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.
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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