More Video, Voice Peering Forum, Part 2
January 2, 2009
This is the second half of the interview with TMC’s Rich Tehrani.
Voice Peering Forum Interview 1 of 2
December 30, 2008
Over the summer, I participated in an interview with Rich Tehrani, president of TMC, at the Voice Peering Forum. Here is part one of the interview.
Happy holidays from all of us at AFS. We welcome your comments and questions. Post a message below or email the Straight Shooter. If you’d like, you can see more telecom videos here.
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.
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.
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.
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.
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.
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