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.
Part I: The Forbearance Bandwagon
October 20, 2008
We took a break from forbearance for a bit – but I was asked by Rob Powell over at TelecomRamblings.com a while ago to make a case for forbearance, and I didn’t want to leave that question unanswered. Here’s what he said:
So Dave, to get me to jump off the fence and onto your bandwagon, can you answer this question? 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?
Let’s have a reality check. Telecom is a high fixed cost, fixed asset business. For the life of me, I can’t figure out how the self-proclaimed “National CLECs” think for a billion dollars in debt/equity that they can compete on a national basis with an ILEC that spent tens of billions of dollars over 100 years just to get where we are today. Please no whining about guaranteed rates of return – it bolsters my argument as to why there should have been zero incentive for any “rational CEO” CLEC to have bought/rented anything from an ILEC.
Before we are ever going to see this alleged plethora of highly rich, user defined applications, there is an inherent need for bandwidth. And I am not talking about “basic” broadband that is dominant today. I am talking about 50 megabits ubiquitously within three years and 1 gigabit ubiquitously within ten years. Sorry to say, but this requires fiber, not rented copper. Inside baseball – don’t tell anyone – the ILECs know the need for fiber. That’s why they are spending over $30 billion annually on new builds though, according to Wall Street experts not so long ago, we had this HUGE fiber glut. As of today, does Wall Street have any credibility with anyone besides themselves?
Like Lehman Brothers, Bear Sterns and more to follow, let telecom wholesale prices rise by way of forbearance to weed out the weak balance sheets. Those running a telecom business on paper (like Wall Street has) by colocations and renting – let this brilliant management group demonstrate their abilities to compete without any more government supports. The CA 1996 is 12 years old; do the asset-light CLECs deserve another 12 years to figure things out? I can’t help it that they took their investors money and went 100 miles wide but an inch deep. Perhaps, like a few of us have done, if they decided to go 20 miles wide but 10 feet deep, I would not have to point this out. However, these CEOs had choices to make over the past 12 years; they had a business plan that gave investors a choice to invest or pass. It is time to lift wholesale rates vis-à -vis forbearance.
Stay with me. Much more to come in this dialogue.
Do you want Dave to shoot straight on another telecom topic of interest to you? Shoot him an email or post your comment/question below.
Network Reliability:You Get What You Pay For
October 17, 2008
I mentioned in an earlier post that I would throw in my two cents on this question we received:
Question about 100% on-net network uptime for all optical customers. Does AFS have any on-net bldgs that are stubbed (no dual entrance)? AFS has never had a fiber cut to a stubbed bldg? AFS has never had ANY outage for an on-net all optical customer?
First, to have an all-optical customer, you must own a metropolitan fiber backbone that is configured redundantly. Renters have a difficult time doing this. An all-optical customer chooses to be an all-optical customer – it is the highest form of redundancy offered. We offer all sorts of scalable options. The customer chooses this path as they recognize any SLA payment is not worth the cost of late delivery, service affecting outages, budget over runs and excuse spinning customer service. An all-optical AFS customer enjoys access redundancy, network redundancy, circuit redundancy and card level redundancy. And it is not cheap, but depending on the enterprise — i.e. hospitals, government, financial, casinos — that require 100% uptime, it becomes more of a corporate risk management issue than a low price issue from purchasing.
Yes, AFS has had outages, but given the redundancy we offer, this customer set has never been affected. They usually don’t know there is a problem. For example, if we have a fiber cut, we call the customer to let them know, though the ring configuration they are on maintains traffic load integrity. They are grateful we called. As I have said over the years, connectivity is perceived as a price-driven commodity until it does not work. Reliability — you get what you pay for — today, tomorrow and 20 years from now. The key is customers needing to know what to ask in separating the lying rats from the straight shooters. If you would like, I wrote a white paper on network clouds that gives you the ammunition and questions to ask a prospective carrier pitching you their solution. The paper assists in smoking out the lying rats. It can be downloaded here and feel free to send it to all your friends.
On stubs, I cover this in the aforementioned white paper. You are describing a collapsed lateral, whereby the provider dedicates four fibers on the same lateral into a building dedicating one pair to a port and another pair to a port on the same box or redundant boxes. The box running the ports has no idea the fiber pairs are on the same lateral and the customer believes they have redundancy until such a time that lateral is cut. At AFS, we don’t sell collapsed laterals as a redundancy feature, some lying rats do, and some don’t disclose the risk. We explain to customers that choose to be all-optical the requirement and cost to have dual fiber entry into their building. Once again, those in corporate risk management recognize the value over low price.
