What America Needs is Choice (and I’m not talking about the election)
September 18, 2008
We have not experienced in 12-years a migration from ILEC dependency by CLECs. The CA 96 was designed to create competition – it has failed. So, do we need other 12-years of status quo? Absolutely not!
What America needs is choice. Choice in true facilities based competition and not the holographic companies that claim they “own” a network.
How will you get true choice? Real competition? You don’t do it by continuing regulations that have not worked. You do not do it by relying on Governments that are only interested in sapping fees from users of any operator’s customers plus the operator. It is time to wake up – you need to do what you need to do and stop relying on the Beltway Broadband Bandits. You do this by leadership and not whining how unfair it is if I don’t get 12 more years of renting. You realize the government is NOT on your side and you figure out your destiny. Prolonging the inevitable only provides the ILECs and cable Companies more opportunity to penetrate with facilities which lock you out of competition.
The Global bandwidth driven economy is passing America up and bandwidth is fast becoming the oil of the 21st century. So let’s keep arguing for the status quo so we can fall behind further.
Yes, the ILECs do not have to share fiber, it’s the law. So why do we sit around and whine about it? A lot of CLECs do whine which is a waste of time and lawyer/lobbyist money. Get over the anger and denial and stop counting on the government. Also, by law, cable companies do not share networks or even rent out pieces like the ILEC is required. I don’t hear too much pissing in the wind about this fact!
Yes, granting forbearance will drive prices up in the short term, as it should. This is called an open market finding competitive equilibrium. The reason we hear; “Oh my costs will go up and my prices will go up” is because the weak CLECs that only compete on price have no value add to offer customers. They don’t have sales people whom are sophisticated enough to sell up the value chain on value and a profitable return. They believe telecom is homogenous and it is all about low price elasticity. Bottom line: being on the ILEC dole so long, some CLECs have become plain lazy. Exactly what the ILEC wants.
As competitive equilibrium is reached in a post-forbearance market and profits realized, then and only then will private investment occur into more local fiber optic infrastructure and access. When investors clearly realize that they can get a return on the capital deployed in this high fixed cost business under a forbearance-granted market, the investment flows. Profits create competition, not the continuance of the telecom welfare state as we know it.
Over 90% of business buildings in this country still do not have cable #2 into their building from a true facilities competitor. It is estimated it would take $125 billion in investment to bring needed fiber to every home and business as entry stakes for Global broadband access. We will not attract new infrastructure investment as long as government regulations make earning a profit a risky undertaking in what is and always has been and will always be, a high fixed cost business for participants of stamina.
Weren’t those 12-years enough time to figure things out?
Shoot me an email or add a comment 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.
Comment Response: Just how prevalent is Ma Bell?
August 13, 2008
The following comment was posted on the 8×8, Inc., Yahoo! Message Board late last evening citing one of my previous posts:
“90% of business buildings are still served by one providers infrastructure, that being Ma Bell. ”
http://www.telecomstraightshooter.com/20…
Still not sure I believe it. Comcast has spent plenty of money marketing to enterprise customers in my area. They must have sufficient cable in the right commercial zones.
Still, this is what Martin (CEO of 8×8, Inc.) has been telling stockholders, believe it or don’t.
See the comment posted on the 8×8, Inc., Yahoo! Message Board
My response: I believe in data … real data. The FCC collects data on competition by an honor system. The Federal Government Accountability Office (GAO) collected data for a report on competition by actually pulling circuit type data from 16 markets through a proprietary, highly confidential database that Telecordia keeps. This database identifies who has what circuits and where.
The GAO report was highly critical of how the FCC measures competition, as they released their findings on true, real, physical facility based competition. This November 2006 report stated that 94% of business buildings in the United States have only one true, real, physical facility based provider … Ma Bell. The FCC would identify 5-7 competitors in a building, however, all riding over the same Ma Bell infrastructure including Ma Bell.
The report may be found at the following location: www.gao.gov/cgi-bin/getrpt?GAO-07-80
Pole Attachments
June 11, 2008
I spent a bit of time during my inaugural blog giving an overview and opinion on the Beltway, Congress, FCC and lawyers.  I will not let that pass. Let me share with you how nuts things are on the topic of pole attachments to prove my point that logic and common sense do not exist inside the Beltway.
The FCC is taking “position papers” at this time on the competitive and cost aspects of hanging a cable on wood or metal poles. But before I go down a path, I need to make sure that you have your mind right. Think about this: If you download a video on to your laptop, does the laptop get heavier? If you upload a document from a laptop, does the laptop get lighter? Do you pay special charges to Dell or HP for a laptop depending upon how or what you are going with the laptop?
So much for the warm-up.
