty of forbearance manifests itself, then and only then will investment groups have an interest in entering the highly fixed cost business of local market competition on a fiber access platform. The worry that the ILECs will price everyone out of business is just a worry. Even the craziest of ILECs will recognize that if they get out of line, soon they would face regulatory scrutiny again. If anyone knows the touch point for monopolistic behavior, it is the ILEC. The last thing they want is more regulation when they have the control to avoid it. Control – understand that is what the ILEC is all about – from there, design your execution strategy.
Forbearance can also be a managed process. It does not necessarily represent a light switch. There can be safeguards and indices built into the process. But clearly, we need a sunset provision whereby all gloves are off the ILEC within five years. A five year sunset provision would mean that CLECs will have been given 17 years since CA 1996 to figure things out for themselves. Having such a sunset provision would clearly signal to investors that making high-cost investments in local fiber optic infrastructure is a value proposition and a long term advantage. Imagine if we had an eight-year sunset provision at the outset in 1996 – we would not be in the current mess. However, no one back then asked the non-celebrity types about regulatory policy – what could they possibly know? After all, they are from outside the beltway.
Is Dave right on or way off? Shoot Dave an email or post a comment below. You can also follow Dave’s xchange blog.
Musing on a Hypothetical
September 30, 2008
I’ve been getting some interesting questions and comments lately. Here’s one I got recently from a reader with about how American Fiber Systems (AFS) measures up in a hypothetical sales situation. I’ve asked Jeff Williams, the VP of Enterprise Sales for AFS, to weigh in.
How does AFS handle a sales situation like the following:
Bldg > Data Center or Carrier Hotel with multiple ON-NET providers; let’s say Level3, XO, ATT, Verizon, and AFS.
SLA > All are very similar regarding uptime, etc.
Provisioning > All promise 5-7 business day install intervals.
Price > Lets say L3 and XO are 15% less than everyone else.
What is AFS’s compelling value proposition in the above?
AFS focuses on working with customers who have mission-critical bandwidth needs across a metro-fiber network, not just bandwidth requests that are entirely served from a single data center location. This is especially true with enterprise clients who typically connect their data center infrastructure to their corporate/regional HQ within a metro. In these instances, Point A will be located with all the other providers in the data center, but Point B is at another location in the city. In this situation, not all circuit designs/service are the same from each vendor:
- Do all the vendors mentioned below have “on-net” fiber at both Point A & Point B?
- Will they commit to a firm install date…and meet it? (numerous horror stories of installs gone astray – months of delay for the customer)
- With what degree of expertise/responsiveness/level of clue will your fiber build be managed?
Let’s look at these questions individually. First, do all vendors offer on-net service at both locations? The answer is no. In fact, the other vendors mentioned often approach AFS to provide the Point B connectivity from a wholesale perspective. Next, when they give you a date, can you count on them to hit it? I think we’ve all heard numerous horror stories of installs gone astray. In some cases, customers have experienced months of delay with other providers. Not so with AFS. And finally, does your provider have the experience as well as the responsiveness you’re seeking as you undertake a fiber build? We believe we are the leader in providing both.
In closing, AFS is disciplined in its core competency. We don’t go chasing every new revenue stream that looks to be attractive. This includes long haul, CDN, hosting,etc. Most of the other vendors mentioned attempt to be that “one-stop” shop. Some do it better than others. While you can make an argument that a bundled service offering/one-stop-shop serves the generic needs of the down-market prospect, it seldom meets the specific, critical needs of larger enterprise infrastructure. And as a result of trying to build a support team to meet numerous different products, the depth of knowledge in any one area becomes diluted. By remaining disciplined to the core – we’re able to groom, train and develop an operational staff which is 100 miles deep in a single & critical competency.
Here’s an analogy that illustrates AFS’s specialization:
If I became interested in joining a motorcycle riding club, I might go to my local Harley dealer and buy the motorcycle, the bandanna, maybe even those crazy leather chaps & some fancy chrome fenders. If I’m interested in building a $100,000 custom chopper with a high-performance engine – I’m going to Orange County Choppers.
Do they know about motorcycles at the Harley Davidson dealership? Sure. Are they aware of the custom-motorbike building world? Yes again. Would I trust them to build from scratch my $100,000 bike in the back of their showroom? NO WAY!
With experience in both enterprise and carrier sales, Jeff Williams has 14 years in telecommunications with the likes of Sprint, Metropolitan Fiber Systems and most recently, AFS. Care to comment? Shoot Jeff or Dave an email or post your thoughts below.
Opportunity Abound for XO Despite NOL’s
September 16, 2008
I recently received the following comment in response to What Frontier Means on a Resume:
The viability for PAETEC will be integrating the McLeodUSA fiber into the PAETEC environment.
I have been challenging tax assessments on this industry specifically focusing on CLEC’s and IXC’s back to 2000. Because of the NOL’s, property tax was a major part of the CLEC operating expense. A CLEC without fiber going forward will soon see the end. I am sure if the credit markets would allow and the PAETEC stock price would rise, Arunas would be after more fiber…possibly XO.
XO is next. Question is who is the buyer.
Thanks Brian.
