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 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.
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.
Don’t Get Mad, Get Fiber
December 8, 2008
In the last post, Broadband for Regular Folk, I admonished our friend who wants broadband to his home to check with county authorities and arm himself with information about who actually has fiber in his area. His final question was, “Do you know of any user groups or vendors who can help a very small cooperative run a few dozen strands from their neighborhood towards civilization?”
If you have an entrepreneurial bent in all this, your timing could be good. The FCC is changing the rules on rural funding programs. Starting I believe in December, the government will no longer fund (subsidize) traditional voice TDM services to RLECs in a phase-out program. After a few audits, the FCC has determined some RLECs have used government subsidies to pay shareowner dividends. In short, the traditional “cash machine” model as subsidized by the government for the RLECs is being phased out along with intrastate and interstate access charges much to their displeasure. Reality bites.
Where the FCC is aiming future funding is for the deployment of broadband infrastructure to rural areas and has fiber optic infrastructure at the top of the list. The place to inquire about these funds is not the FCC. Contact the Department of Agriculture. They issue the funds and can provide you the rules of engagement to receive funding. There is a capital (cash) component you would need to bring to the party if you choose the entrepreneurial route. If you choose to go entrepreneurial and if you are not personally wealthy, try contacting local businesses (large enterprises), municipalities, school districts or an RLEC or two for funding or a consortium business model.
Keep giving me questions as you progress. I am happy to give you information as you go along, but like I said I could respond with a book on the ins and outs of deploying fiber optic networks.
For inspiration, I was on a board of a company before the telecom meltdown of 2001-2003. This company provided fixed wireless connectivity. We sold the company months before the telecom crash to the advantage of shareholders. This business was solely founded as the result of the founder/entrepreneur getting pissed off over the local phone company turning away his requests for high-speed bandwidth. He said enough is enough and tapped some friends and family for cash. He started with two nodes and over a period of three years served cities from Boston to Albany to Buffalo… all because he was pissed off and those that funded him were sick of the phone company as well.
Don’t think big. Think about incremental entry and selling service reliability.
Have a comment or want to know more? Type away below or shoot Dave an email.
Latest Meltdown a Blessing?
November 24, 2008
In my last post, Consolidation in an Unstable Economy, I talked a bit about the choices open to AFS given the economy and that we’re not compelled to sell for anything other than optimal value. That said, we are also pursuing acquisitions as I am most certain the latest economic meltdown will push a few gems to the surface sooner or later.
Some think I am nuts in viewing the latest meltdown as a blessing. I thought I would never see M&A deals like the dot-com bubble pushed to the surface again in my lifetime. But here we go again … marginal companies with highly levered debt are suspect targets as the global economy reels in pain for the next two to three years. I would prefer not to have this blessing as the collateral damage of this meltdown and its innocent victims will be substantial and very unfair. However, I believe Karma wreaks havoc on people involved with over-the-top greed lacking any type of moral compass.
What I do believe will be different this go around is value being placed on hard assets. This meltdown has demonstrated the inability to hold value if you are light in assets and/or primarily paper pushing. Debt lenders have learned a valuable lesson of lending purely against paper-based cash flows. Paper-based cash flows can disappear overnight!
As one with American Indian ancestry, I have often said that those utilizing the ILEC infrastructure have the shallow root base of a willow tree. AFS has built a mighty oak with deep roots. Sure the oak does not grow as fast as the willow, but when the strong winds blow, the soft wood of the willow breaks and falls while the mighty oak remains. When hurricane winds blow, the willow will be ripped from its shallow roots, yet the mighty oak remains. I will have passed from this earth and the mighty oak networks we have built at AFS will remain for decades beyond my departure. The economy can blow its harsh winds at AFS, and this mighty oak stands.
Wall Street has little patience for growing oaks over willows. I will let you decide if the oak or “Wall Street willow” is more reliable, predictable and enduring.
Shoot Dave an email or share your comments and opinions 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.
Growth in Backhaul and Data Centers
November 18, 2008
I was asked to speak to the growth in backhaul demand as well as what we’re focusing on at AFS relative to that and other areas of opportunity. With the economy in a state of flux, we are seeing two areas of continued growth for all optical services: wireless backhaul and data centers.
Wireless backhaul continues to grow at double digit rates as more and more data IP applications get deployed wirelessly. We are building fiber to towers for wireless carriers. Outside of the demand, the fiber to the tower by AFS does two things for wireless operators. The first, we are not the ILEC, so you are not funding AFS to steal your customers. The second, fiber access is the most prudent, reliable and future proof way to go given escalating demand. However, what I am finding amusing is that certain carriers are getting snookered by believing copper bonding is a solution.
My reality check: AFS has done copper bonding as a test in one of our markets. Bottom line: we have ruled copper bonding out. It is only as reliable as a copper loop is until the next rain storm, signal dispersion ratio and its distance limitations. At AFS we go out of our way to avoid copper Type 2 anything. Some data: on our networks where we have some copper Type 2’s, over 95% of our service alarms per month are from these Type 2 circuits. Our end-to-end, all fiber enabled customers have had 100% service reliability since our inception eight years ago. At AFS we deliver on-time, and our networks are highly reliable. I see no use changing to copper bonding and risking our business reputation on ILEC copper pairs.
The second area of substantial growth is data centers. Enterprises and data center owners are recognizing the importance of having diverse optical network connectivity coupled with ring-protect fail over, circuit-protection and card level redundancy. Enterprise customers have learned that fiber to the data center which is diverse is a necessity to even enter a data center. It wasn’t long ago where the assumption was that the transport already exists at a data center placing the cart before the horse. On-time delivery, network reliability/diversity is very important to customers of data centers.
Shoot Dave an email or leave 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.
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