Shoot Dave an email with any questions or comments on this post or fill out the comment form below.
My Recon from 1999
October 14, 2008
So we’re continuing our discussion on how AFS would handle a sales situation in competition with LVL3, XO, ATT and Verizon, given the hypothetical scenario in which we’re all supposed to have “similar” SLAs, provisioning and pricing. I ended my last post on separating fantasy from reality by saying that I had done my own recon in 1999 instead of relying on the information from the providers and the media.
I decided, using my brain, that I would call the major construction firms in the United States that would be deploying such fiber and pose as if I had the crazy equity and high yield “heroin” money that was prevalent at the time. After capturing their interest in greed, this is what I found out for myself:
- The concentration of metropolitan fiber builds were occurring in the top 12 US markets, not the 150+ advertised.
- On average, there were 12-15 independent fiber networks being deployed in each of these markets. Metromedia FiberNet aka MFN was a king pin fiber builder in these markets as well back then. [Bill LaPerch CEO of AboveNet has done an outstanding job reconstituting the company under the AboveNet moniker.]
- The ILECs were deploying fiber as a defensive move in these markets as to fend of competition given the crazy investment cash flow into the CLEC sector.
- The cable companies were deploying local fiber in preparation of the telephony-meets-video collision coming down the pike.
- When we had them back in 1999, long distance companies such as original herbs & spices AT&T, Bernie’s WorldCom, Sprint, Level 3 and others were busy deploying in these markets.
- Many of the builds were becoming joint builds – sharing the trench – to save capital dollars driven by bean counters or forced trench sharing by municipalities when carriers would cut power lines, water mains, etc., in their lust to land grab.
My point? If I believed the lying rat websites, brochures and PowerPoints, I might have never started AFS, or I might have gotten drunk on all that easy money. Believe me, the latter would not have happened – all the smart guys on Wall Street – like Lehman, Wachovia, Merrill Lynch, Forstmann Little et al – told me point blank that I was clueless with the AFS demand-based business model to build out fiber, a focus on underserved second tier markets and the audacity to suggest incremental success-based funding. Why does that Elton John song lyric keep playing in my head, “I’m still standing after all this time”? But what the heck, what does someone from upstate New York know in relation to all the Wall Street, Ivy League spreadsheet sophistication and “deal makers”?
So I have taken the long way to explain to you that none of those carriers listed (and others) are homogeneous in delivering services. None. We are all different. Do your homework. They all might make the same promises, but the challenge for customers remains, in the worse of settings, to separate the lying rats from reality.
What do you think about this post? Shoot Dave an email and tell him. Or better yet, post your ideas and questions below.
Getting Down to the Nitty-Gritty on Forbearance
August 1, 2008
Thanks to those of you who asked for a more thorough explanation of forbearance and wanted to understand its impact. Keep the questions and comments coming. As for forbearance, read on…
Forbearance comes from our “friends” in the legal community. Forbearance as applied to the telecommunications service providers is a legal instrument that determines on a market-by-market basis if there is adequate competition whereby Ma Bell no longer needs to supply Ma Bell wannabes wholesale services at government regulated prices.
Only Ma Bell can apply to the FCC to be granted forbearance to lift the market specific regulatory burden. In filing a forbearance petition to the FCC, Ma Bell must submit documentation and analysis that adequate competition exists. They may demonstrate market share loss or line loss due to wireless substitution, as two examples. Of course, the Ma Bell wannabes can file petitions in response, playing the same song since the Communications Act of 1996 some 12 years ago.
Why I favor granting forbearance is that I believe it will provide an impetus to build out fiber optic facilities to homes and offices. As long as forbearance gets denied, alleged ”competitors” of Ma Bell have no incentive to advance true broadband capabilities as the result of relying upon Ma Bell copper loops and/or special access wholesale. From a physics perspective, fiber optics offers unlimited bandwidth capabilities when compared to copper facilities or fixed wireless alternatives. From an economic perspective, fiber optics enables us to be globally competitive. From a national security perspective, the more last mile fiber we deploy, the sooner there is no longer a need to locally centralize trunking at Ma Bell central office wire centers. Router capability in each home and business will distribute access whereby terrorists targeting wire facilities would become very discouraged in doing so.
