Next Generation Connectivity
October 22, 2009
This link will take you to a 232 page report on Broadband titled, Next Generation Connectivity:
A review of broadband Internet transitions and policy from around the world. It is published by The Berkman Center for Internet & Society at Haarvarrd University. (Yes, Buffy dear, I purposely spelled Harvard as “Haarvarrd” for contextual affect.)
Click here to go to the report.
My conclusion: In America, it’s all about having policy, objectives and economic incentives to deliver fiber optic connectivity to 90% of homes and businesses with remote areas being served by subsidized satellite capabilities that already exist within 10 years. This approach will stop spending good money after bad, keeping copper loops alive. And, of course, broadband mobility should be left to the free markets to sort out with the least amount of government “help.”
If you have the fiber optic infrastructure, mobility backhaul for 4G services is a slam dunk. You need the fiber infrastructure first; otherwise you end up putting the cart before the horse.
Back to the Future
May 15, 2009
It’s Back to the Future for me – just like the movie.
The big media buzz of Verizon selling select rural wire line (copper) facilities to Frontier Communications over 14 states for $5.6 billion in Frontier stock is the latest indicator that a consolidation cycle is starting and credit markets thawing. Though this deal won’t see Free Cash Flow positive for Frontier Communications for two years, it is the right strategic move for both companies. For an RLEC transaction, the EBITDA multiple is very good.
Verizon is focusing on the higher growth population centers and gains from the divestment of rural facilities that no longer accommodate Verizon. This also lessens any argument that Verizon is a menacing monopoly by way of this divestment.
Frontier Communications benefits from scale as they specialize in more rural areas to the extent they gain more proficiencies by integration. Frontier Communications does not serve the most rural of rural locations, so don’t expect any effort to deliver broadband to the barn, Green Acres or Petticoat Junction. It’s a great consolidating play for Frontier Communications, especially using stock as a currency, leaving the ability to lever debt off of EBITDA flows as a viable option/hedge.
Why is it back to the future for me? Well, way back in the early 1990’s, I was the first President of Frontier Communications well before the Communications Act of 1996. Once again, I will find myself holding Frontier stock as a result of this transaction since I hold Verizon stock. I am more confident this time that my stock quality will sustain itself, as the last time I held Frontier stock, the bandits from Global Crossing bought Frontier Communications, and in very short order destroyed shareowner value, the wealth and pensions of thousands of people. And no one went to prison.
I would like to share with you, my gracious readers, a funny story as an aside to this transaction (at least for me). If you go back to the 1990’s, the really big thing back then was long distance carriers. Hundreds, if not thousands of them existed. In the mid-1990’s, a consolidating cycle amongst these carriers had commenced as there was an over supply of carriers (capacity) that drove long distance prices so low, that you either merged for cost synergy or went bankrupt.
During this time of long distance consolidation, I participated in the Frontier Corporation M&A meetings discussing various targets or strategies. My invite was eventually lost in the mail.
If you have read the blog for sometime now, you know I don’t buy into the lemming model of business (move as a group to mitigate risk in the eyes of Wall Street…after all, if everyone is doing the same thing, it must be the right/safe thing to be doing. And, Wall Street, of course, being the fee-based vultures they are, happily endorses such paradigms.) Myself, I prefer contrarian moves and innovation.
Back to the M&A meetings: My first meeting, I went and listened. After all I was the new guy from “outside” the phone company and I wanted to take in the ambience. The second meeting, I raised my hand and made a suggestion. That suggestion was not to focus on buying into the over-supply of long haul carriers which drove prices into the ground, but instead to focus on acquiring local operating companies that already own infrastructure who are a gateway to the multitudes of long distance operators. My simple mind theory on this approach was that once prices go down, they usually don’t go up – integration synergies will keep the price wars going as things consolidate. I was told: “Dave that’s an interesting idea.” And the discussion continued on acquiring long haul carrier interests.
