Gomer Pyle: Part Deux
December 15, 2008
Page A18 of the December 11th issue of the Wall Street Journal, The headline read: “Political Favors at the FCC.” Sub heading: “Kevin Martin orders up another rigged spectrum auction.”
Surprise, surprise, surprise … yet another game of Beltway insiders and money-people playing do as I say, not as I do. We have a two tier society in America. The top tier is for the greedy Real Smart Guys (RSGs) and politicians with perceived power and money and the second tier, for us common folk. It is rare a top tier villain goes to prison, but us second tier folks, don’t jaywalk or you will end up in jail.
The Readers Digest version of the story is that FCC Chairman Martin (R) and the venture capital RSG John Doerr of Silicon Valley fame Kleiner Perkins, worked back channels to place terms on the spectrum auction whereby the spectrum in an auction would not be attractive to dominant carriers. The article mentions under the “conditions” placed on the spectrum at auction it would sell for $50 million. However, economists estimate the value to the federal government coffers of $3 billion without said conditions.
Kleiner started a company to pursue this spectrum auction called M2Z. As the articles states:
“M2Z and Mr. Doerr are essentially asking taxpayers to subsidize their attempt to start a new telephone company. Mr. Doerr will have profited from what amounts to a government subsidy via a rigged auction. And if the start-up fails, don’t be surprised if M2Z attempts to sell licenses that it has acquired for a song and reap a windfall.”
For those that want to point political fingers, I suggest you read the article. Both parties are just as guilty as they are in our credit crisis. And, by the way, a company called Frontline also funded by Kleiner Perkins and headed up by former FCC Chairman Reed Hundt(D) failed in a similar scheme this past January.
Now for my soapbox. There will be no outrage over this. There will be no criminal charges. Why? This is top tier money play of influence and power at the expense of the second tier of our society. This is about greed. It’s not about fairness, transparency and equal opportunity. It’s a classic “non-nod, wink-wink inside the corrupt beltway” event.
My advice to CLECs: stop lobbying Congress and the FCC — they don’t give a rat’s ass about what is best for America. Sure they will meet with you and your highly paid lawyers to act interested, but unless you are driving party politics by stature and cash, you are nothing. By the way, what may be good for America may also not be good for CLECs, for the record. But in my naĂŻvetĂ©, I actually fantasize that our elected officials and their appointees like Chairman Martin can be objective and not deal in dishonest dealings or dollars.
My fellow CLECs, spend your beltway dollars on infrastructure to gain your independence from ILEC infrastructure (UNE’s, Special Access) and the FCC.
What do you have to say about it? Let Dave know. Email the Straight Shooter or add your comments below.
For the record
December 12, 2008
If you haven’t read or at least skimmed the House report, DECEPTION AND DISTRACTION: THE FEDERAL COMMUNICATIONS COMMISSION UNDER CHAIRMAN KEVIN J. MARTIN, I encourage you to do so. On Wednesday I wrote in the blog post “Hate to say ‘I told you so’” that non-ILECs should stick to focusing time and money on infrastructure.
For the record, a few years back, I had a meeting with the president of Comptel at our offices. We discussed openly and candidly the lack of success non-ILEC lobbying efforts has had inside the beltway. I will keep the majority of the conversation private. However, I did provide a bold strategy for Comptel to consider. I suggested that Comptel issue a press release stating that the non-ILECs represented by Comptel have given up and that the ILECs and cable companies have the FCC and Congress in their back pockets. Comptel members are no longer going to fund lobbying efforts to effectuate competition. Comptel would no longer encourage membership to lobby independently as well. Comptel, the last remaining non-ILEC membership group, surrenders to the FCC and Congress. I suggested that doing this will get Comptel and its members all sorts of Congressional hearings. But alas, my suggestion was ignored.
As you will find in the Martin allegations, the game is rigged. It’s a house of mirrors. As we are slowly learning in America, justice, opportunity and fairness is a function of how much you can afford to spend whenever our government or politicians are involved. Just look at the picking the winners and losers on Wall Street by Congress in our financial crisis. The responsible companies are getting punished while “the too big to fail” real smart guys (RSGs) get bailed out. There is a bit of poetic irony with the banking firms selectively being bailed out – all those years banks picked winners or losers for investment not on the basis of merit, accomplishment or experience, but by whom you knew or were referred by.