Poles are those tall structures that carry the cables for copper facilities, fiber facilities and power distribution. They are regulated by our government, as they should be. No one wants six poles installed within a four-foot circle to carry six different carriers or utilities facilities. Now, from this point on I suspend any form of common sense until my proposed solution, as I describe in layman’s terms the genius of the Beltway and some carriers…
I don’t want to impress you with my brilliance. I have an MBA, but perhaps more importantly, I have read all sorts of legal filings and industry related articles on pole attachments. (I will spare you the detailed insanity.) At the center of the pole attachment debate in DC is who pays what to place a cable on a pole. Isn’t it funny? It’s always about money.
Anyhow, the genius of the debate is that an entity offering voice services should pay a different rate to attach to a pole than an entity providing cable services to attach and a different rate yet for an entity providing IP services over a cable to attach.
How nuts is that?
The last time I checked, a pole has no idea what is traveling over a cable. What the pole cares about is safety and a solid physical attachment. Better yet, if you are running an OC-12 over a cable across a string of poles and decide to upgrade to an OC-192, in fact, the cable does not get any heavier.
Every time I discuss this topic with a man or woman not familiar with telecom, they rightly so and quickly determine that charging by “what” runs over a cable is asinine as the pole is indifferent. Now, mind you, these are just normal, every day citizens not nearly as smart as the Beltway buddies.
There is also hypocrisy to the situation. Let me share an observation - I will change the names in the story to protect the guilty.
Carrier Vextron delivering voice and data for years never participated in the pole attachment debate. Vextron pretty much left the debate and cost arguments be handled by the “little people” carriers, if you will. The reason for this is that Vextron for years cut some sweet deals with a few cable companies which allowed them to lease fiber from a cable company within a cable companies closed fiber sheath on pole routes. Cable company rates to attach a cable are the lowest of attachment rates on a given pole. With Vextron inside the cable sheath, delivering non-cable services, they were clearly cheating the regulators. Also, Vextron was not competing at the same costs to be on a pole as its competitors — probably an oversight.
Low and behold, our industry changes. Cable companies are now becoming phone companies, and phone companies are becoming cable companies. Cable companies are now chasing business as well as consumers for telecom services. As such, the cable companies turned on Vextron, reporting them to the FCC, and no longer allows the free loader any fiber as they are now direct competitors.
Where is the hypocrisy?
Upon this industry change adversely affecting Vextron, Vextron immediately put on a red superman cape and entered the circle of competitive providers vis-a-vis the Comptel organization. Comptel is the last standing organization inside the Beltway that allegedly acts on behalf of all members interests in regulatory and competitive matters before Congress and the FCC. It’s sort of an anti-Ma Bell group.
Anyhow, Vextron swoops in and tells all the “little people” at Comptel now is the time for us to unite and petition the FCC for lower cost pole attachment fees. What did the “little people” do? They signed on with this group that never gave a rat’s ass about them until their sugar deals with the cable companies went bad. Did anyone at Comptel call them on the table? … Did anyone ask: where have you been for the last 12 years on this issue? No. Why? Because it’s always about money.
Don’t ever let it be said that I don’t offer up solutions to problems. My solution to the pole attachment issue is so simple, it won’t get implemented!
My solution starts out with the idea that no one should care about what content or transport a cable is carrying. What we should care about is that we don’t end up having 15 cables hanging on one pole. And here is where my fairness and equality of access comes in to play.
If a company, say Vextron, has a cable on a pole, and it is a closed cable that only Vextron has access to the copper, fiber/coax or fiber strands, it is my belief for such privilege that Vextron et al should be paying 80% of pole attachment fees for the pole. Any closed cable should pay much higher fees relative to open cables. I would even consider a federal or state fee per mile for a closed cable. I would even consider federal and state fees for copper cables which are much heavier than fiber optic cable … a great incentive to deploy open access fiber cables!  More fees … sounds like I am running for President.
Open cable providers, those carriers that lease fiber to others so that we don’t have overbuilding or 15 cables on one pole, should pay a minimal amount to pole attach as an incentive to share copper, fiber/coax or fiber facilities. In my open cable solution, for example, a fiber cable must at a minimum contain 96 strands of fiber, and 50% of those strands readily available to lease to others on equal terms. No single other carrier can buy all the inventory.
This solution solves a lot of problems. The first problem solved is larger carriers like Vextron or Ma Bell monopolizing a pole and thwarting competition get competition and subsidize competitors for the privilege of having a closed cable. By driving an open access component (a business choice driven by economic costs) to the actual physical cable it provides proper incentive for competition in all forms and the idea of “what” a cable carries is no longer important. The idea of overbuilding a pole line (and fighting Ma Bell or the utility to do so) because of closed cable systems, is that rational new fiber deployments can occur. Lastly, and logically, fiber will get deployed more efficiently as open cable competitors will efficiently deploy more cable where by other competitors will already know they have an open access option once it is built. Last I checked, America is in need of deeper fiber penetration and fast.
Too simple to get implemented; my solution is good for competition, good for consumers, good for business and good for America.
Remember: the softest pillow is a clear conscience.
Dave Rusin
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