More Video, Voice Peering Forum, Part 2
January 2, 2009
This is the second half of the interview with TMC’s Rich Tehrani.
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.
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.
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.
Part I: The Forbearance Bandwagon
October 20, 2008
We took a break from forbearance for a bit – but I was asked by Rob Powell over at TelecomRamblings.com a while ago to make a case for forbearance, and I didn’t want to leave that question unanswered. Here’s what he said:
So Dave, to get me to jump off the fence and onto your bandwagon, can you answer this question? 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?
Let’s have a reality check. Telecom is a high fixed cost, fixed asset business. For the life of me, I can’t figure out how the self-proclaimed “National CLECs” think for a billion dollars in debt/equity that they can compete on a national basis with an ILEC that spent tens of billions of dollars over 100 years just to get where we are today. Please no whining about guaranteed rates of return – it bolsters my argument as to why there should have been zero incentive for any “rational CEO” CLEC to have bought/rented anything from an ILEC.
Before we are ever going to see this alleged plethora of highly rich, user defined applications, there is an inherent need for bandwidth. And I am not talking about “basic” broadband that is dominant today. I am talking about 50 megabits ubiquitously within three years and 1 gigabit ubiquitously within ten years. Sorry to say, but this requires fiber, not rented copper. Inside baseball – don’t tell anyone – the ILECs know the need for fiber. That’s why they are spending over $30 billion annually on new builds though, according to Wall Street experts not so long ago, we had this HUGE fiber glut. As of today, does Wall Street have any credibility with anyone besides themselves?
Like Lehman Brothers, Bear Sterns and more to follow, let telecom wholesale prices rise by way of forbearance to weed out the weak balance sheets. Those running a telecom business on paper (like Wall Street has) by colocations and renting – let this brilliant management group demonstrate their abilities to compete without any more government supports. The CA 1996 is 12 years old; do the asset-light CLECs deserve another 12 years to figure things out? I can’t help it that they took their investors money and went 100 miles wide but an inch deep. Perhaps, like a few of us have done, if they decided to go 20 miles wide but 10 feet deep, I would not have to point this out. However, these CEOs had choices to make over the past 12 years; they had a business plan that gave investors a choice to invest or pass. It is time to lift wholesale rates vis-à -vis forbearance.
Stay with me. Much more to come in this dialogue.
Do you want Dave to shoot straight on another telecom topic of interest to you? Shoot him an email or post your comment/question below.
Network Reliability:You Get What You Pay For
October 17, 2008
I mentioned in an earlier post that I would throw in my two cents on this question we received:
Question about 100% on-net network uptime for all optical customers. Does AFS have any on-net bldgs that are stubbed (no dual entrance)? AFS has never had a fiber cut to a stubbed bldg? AFS has never had ANY outage for an on-net all optical customer?
First, to have an all-optical customer, you must own a metropolitan fiber backbone that is configured redundantly. Renters have a difficult time doing this. An all-optical customer chooses to be an all-optical customer – it is the highest form of redundancy offered. We offer all sorts of scalable options. The customer chooses this path as they recognize any SLA payment is not worth the cost of late delivery, service affecting outages, budget over runs and excuse spinning customer service. An all-optical AFS customer enjoys access redundancy, network redundancy, circuit redundancy and card level redundancy. And it is not cheap, but depending on the enterprise — i.e. hospitals, government, financial, casinos — that require 100% uptime, it becomes more of a corporate risk management issue than a low price issue from purchasing.
Yes, AFS has had outages, but given the redundancy we offer, this customer set has never been affected. They usually don’t know there is a problem. For example, if we have a fiber cut, we call the customer to let them know, though the ring configuration they are on maintains traffic load integrity. They are grateful we called. As I have said over the years, connectivity is perceived as a price-driven commodity until it does not work. Reliability — you get what you pay for — today, tomorrow and 20 years from now. The key is customers needing to know what to ask in separating the lying rats from the straight shooters. If you would like, I wrote a white paper on network clouds that gives you the ammunition and questions to ask a prospective carrier pitching you their solution. The paper assists in smoking out the lying rats. It can be downloaded here and feel free to send it to all your friends.
On stubs, I cover this in the aforementioned white paper. You are describing a collapsed lateral, whereby the provider dedicates four fibers on the same lateral into a building dedicating one pair to a port and another pair to a port on the same box or redundant boxes. The box running the ports has no idea the fiber pairs are on the same lateral and the customer believes they have redundancy until such a time that lateral is cut. At AFS, we don’t sell collapsed laterals as a redundancy feature, some lying rats do, and some don’t disclose the risk. We explain to customers that choose to be all-optical the requirement and cost to have dual fiber entry into their building. Once again, those in corporate risk management recognize the value over low price.
Shoot Dave an email with any questions or comments on this post or fill out the comment form below.
The Secret of Our Success
October 16, 2008
We were asked recently, “What is AFS’s compelling value proposition” (the case of competing carriers such as LVL3, XO, Verizon and ATT)? You can read the post leading up to this one that explains the full question here.
I will share with you the company secret that has made us successful. Do not share this with anyone else. Here it is: (1) We deliver on-time all the time for the past eight years; (2) we always meet the quoted budget for the past eight years; (3) our networks work and are highly reliable – we have all optical customers for eight years who have never experienced a network failure; and, (4) when we do have a problem, we are proactive with the customer in telling him or her what is going on without any spin. Funny thing, customers can tolerate things if you are honest with them. That’s it … the secret to our success. To make it a matter of fact, we are so good at these four points, we are the underlying carrier for most carriers in our markets.
Pricing you ask? We don’t price below the ILEC because of the four points above. We have charged premiums to carriers who are very willing to pay it as our track record has given them the confidence over eight years that we deliver on-time, on budget, reliable service and proactive customer communication. I have had CEOs of our carrier customers tell me they know they are paying a premium but they also know we are not lying rats (plus we don’t steal their customers).
By the way, our sales organization is also a very important part of this mix. They know the value we deliver, and they sell that value. If you are looking for a low priced transaction based “partner”, we are not it. Our sales people are more than happy to leave prospective customers with other carriers that want low price or wish to lose money on the service requested. We have had many low price buyers return to us after a few rounds with the lying rats. Our sales people are business people first, and they do and will say “no” to a bad deal. I love our sales force. It’s all about the love at AFS since 1999.
Added tidbit: That “free” business model and selling below costs has yet to work for anyone I know.
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