Has America lost its direction? I would like to hear your opinion.
Sound off now by posting a comment below or by shooting Dave an email.
Hate to say “I told you so”
December 10, 2008
As Gomer Pyle would say: “Surprise, surprise, surprise …”
For years at telecom conferences and most recently on this blog, I have heralded the waste of time, money and effort spent on lobbying the FCC or anyone else inside the beltway. I have referred to such expenditures on lawyers and/or lobbyists as money entering a large vortex. The only winners in the vortex are the lawyers who create arguments amongst themselves in an endless circle only to bill you with no results. Non-ILECs have no voice inside the beltway. I say spend your money on infrastructure rather than legal fees and lobbyist bills – because infrastructure gives you ILEC independence.
I can sum up things relative to non-ILECs receiving a fair hearing inside the beltway as appalling at best and at worst bordering on corrupt. Yesterday, a report was released entitled: DECEPTION AND DISTRACTION: THE FEDERAL COMMUNICATIONS COMMISSION UNDER CHAIRMAN KEVIN J. MARTIN. A few excerpts for my loyal readers:
“Transparency was plainly not a priority.”
“Chairman Martin withheld important and relevant data from the other Commissioners … “
“The Chairman’s office appears to have ignored evidence that rate payers have been over charged, while the companies providing Telecommunications Relay service has been over compensated, potentially by as much as $100 million per year.”“Chairman Martin manipulated report findings and policy direction … when he ordered that a report to Congress previously issued by the Commission be rewritten with a completely different outcome ….”
“There is a climate of fear and intimidation at the FCC.”
See for yourself. The full 110-page report is available online.
Now, to be fair to FCC Chairman Martin, he has yet to respond. In addition, given the change of administration, there is certainly an air of cowardice in issuing this report in December 2008. That said, and I will say it again, non-ILECs have no voice inside the beltway; spend your money on infrastructure which gives you ILEC independence.
What do you think? Post a comment below or email Dave your opinions and ideas.
Consolidation in an Unstable Economy
November 21, 2008
With an unstable economy, we’re going to see more consolidation. Who do I see partnering and conjoining in all this?
I am expecting more M&A to emanate from foreign entities such as Reliance Telecom, Deutsche Telecom, T-Mobile, etc. What you will see, given the financial mess the world is in, the consolidation will be driven and valued on hard fixed assets. Carriers of the rental or co-location genre will get heavily discounted as broadband demand continues to grow and outstrips the need for or carrying capacity limitations of copper loops, T1, DSL, coax and SONET/ATM.
So what does that mean for AFS? What are AFS’s plans in this arena?
I have come to find that those out looking to acquire travel like lemmings. For example, if all the EBITDA multiples are 7x, then everything must sell at 7x. I am sorry to point this out to public shareowners, but this is as sophisticated as due diligence gets with some Investment Bankers. So a company like AFS that is growing, profitable and has probably the lowest churn in our industry can afford to wait until the lemmings move back up the scale. Companies not similarly situated, you get what you can when you can get it.
AFS is somewhere between a number of options, and as I write this, the option I prefer is management buying AFS from our existing investors and moving forward from there. We have often received unsolicited offers or inquiries of interest on a regular basis. Any decisions made will always be made in the optimal value interests of all our shareowners. As I stated earlier, there is no compelling reason to sell for less than optimal value in our case.
More to come on all this…
What’s your take on consolidation and the state of the economy? Shoot Dave an email or post a comment below.
Latest Peering War
November 13, 2008
I’ve received several great questions via email recently — thanks much to those of you who are participating in the discussions in this forum, both with your ideas and your questions. Here’s a question I thought may be of interest to you.
What do you think of the latest peering war between Cogent and Sprint?
In one statement: Here we go again. It appears each time there has been a publicized peering dispute, Cogent shows up. I would feel different if we had the likes of Level 3 or a Global Crossing having disputes with others, but they don’t.  All I can speculate upon this time is what Cogent stated previously about a drop in internet traffic on their backbone.