The third meeting I attended, I listened attentively again. Once again, I suggested a contrarian focus on acquiring local operators, this time my logic was that it had been my experience that those whom are closest to the customer have a better relationship and competitive advantage over those that are more distant – like in long distance. I was told: “Dave–that’s an interesting idea.” And the discussion continued on acquiring long haul carrier interests.
The fourth meeting…well there was no fourth meeting for me. Somehow my name fell off the e-mail invitation list. Several months later, Frontier merged (acquired) a major long distance carrier.
Today, as we know, long distance is near free with services such a Vonage, VOIP, Skype and MagicJack rapidly driving all-you-can-eat long distance services at flat rates across the globe. Flat rate all-distance is not far behind.
Since waking up with Back to the Future, my biggest worry now is waking up in Ground Hog Day – just like the movie. There is nothing brewing, but the Ground Hog irony of this adventure would be if Frontier Communications were ever to acquire American Fiber Systems because of our local presence, unique fiber assets, lucrative ARPU’s and our focus on being closest to the customer!
Talk about crazy!
Head in the Clouds
April 8, 2009
The trade press of the Telecom industry never ceases to amaze me. When it comes to Telecom reality–most of the time–the trade press is way ahead of the curve.
I keep stumbling across articles on new technologies that will transport data at 400 gigabit speeds. Just last night, I read how IBM has some new chip that can process data at a rate of 10 peta-flops. At least no one is making a claim that such speeds will carry over copper or wireless…yet!
With Google behind the scenes pushing on our Government, I am also seeing more and more ink on Cloud Computing, aka Software as a Service (SaaS). In a nutshell, it’s about moving applications from the desktop and your local server up into Google-land or some functional equivalent. Translated: an attack on Microsoft. (Note: I really enjoy watching rich companies fight).
As I have stated on this blog, and will inevitably state again, nothing happens in Telecom in the United States at a rate most analysts, market research houses, Congress, or trade press predicts. Cloud Computing will be no different. Cloud Computing is still a twinkle in Google’s eye.
But, as I sit here in my metropolitan fiber bigot world, I once again ask a simple question, (whether it’s peta-flops on your server or massive parallel Cloud Computing farm, the data still has to get from Point A to Point B–quickly and reliably): Why are we so relentless in placing the cart before the horse? (The horse in this case is reliable optical connectivity.)
I am not worrying about quick and reliable anymore. After all, input to the Federal NTIA broadband funding initiative has some carriers defining broadband at 1.5 megabits as perfectly acceptable. How long would it take a machine pumping at 10 peta-flops to upload to or interface with a Cloud Computing farm at 1.5 megabits per second? I refuse to do the math.
Here’s my point, America needs optical broadband connectivity. The entire country with a very few exceptions is under-served.
Reliability? That’s a low price, non-dimensional commodity–until something does not work. Sort of like electricity, or natural gas or fuel oil…have you ever wondered when some say bandwidth is as important to America as electricity but it should be plentiful and cheap? Have we ever had electric rates go down? The more electricity you consume, the more you pay? Sorry I digressed.
My point on reliability– and the same goes for Cloud Computing…what does it cost you if the Cloud is down or you can’t connect? Take out a calculator, assume your ”Cloud” goes down for 24 hours…What’s your cost? I would love to hear from you.
I am not picking on Google, but not too long ago, GMail went down for 24 hours. Those of you relying upon GMail–how was the experience? I would love to hear from you as well.
Reliability and optical bandwidth speeds–America’s ignored step-children
Why I’m Bullish on Qwest
April 3, 2009
The media is abuzz about Qwest Communications.
The buzz: Qwest would like to sell off its long haul business–analysts say it will fetch $2 billion to $3 billion. They say it’s to retire some forthcoming 2010 and 2011 debt.
Now–I am not surprised, given the vast majority of analysts have never operated a company and enjoy the pleasures of spreadsheet surfing as a form of art–that retiring debt is the conclusion. The short term antics of analysts are still alive and well! And, if I ran Qwest, I would tell the analysts no different. After all, you don’t get rewarded for thinking long term.
