I read lots of articles, reports, analyst’s reviews, technical briefs and congressional filings.  Yes, I know, I need to get a hobby.

I usually like to digest things before commenting such that there is level of objectivity and credibility in my observations.  Some times, things I read give me indigestion and that’s when the real sarcasm appears.  My itch today has to do with this “Third Way” proposal that my buddy FCC Chairman, Julius Genachowski, is pursuing relative to re-regulating broadband from an information service to a fully regulated service.  As I continue to read, I am becoming more and more suspicious that Chairman Julius has stopped reading my blog.

The FCC is about to become a Yoga pretzel all tied up in knots in this scheme to regulate the transport aspects of broadband.  Transport being limited to wire line, not wireless, though I assert to you that wireless is an oligopoly being dominated by a handful of bi-modal competition rules from previous Chairman Martin.

So who is going to be the Yoga instructor on this one for the FCC?  Well, it’s not going to be Richard Simmons.  In the end, it will be the ILECs at the Federal Court level once again telling the FCC you regulate to the laws created by Congress.  Chairman Jules – just listen to me now and save the tax payers millions in legal fees.

Actually, the “Third Way” for neutrality is a façade.  It’s like a slight of hand trick.  The issue being advertised has to do with remnants of network neutrality (Comcast v. FCC) where Comcast was the Yoga instructor of choice.  Just like Chairman Martin, the FCC was told you are not Congress; you must follow the law as set by Congress.

The ‘Third Way” is an attempt to regulate the Internet and previously lightly-regulated information services such as VOIP and applications.  The guise of the proposal is to regulate transport on an unbundled basis – an area that needs less regulation and more incentive for infrastructure builds.  But the whining copper loop and special access (aka Type 2) CLEC crowd who have played arbitrage since the Communications Act of 1996 (over 14 years ago), are still pursuing that ILEC teat instead of investing into their own facilities or the facilities offered by non-ILECs.

Over the past 14-years, the Communications Act has increased competition and has lowered market prices.  Lower prices are not a good thing for any operator unless their costs drop at a rate faster than price.  Thus, every time the CLEC whiners start whining, it is because their love of arbitrage and margins are getting squeezed by lowering market prices while being dependent upon the ILEC teat for infrastructure at regulated fixed costs.  So the cry for the “Third Option” is to get even lower cost prices from the ILECs who are investing heavily in more cost efficient platforms called fiber optics.

It’s no secret that 1.5 megabits just doesn’t float too many boats anymore–even Harry Homeowners boat.  So with an organic increase in demand for bandwidth far exceeding 1.5 megabits, an emphasis is being placed on regulating unbundled transport prices to further the 14-year arbitrage game.

So, that’s the slight of hand so far.

Tune in on Friday to read the remainder of Dave’s rant–

Yes, I have been preaching the virtues of owning your own local fiber optic network and/or carriers to be on anyone else’s network except the ILEC’s … well; the crows are coming home to roost. I’m just a simple man of the earth … so what would I know?

Qwest announced today that they are launching – get this – a referral program targeted to small businesses. As I like to say, the T1/IAD, DOCSIS, special access and xDSL end of the market. They are offering cash (not bill credits) incentives between $50 -$150 per referral for one small business to refer another small business to switch to Qwest. Just the thought of this brings back the long distance price wars of the 1990’s where such marketing further commoditized and devalued the long distance service industry and value propositions. As a result, we saw rapid consolidation and the bankruptcies of “asset light” resellers virtually over night. And if you care to remember, the last of the dying warriors ended up somewhere between Bernie Ebbers cooking the books at WorldCom and Joe Nacchio allegedly conducting inside trading as former CEO of Qwest.

What’s that crazy saying about if you don’t pay attention to history, history has a tendency to repeat itself? I think that’s the saying. Thus my thesis is: if a carrier does not have a low cost platform to lever from as organic bandwidth demand continues to accelerate and cash referral marketing evolves — history may not be as nice this go around!

I have no idea if Qwest has started a fire and if AT&T and Verizon will put on a similar squeeze in-territory also. No matter how you cut it though, this does not bode well for the CLECs who have built their fortunes, dreams and investors’ cash on renting pieces and parts from the ILEC. Most CLECs can’t afford to even match this cash offer, let alone any marketing “gotcha” in response – it’s a pure cash incentive play. Bare knuckle stuff… he with the most cash wins.

So what’s the multiple of an asset-light CLEC under these circumstances versus, say an AboveNet? Cogent Communications? TW Telecom? Level 3? You know, those idiots and their local fiber infrastructure…what do they know after all? Bunch of dummies …

I hear something in the distance; it’s a fine whine just developing. Yes, it’s coming from the Beltway … it’s a protest against Qwest for doing this … “It’s not fair!” After all, the CLECs only had 14-years to figure out how not to be dependent upon the ILEC – Qwest should now be required to slash their loops, special access and T1 prices for making such a bold move and to make the share owners of asset-light CLECs viable.

Analysts–what will they say? I pity the CEO’s quarterly call reporting excessive churn in Qwest’s territory … I can hear it now … “… due to continued downward economic pressures and aggressive promotions by competitors …” will be the cry. But the reality is, like in the story of the three little pigs; when you build your house out of sticks or hay, eventually the big winds of reality arrive. It may be too late to build that brick platform that has been ignored for years. Equally culpable, deemed acceptable to ignore as of value for doing so are the Wall Street analysts. (All my public brick-owning, fiber-bigot CEO friends just smiled because they can’t write stuff like this but I can).