They made this admission on their last quarterly call. If the traffic drop is severe enough, it would cause an imbalance between carriers resulting in Cogent traffic being carried for free in a load sharing arrangement.  What would drive traffic to fall? Well, if Cogent is the lowest priced provider, perhaps the theory of elasticity of demand just isn’t working. As the theory goes as you lower your prices, usage demand rises. Other carriers have not reported a drop in traffic demand albeit priced higher that Cogent. Other issues can affect traffic loss as well – things like coverage or network reliability. I don’t know if reliability is a problem for Cogent, but what I do know is that it is quite typical in telecom to get what you paid for.
Next quarterly call, let’s see what Cogent reports on churn and their traffic patterns.
Shoot Dave an email with your take, or post a comment or question below.
Difference Between Wholesale Business & Enterprise Business
October 29, 2008
Continuing our discussion on our reader’s main question:
I wanted to see if you would comment on the differences between running a wholesale business vs. an enterprise business. It has been my recent experience that the next gen companies that have tried to combine the two models have had only marginal success. An analogy that told to me is that it’s like running a corporate bank versus a retail bank. The skills of the executive team has to be different with different philosophies on how to build market share taking into account off-net strategies, empowering local sales managers to expect lower margin or longer payback on companies with great long term potential, and how much to invest in SG&A etc.
The issue of retail v. wholesale business management skills is a matter of segmentation and focus. I do believe that you can be a better retail provider if you have wholesale network operating skills and experience to be applied. Someone with purely retail skills, well, there just isn’t much differentiation — the retail side has become a “me too” value proposition. The other nuance and trap of retail is the lust of revenue growth for the sake of revenue growth. The real smart guys on Wall Street seem to focus their attention on a company’s revenue growth and growth prospects and think everything else is secondary. Then there are the CEOs in retail growth for the sake of testosterone/estrogen buzz of having a big revenue business with a wish of reading about themselves in the Wall street Journal with a dot matrix photo of themselves.
Silly us at AFS, we focused upon long term sustainability and profitable growth — one building at a time.
Why we don’t like retail at this time is simple. There are no barriers to entry. Anyone can get a CLEC license and start reselling, ILEC renting or what have you doing nothing more than competing on price. Retail means lots of customers, lots of small ARPU’s (we average $6000 ARPUs), lots of sales people, lots of back office complexity, lots of customer hand holding and lots of churn. Very costly and risky.
Eventually this will change as bandwidth demand outstrips copper facilities rendering most retail models obsolete. Having direct building or residential access is the long term game. Most retailers today have no long term position or underlying staying power. The more a competitor to an ILEC is dependent upon the ILEC, the greater the risk of not being here in the long run. Anyone relying on the Federal Government by way of the FCC or Congress is, in my informed opinion, a fool. As we are learning via the financial collapse we are facing, Congress is for sale and non-ILECs don’t have the cash collectively to be noticed. This is a reality of which so many are in denial.
The bottom line: if I were an investor in a “provider” that is trying to straddle retail and wholesale — I would rethink that investment, refocus the business on a winnable, defensible niche or change out management, or at least have management get a drug test.
Today, our (AFS) position in the value chain is one of opportunity. We can inch up this chain toward retail as the economy and opportunity presents itself. Our high fixed costs capital expenditures are behind us and we can lever very profitably as driven by demand.
My opinion, the present state of our economy is going to be brutal on highly leveraged, highly ILEC-dependent retail companies.
Agree? Disagree? Weigh in by shooting Dave an email or sounding off with comments below.
Drinking Your Own Kool-Aid Can Be Dangerous
October 27, 2008
Got another email the other day that I wanted to share. Keep ‘em coming.
I’m an investor in telco, all “next gen” type providers, and I wanted to see if you would comment on the differences between running a wholesale business vs. an enterprise business. It has been my recent experience that the next gen companies that have tried to combine the two models have had only marginal success. An analogy that told to me is that it’s like running a corporate bank versus a retail bank. The skills of the executive team has to be different with different philosophies on how to build market share taking into account off-net strategies, empowering local sales managers to expect lower margin or longer payback on companies with great long term potential, and how much to invest in SG&A etc. Perhaps if you feel so inclined you could post a few of your thoughts in this area? Regardless, thanks for your comments I enjoy them very much (although I don’t agree with all of them!)