May I digress for a moment? A memory just popped into my head… Years ago, an Investment Banker (aka Real Smart Guy on Wall Street) left his lofty perch as a Banker in pursuit of even greater riches and became the CEO of a small CLEC. After all, he reasoned, after years of being a Banker, how hard can it be?
As Paul Harvey would say: “And now…the rest of the story…”
Over dinner one evening, our ex-Banker friend told me that he should have never left Banking, this (being a CEO) is “too much like work, Banking was easy.”
Back to Qwest… I like to think about things and observe. And one thing my years of Telecom experience have taught me about ILECs, is they usually don’t do something on a proactive basis, like divest network assets unless they are forced to by the Government or are in dire financial straights. Qwest is not under Government orders, nor are they in hard financial straights. You have to give the ILEC credit–they are not dumb people. Case in point, Verizon Communications unloading their Maine, Vermont and New Hampshire wire line network assets to Fairpoint Communications recently. It has not been an easy path for Fairpoint. Some analysts in hindsight are now questioning a number of things…except, of course, their past analysis of the deal.
I give Qwest credit, my logic beyond “debt retirement” is as follows:
1. Qwest International was the first to build out an independent nationwide long haul fiber network back in the mid 1990’s. The infrastructure is long in the tooth, the fiber is not “this generation fiber.”
2. Long distance calling as a usage product is marginal at best and is going to succumb to “free VOIP” if you buy our data plan. Texting has already surpassed TDM voice in usage…and twitter is just starting…in Academia, this shift would be called the end of a life cycle.
3. Qwest International IRU’d fiber over the years to other carriers. Built-in options exist for capacity. Long haul wholesale is a tough pony to ride.
4. Qwest is not in the wireless business. Wireless is driving backhaul. There is no distinct competitive advantage for Qwest to become a virtual wireless operator. As IP evolves and the Federal Government gets open network access and devices–not being in the cellular business won’t matter much–local market network presence will.
5. Every day I read about yet another box provider stating 10 gig, 40 gig and 400 gig capabilities for long haul networks. We always must remember the cheapest and easiest network to light have always been the long haul networks. Local networks are far more costly, complex and knowledge intense than long haul.
6. Service and application value-add originates and terminates locally – that is the future. Long haul networks running at 400 gig are pure commodity–cheaper than salt. The telephone has been around for over 100 years…I have yet to witness a call originate or terminate on a long haul network. This is why Google is working real hard inside the Beltway on policy and as a friend of President Obama.
So, as I look at Qwest and their footprint, I believe they want to stay in the game and will focus on services inside and outside their territory. I imagine they see the same data that I see where margins and profits are better for carriers where rational competition exists and less bravado overbuilding has been done. I believe they see a future where margin growth is valued over revenue growth given our financial markets are not likely to return to their old practices of lending any time soon–I am not talking about a near term credit thaw. I believe our financial institutions will be regulated as such, that margin and profit growth will become the key lending criteria–no longer the big revenue “too big to fail” financings of the past.
I also believe Qwest sees the importance of local fiber access and presence–even if you end up as a nationwide wholesaler of local bandwidth.
I believe with cheaper capital forthcoming, and the retiring some debt, Qwest will become a near term consolidator of Telecommunications infrastructure. I see a focus not so much on the top tier markets, but in viewing an opportunity to become a major national player below the top 12 cities in the United States. Today, on a network basis, below the top 12 cities, it is a highly fragmented market with a donut hole between the ILECs and the smaller players.
All due respect to the larger CLECs with a billion or two in revenue, but–in the scheme of things–we are all tiny. I have had countless inquiries from all sorts of Private Equity firms claiming they see a large opportunity in consolidating below the top twelve markets, yet no PE firm has shown the moxy to lead it…yet.
Qwest and the right PE firm – could be an entirely different story. A newly reconstituted Qwest can provide the right platform, existing scale and PE comfort to become a national “Zone 2” carrier and enabler which is missing in America.