We have had 12 years since the Communications Act of 1996 to develop businesses that are not dependent upon Ma Bell. Instead, those that argue against forbearance are actually arguing for the status quo especially if in 12 years they have not enhanced shareholder value by being independently competitive of Ma Bell infrastructure. Here we are - it’s 2008, yet after 12 years of deregulation some 90% of business buildings are still served by one providers infrastructure, that being Ma Bell. And the vast majority of telecom services are provisioned over bandwidth limited copper facilities. We don’t need another 12 years of renting copper; we need greater grants of forbearance to drive a different competitive mind set.
Got something you want answered about forbearance or other telecom issue? Send me a question now.
Why is Forbearance a Good Thing?
July 25, 2008
Let’s have a fantasy for a short minute…
Assume that the FCC, Lobbyists and Congress actual took an Economics 101 course. By granting forbearance, in the short term, wholesale prices will and should go up thus generating higher profits. As higher profits are generated, new capital will flow into the market for a share of this new found profit opportunity. New entrants, having the wisdom of the past 12 years, would rationalize their entry in raising the bar of performance.
Translated: new entrants will build new strategic facilities and offer optical connectivity that would elevate the United States on a globally competitive basis … considering our poor rankings. A byproduct of this is that the consumer is more connected globally, without limits, and may innovate as he or she may wish. Generating more true facility based competition in the long run will lower the price per bit to the consumer.
What forbearance does is stifle pent-up demand. When the FCC maintains/limits competition to legacy copper facilities where do they think we are going? This supply protectionist desire by the FCC to stimulate “demand” has not demonstrated anything appreciable in the world theater of global competitiveness on the part of the United States. The same FCC that denies forbearance is the same FCC that said cable company infrastructure is closed to competitors and new fiber deployments by ILECs are closed to others. It’s the same FCC that is trying to figure out how much a pole attachment should cost depending upon what application that a physical cable may be carrying!!!
Declaring a victory for a denial of forbearance, in my opinion, is stifling to our economy and global competitiveness. We need more true facilities based competitors not less. The FCC is not encouraging new entrants; they have handed the ILECs one sweet deal, and the CLECs in plausible denial clap/applaud as the FCC continues to stifle new infrastructure investment while the ILECs and cable companies build out optically.
Now the average whiner will say: “But if we don’t have access to their copper …”
Here is the reality: anyone and everyone relying on Ma Bell for type 2 circuits are in the same boat … you all pass on the costs and a small margin to the customer. If the ILEC raises wholesale prices, everyone will pass them along as well, assuming you are a rational competitor. Plus, if type 2 access was of such strategic importance, I am befuddled by the lack of wireless last mile access that can emulate the limitations of copper or exceed it. There is true technology choice available to all competitors for copper equivalent data rates by wireless access.
The proverbial horse left the barn 12 years ago. What needs to be done is quite simple. The FCC should sunset wholesale regulations in a declining manner over the next five years, At the end of five years, the wholesale market would be driven by market-based facility competition and priced accordingly.
One would think that after 17 years, if you have not figured out how not to rely on Ma Bell, you never will.
Remember: the softest pillow is a clear conscience.
Forbearance is Good for America
July 22, 2008
Here I go again being unpopular.
The most recent forbearance petition denial of Qwest by the FCC is not a step forward in the interests of the consumer or our nation. It is a step backwards.
The Communications Act of 1996 was allegedly designed to foster competition in the interest of consumers of telecommunication services. The Communications Act of 1996 was not designed to benefit competitors. It has been 12 long years and what do we have? A bunch of competitors of Ma Bell that still want to hang off of her teat. It’s been 12 years … when will competitors figure out how not to rely on Ma Bell? Are these same competitors going to lobby Congress for perhaps another 12 years? That would make it a quarter of a century of government protection on a class of competitors that want to hold this country back because they don’t get it (and neither does Wall Street).
If the FCC truly wants consumer advantage, it would get out of the way and stop providing this form of corporate protectionism. After all, isn’t 12 years a long time to figure things out? We sent a man to the moon in less time.
I believe in open market competition. Markets will sort themselves out. Artificially regulating wholesale prices hinders growth, it does not encourage growth or investment.
Next time we’ll talk about why forbearance has a positive impact for the United States globally.
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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