More Video, Voice Peering Forum, Part 2
January 2, 2009
This is the second half of the interview with TMC’s Rich Tehrani.
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.
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.
Profitability vs. Manifest Destiny
August 29, 2008
Consider this post an epilogue to the series on forbearance.  AFS is a privately held company, and  someone coming up with “AFS only hits about 1% of businesses in any market” reflects a limitation in research, not fiber service. It is an incorrect statement in and of itself. Here are some facts…
We did not get trapped in the Wall Street measure of national manifest destiny that so many did, and we did not perish in bankruptcy. CA96 promoted a pro-competition framework … no we don’t look like others and our market segments are different from most others. Actually, only a handful of us as a percentage of all competitors chose to build and own fiber infrastructure methodically and rationally as a sustainable strategic advantage. I believe the count today is less than 30 metro network fiber providers remain; of the 30, only a handful are financially healthy.
Our fiber placement is unique in our markets with primarily one competitor to route compete against with, Ma Bell. We only address the business segment; consumer residential is a two wire game between the cable company and the ILEC. We only connect bandwidth into buildings where the lead-in customer requires a minimum of 50 megabits. We purposely don’t want to be in the low end, copper retail, high churn, no loyalty, thin margin, low price-only, usage sensitive T1, IAD, DSL retail segment. However, we do backhaul for these folks in this segment over our unique network footprint as a viable, diverse, reliable alternative to Ma Bell. And, by the way, once we drop fiber into a building, it does not take long for us to garner 100% building share.
We place our fiber in our markets to address 95% teledensity of high bandwidth, high margin buildings. We maintain a database of physical audits of these buildings inclusive of prospects, digital photos of the telco closet, racks, terminations, GPS coordinates and building entry points for the fiber. We pretty much know what’s going on when our sales person shows up and more importantly, how to price based on the route and competition. 50 megabits, by the way, blows out most copper clad CLECs in a building.
We have been taking one building at a time since inception in 2000 and have a CAGR of 40% for revenue…our margins are to die for. We are not a big top-line revenue testosterone driven company; we only want to address the 20% of the high margin, high bandwidth segments in our markets where we do have a greater market share than 1%. We are a different cat, and given the fiber shortage, we can keep doing what we are doing because like the GAO, lots of buildings still lack another real competitor, let alone fiber access. We prefer profitability to manifest destiny. After all, our customers actually like us, and they recognize we need to stay in business to provide the service they have come to appreciate and trust.
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
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