I’m more bullish on Qwest than just retiring some debt…we’ll see …
Fresh Squeezed in Florida
March 30, 2009
The House & Energy & Utility Policy committee in the State of Florida has passed a bill removing most state regulations over telecommunications competition. The bill also limits the Public Service Commission from most Telecom matters for all but basic landline services.
Here’s the logic:
- The rates for telephone service will go up–by an estimated 6% to 20%. This will attract more competition.
- Cable Companies are not regulated for phone service, which creates a disadvantage for the incumbent. (Talk about a good lobbyist). Cable companies can bundle, price, and promote without seeking PSC approvals.
Rusin Translation: The duopoly structure in Florida is not working and one party in the duopoly can’t compete because of regulations, resulting in lost market share. By allowing prices to rise (as I have said over the years, the free market) and as growing profits are realized, then and only then will new competitors enter. That’s when the business model just might make economic sense…
Will other states follow? What a concept–let the market decide prices, the winners, and the losers.
Now, if we could get the FCC to focus only on basic land line services only….
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.
Open Source Solution to Amway TEM?
December 19, 2008
I recently received an email question about the skepticism and resistance to Telecom Expense Management (TEM) services, especially software solutions. A reader wrote:
I’m writing to get your input on why TEM (Telecom Expense Management) companies seem, to me any way, to have sort of a “Multi-Level Marketing” feel to them. The reason I ask is that we are a small management consulting firm that specializes in business development, sales, marketing and profitability consulting for the A/E/C industry. We have one client with 2,500+ wireless units who we matched up with some friends, (former co-workers…many moons ago) who have their own wireless consulting company that have written their own rate plan optimization program for Sprint/Nextel. (They are former Sprint/Nextel execs.) Anyway, they saved our client $326,000 in 12 months so now we both look like heroes.
Being a big believer in networking and since part of what we do is help our clients increase profitability, we have recommended these guys to other companies in our industry but seem to get ‘pushback’ as if I was trying to get the to join Amway or something. (Apologies if you are an Amway rep)
Telecom Expense Management or TEM can mean a lot of different things to different people. Depending upon the size of an enterprise, a TEM process can range from simple spreadsheet tools to a software platform to an outsourced provider. Some stats I have seen claim that 20% of most telecom bills to enterprises have errors. Given that no billing standards exist, short of ILEC bonding, the TEM industry is highly fragmented – lots of custom software. Software is my life’s nemesis. I often get asked after 20+ years in and around telecom network software applications, why I started AFS. My answer was simple: once you install the fiber optic sheath, add the laser and shoot the OTDR — it works or it does not. No mystery bugs, crashes or patches. Believe me when I say software is hell on earth, I am talking first hand experience. I could go on about this … I am so tempted.
Anyhow, the Amway-like pushback you might be getting has more to do with the human condition than anything else. What I mean by this is any individual in an enterprise dealing with telecom expenses, especially if he or she has grown an in-house solution, will be on the defensive. The economy is slowing, and someone or something better and/or more efficient is a viable threat to a fiefdom. Perhaps there is a need to go higher – like to the CFO – if the referral has been to whoever may be threatened. The savings you cite are impressive and a good testimonial — I would ask the customer who saved this money to be proactive in assisting with the marketing.
The problem you are facing is there are a lot of scammers out there when it comes to software solutions, given the low barrier to entry. Everyone is an expert, and given the fragmented aspects of the segment, no one looks different.
My suggestion, if you want to knock the socks off the TEM world, is have your former co-workers contact the Open Source Community and make its software available as an Open Source TEM platform. Literally over night, thousands of software types will add extensions, bolt-ons, etc., in driving a technical consolidation of a fragmented industry. (Boy, did I just make some enemies).
In the long run, the need for TEM solutions will wane as flat rate services over big IP pipes take hold, thus eliminating the aspects of complex usage billing. As this happens, a device and IP address inventory system will become more important than an integrated TEM software platform. Full disclosure…I am a local fiber bigot.
Go Open Source – change the telecom world!
What are your issues and comments regarding Telecom Expense Management? Shoot Dave an email or post your thoughts below.
Feeds