Fair enough. I don’t expect everyone to agree with my comments that’s what America is all about – freedom of expression. However, when I do post my opinions, they are informed opinions and typically based upon experience and results. I don’t spend time wishing the way things should be, but rather I deal with the reality of each situation that presents itself to me.
The greatest poison competitive carriers face is trying to be all things to all prospective customers. So far, after 100+ years of regulation, only the ILECs have demonstrated that this can be done. For the life of me, prior to the telecom crash, the thought that a company capitalized at a billion dollars of equity and debt is somehow going to be a national threat to the ILECs was ill conceived to me – but not the “real smart guys” on Wall Street.  The real smart guys poured billions of dollars into hundreds of CLECs after drinking their own Kool-Aid. (My apologies to Kraft Foods, the makers of Kool-Aid.)
Here at AFS we have management very familiar with retail telecommunications. So much so that we purposely have avoided the retail side of the business and have focused on our business – underserved second tier markets, data, IP access, on-net buildings, 10 meg + demand and owning the local fiber optic infrastructure. (Note: given the current economic uncertainty, our model has us positioned quite well in a McKinsey nine-box matrix against most other competitors.) This has been our choice since day 1 and given that we are facing yet another downturn, our position is capable of weathering the worst of storms.
More to come soon on my response to our friend…
Have a question, comment, complaint or otherwise for Dave? Shoot him an email or post a comment below.
As Long As I Have Your Attention…
October 24, 2008
As long as I have your attention, let me address the broader economy relative to AFS. Here is what I have communicated to our team regarding the current financial conditions:
This economic downturn is much different from the Internet bubble of 2001-2003. Telecom is not at the center of this downturn. We are experiencing a combination of Congress, Wall Street, Hedge Funds and Financial “Banks” being caught up in a lending house of cards relative to the mortgage industry. If you want a life lesson out of what is going on today, just remember this: there is nothing immune from economic business cycles … nothing. Somehow the real smart guys (RSGs) believed housing prices were going to keep rising forever and people were afforded mortgages (Fannie Mae and Freddie Mac) on homes without having a job, address and/or a down payment. The RSGs in Congress, Wall Street, Hedge Funds and “Banks” in combination drove the collapse of our financial institutions.
Also please note, whenever there is a downturn based upon over exuberance, you will always find Wall Street’s finger prints all over it.
Compared to the Internet bubble, today AFS is a much different company and in a better position than most. Our constant drive for quality customers, high bandwidth customers and profitable customers is what has and will continue to sustain us. Yes our mantra – deliver on-time, on-budget, reliable services and proactive customer services, is what has sustained us and will continue to do so. We do not need to change a thing.
Those in telecom that I believe face great exposure are those firms serving the low end of the market via copper loops, T1, IADs, VOIP or special access. Because this segment of the market relies on the ILEC for network, as credit gets tightened, a number of these firms will start doing something real dumb to raise near term cash to pay the bills … they will start cutting prices. The problem with this strategy, outside of its lack of sophistication, is that their Cost of Sales via the ILEC is fixed. As they price war each other, it becomes a death spiral as every dollar in price dropped is a direct dollar in margin dropped. In addition, this segment of the market historically churns at a very high rate in a down business cycle as small businesses cope with declining demand or lack of capital. Thus, the situation is a one-two punch for those serving the SME segment via the ILEC infrastructure.
As you know, I constantly encourage everyone to be creative in our business dealings whether to increase sales, lower costs or streamline processes to the benefit of customers. If we had a conforming business model and culture like other telecom companies to the benefit Wall Street, we would not be in the growth position we have experienced. My opinion is Wall Street and investors look for conformity to gain comfort. This is often referred to as the lemming culture. Such conformance may provide a few relative data points, but in my opinion, diversity of ideas and talent gets stifled whenever it is okay to look and act like everyone else. It is fair to say, and it’s not hindsight, that our contrarian culture and demand-driven strategies have greatly benefited our investors, customers and employees. No one is here to satisfy me – we are all shareowners.