I believe if anything reasonable were in M&A play, XO is in a better position to go on an acquisition spree. Mr. Icahn recently cleaned up their balance sheet and they are now debt light. The owners of metro fiber like an XO can benefit by adding customers and applications to their local fiber infrastructure at a reasonable valuation. The net effect of doing this is the acquired customers’ margin contribution to the fiber-based entity can increase as much as an incremental 40%.
The converse, an asset-light company buying a metro fiber based company with its customers, is a different animal altogether. The same 40% in margin increase can be had by the acquirer as it comes with the fiber platform, however, the valuation profile of such a local fiber-based company will be much higher than an asset-light company. The thinking behind such a scenario isn’t as much about the local the cost of acquiring the metro fiber business but the value of its metro fiber; it quickly becomes a valuation of “what does it cost me if I don’t have access to the metro fiber M&A play and get locked out by a competitor?” It is not an industry secret that there is a shortage of metro fiber and having to build it if you can’t buy it is a costly proposition. It costs 60% more today for the same metro fiber build than what it cost to build 5 short years ago.
In an acquisition or merger, NOL’s get fractionalized to such an extent by the IRS, they are of marginal value. Whether you agree with Mr. Icahn or not, he restructured XO in such a manner within his holdings that he can take advantage of the lion’s share of XO’s NOL’s.
Shoot me an email or add a comment below.
Wisdom from the Street — High Margin is Bad
September 11, 2008
One of my readers, Mark Miller of Miller Capital Partners, wrote asking about my thoughts on an announcement by TWTC:
Any thoughts on the announcement today from TWTC (a big fiber owner), recent issues with CCOI [Cogent], while LVLT [Level 3] and GLBC [Global Crossing] say no slowdown in sight? Is it that TWTC have so much voice and CCOI sells basics, whereas LVLT and GLBC have a different revenue base? I guess we’ll see what LVLT and TWTC have to say later today.
First of all, thanks for writing, Mark. I really enjoy hearing from other professionals about telecom topics such as this.
For those not following the story, TWTC filed something with the SEC yesterday and said that they are experiencing churn from their very small customers who are not paying their bills. Well, as soon as the Chicken Littles got this news, the knee jerk reaction is to downgrade. I say upgrade TWTC; this is good news.
The Street reaction to the tw telecom filings, per usual, just demonstrates to me, again, a major disconnect between Wall Street and reality. Once again, Wall Street does the “the sky is falling” routine.
Want a stock tip: buy TWTC courtesy of Wall Street Analysts that are short sighted. Clue: You can’t find an analyst on Wall Street that has run a telecom firm that can distinguish between staying power and last night’s date.
Wall Street has some kind of Oedipus complex with top line revenues. Any disruption to revenue growth, well, that is not acceptable. When will Wall Street start realizing this game is about predictable margin and profitability growth?
If “small customers” (a/k/a Type 2 **) are churning out of TWTC, this is good. These marginal, no growth, financially strapped customers are leaving for another carrier. I say lets get a cake and have a party. TWTC margins will improve! Low end, low margins v. high end, high margin customers … what’s the problem? Rejoice!
I would be more concerned if TWTC were having a run on the on-net customers since these are high margin, high revenue customers. But they are not and will not because TWTC owns local fiber optic infrastructure. Metropolitan fiber allows you to play at the 70% - 85% gross margin level with on-net customers; it’s the type 2 customer that drags down margins. Type 2 customers – good riddance — have a piece of cake on the way out. Go back to Ma Bell where you belong.
So, in my simple way of thinking, since tw telecom does not make sub-prime mortgage loans, manufacture automobiles or build houses, I think they are a buy. Funny thing – the credibility of Wall Street firms – they create the bubbles and somehow want to be seen as credible. To Citicorp that provided a downgrade take note: people who live in glass houses should not be throwing any stones.
Do your homework, and jump on buying opportunities like this when the uninspired, inexperienced Wall Street spreadsheet jockeys hand you a gift like today’s.
** Type 2 describes when a provider like TWTC buys a circuit wholesale from the phone company (because they don’t have a particular building On-net), and they then resell this circuit to an end-user. AFS does Type 2 circuits less than 5% of the time. Paetec is 100% type 2.
Shoot me an email or add a comment below.
Two Cents on Paetec
August 28, 2008
I got an email from a reader that said, “I’m surprised I haven’t seen the Straight Shooter’s $0.02 on this topic: Who will buy McLeod’s fiber from Paetec?”
Here’s my take: What I heard on the conference call is that PAETEC is not selling fiber anymore, so analysts should not rely on said sales going forward.
I think it’s a smart move not enabling competitors. That said, previous management to Paetec, attempting to avoid bankruptcy, sold fiber on the cheap thus enabling low cost competitors on the same local fiber routes. I don’t believe Arunas was saying that they will divest and be a non-fiber participant. If this were the case, in my opinion, Paetec would not have bought McLeod. I believe Paetec management understands that fiber enables greater margin control/growth and service differentiation.
Paetec hit a bump in the road; they should be running to local fiber, not from it, regardless of the 90-day Wall Street view of matters. Local fiber creates a sustainable, competitive advantage.
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