As we go forward, I encourage you now more than ever to get creative to streamline processes, increase sales or lower costs to the benefit of our customers.  This credit crisis is going to get butt ugly. Cash is king. The more cash we have on our balance sheet, the better we can serve customers, weather this storm or take advantage of opportunities that present themselves.
Do you have a take on the financial crisis? Post a comment below or shoot Dave an email.
Just for Grins
October 23, 2008
Just for grins, when I originally sought funding for American Fiber Systems in 1999, I had a business model that was purely demand driven. The model was based on a fundamental premise that in the long run, if you do not own and operate your own local fiber optic infrastructure but rather rely upon your largest competitor to stay in business, well, it is simply not a smart idea.
Once again, it’s 1999 – my view based on experience, you cannot rent or lease your way to sustainable economic success through the ILEC. The more you depended upon the ILEC pieces and parts, your ability to innovate, time-to-market, provision and compete is limited. When your largest competitor, the ILEC, basically controls your costs and has expertise in regulatory and judicial matters, I don’t see this as a win-win formula … but I could be wrong.
Anyhow, the reason I bring this up is purely for grins. In 1999 I pitched many investment banks, a/k/a “experts,” for funding, Lehman Brothers and Bear Stearns amongst them. Across the board, I was told by the Wall Street experts that my demand-driven, slow role, metropolitan fiber based business model was not attractive and not fast enough. They were critical because I had an incremental, success-based funding model. I was told that unless I was raising $500 million equity and $300mm in high yield debt (heroin), I had no idea what I was doing.
Thank god I had experience, common sense and thick skin. I ignored them and eventually went the venture capital route. So as I watch Lehman Brothers and Bear Stearns fade from our memories … with more to follow … I guess I will let the record speak for itself alongside the business moral values of some CEO from upstate New York who had no idea in 1999 how to build a business according to the big Wall Street firms.
Shoot Dave an email or include your insights and questions below.
You Want the Truth?
October 22, 2008
This post is part II in a series on telecommunications forbearance and getting on the bandwagon.
If you want the truth, here it is: Most asset-light competitive CLECs started out all having the same business plan — targeting a 12% market share in each market by colocating, renting, #5ESS switching, UNE-P, UNE-L, etc. If you have 30 competitors in the same market, all with the same business model, the odds of capturing a 360% market share is illogical. In addition, few will admit it, but back in the 1990s, the CLEC fantasy was to build out with a #5ESS and rent — look like an ILEC and be acquired by a long distance carrier for doing so. Well, who would have predicted the collapse of all the major long haul carriers that were consolidated by the ILECs and blessed by the United States government? Perhaps, just perhaps, if a few Wall Street experts thought a little longer term, that maybe recommending company stocks that actually owned local fiber optic infrastructure, that built it out slowly and selectively, were a better bet than 30 look-alikes vying for 12% market share. I must be nuts; Wall Street can’t get past a 90-day horizon, so my conjecture is a pure indication I am off my meds today. In assuming any type of long term fiduciary duty on the part of Wall Street — is insane.
What some more truth? Investor experts of the 1990s flocked to celebrity-like CEOs and CFOs that showed up with a CLEC plan. The majority of these CEOs and CFOs came from the long haul or old CAP business with great claims to fame. The truth is, running a local metropolitan network, in any form, is 10 times more costly and complex than any form of long haul or CAP networks. Many of these CEOs and CFOs gorged themselves on investors’ cash while they were in reality getting on the job training at shareowners expense. Pick any CEO that went bankrupt… you will see what I mean. Check out any of their current resumes – they won’t say they went bankrupt, they will use the word “acquired.” Though having your assets or business “acquired” in bankruptcy is a small detail they leave out. Yet, the insanity continues. Why the hell would anyone hire a CEO or CFO that destroyed a company and lost everything while doing the lemming waltz with Wall Street? Strangely enough, it happens. I guess if you didn’t destroy shareholder value, you are not “experienced” enough for Wall Street.
Still more to come on this topic. I’m pacing myself…
Is Dave right on or do you think he’s missed the mark? Tell him so. Shoot him an email or give him a piece of your mind below in the comments section.
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