As the analysts say on Wall Street, what have you done for me lately (this quarter)? The winds are a blowing with Qwest firing the first salvo, maybe a cable company will follow as well … meanwhile the AboveNet’s, Cogent’s , Level 3’s and TW Telecom’s of the world are happily nestled inside their brick fortresses which they built (and/or bought), brick-by-brick, slowly over many, many years–when it was not popular to think beyond next quarter and securing their future by spending capital on bricks (local fiber optic infrastructure)! To this day, capital expended for unique local fiber is yet to be understood in value, multiples, strategic or sustainability as a business model by Wall Street.

Caw! Caw! Caw! I hear the crows and they are getting closer. (Editorial Note: Based upon my Native American ancestry, the crows arriving are a good thing for my tribe).

I own a brick platform and I intend to make money off of Qwest – so can you. I am going to submit some referrals into Qwest under this small business referral program to make some cash. I am going to obtain all the local Yellow Page books in Qwest territory and staple it to a referral application and just wait for the cash to flow in …

Amazing how things can change so quickly if you are not prepared or constantly scanning the horizon.

Bernie Madoff.  Remember him–the biggest Ponzi scheme of all time?

After first being alerted nine years ago about possible investment fraud behavior on the part of Mr. Madoff, the Securities & Exchange Commission (SEC) has taken action.

After already having started a 150-year sentence in the Federal slammer, the SEC has just informed Mr. Madoff that he is now barred from the securities business.

Take that Bernie!

1.  Why can’t the National Telecommunications and Information Association (NTIA) use the same qualifying language for fund eligibility as the Rural Utilities Service RUS?  In sum and substance, a company is not eligible for funds under the RUS if they have more than a 2% national market share.  This would eliminate the concerns of ILECs, big wireless, and large cable companies who already have billions of dollars from engorging themselves further.  Give us guys under 2% market share a chance!
2.  For fiber infrastructure deployment-–it is my belief that carriers that provide an open access network platform should be favored over those who don’t.  Carriers (who as a normal business practice offer wholesale backbone capacity and dark fiber leases to other carriers) should move to the head of the line.  In my opinion, any Federal dollars spent on fiber optic backbone should have a requirement that, at a minimum, dark fiber must be made available to other carriers on a commercial lease basis.  A closed network carrier plus Federal funding for network extensions will not promote competition-–just a bigger closed network footprint.  Carriers with closed networks should be required to open an appreciable percentage of their existing dark fiber for lease to other carriers before getting dollar number one from the NTIA.  Talk about a fiber fantasy!
3.  Flipper…and I don’t mean the dolphin.  Yes, there are entities out there that will take the funds, install or warehouse something (fiber, PoPs, tower, wireless, WiMax, etc.) and then sell it to someone else a few years down the road for a profit.  Since the NTIA funds are grants, whatever flipper gets is 100% profit.
4.  The over-reachers.  How will funds be managed to avoid a carrier from building over an existing carrier, especially a closed network carrier building over a carrier with an open access network platform as described in point #2?   Remember the great land grab and Telecom meltdown circa 2001-2003-–lots of redundant networks built on top of each other in certain markets.  Back then, private capital took billions of dollars of losses, given the irrational exuberance of “build it and they will come” prevailing culture.  If CEO’s were willing to piss away private capital, what makes one believe some won’t do it with public grant money that comes without any equity interests?
5.  Cross dressing.  How will funds be managed to optimize their use?  For example, AFS is very good at metropolitan fiber optic network deployment.  We are very efficient at it and know the ins-and-outs.  I would not expect that AFS pitching tower builds for Federal funds to be taken seriously (in a rational world) as this is not a historical, established proven core competency.  Likewise, one would not expect a wireless mesh back haul provider to be seeking funds to deploy a fiber optic infrastructure when it is not a proven core competency.  Federal funds should not be used for on-the-job training and new ventures.  Once again, if open access platforms are funded as a priority as described in #2 above, the capacity or dark fiber lease will be available to others not so situated.  I must be dreaming.
6.  What stops a firm receiving funds by grant from placing them on their balance sheet and then levering them with debt?  Sure, they will use funds to meet the Federal proposal–but why should the tax payers get cut out of the gravy if they can lever the funds?  Let’s face it, if a participant levers funds by debt and goes bankrupt, the taxpayer is stuck as well. Some companies may actually lever funds by debt, and use the debt to pay dividends.  Is that good use of the program? (Did I just piss off a bunch of shady types or hand out a real good idea for the ethically challenged?)

I have more, but will save it for my beltway visit.  The above, at least to me, is all about commonsense.  As much as I’m tempted to write further about commonsense and the beltway, my commonsense tells me to stop writing now.

Right or wrong about the package–it’s a lot of future debt…and I’m not comfortable with the speed in which it was enacted.

What remains missing, in the overall scheme of things, are the fraud and violation of fiduciary duty criminal charges.  The longer the Department of Justice waits, the more time the Real Smart Guys can hide assets.

My overriding concern with the “funds” is that, within a few years, we will find ourselves with millions of dollars in fraud and abuse.  Let’s face it-–money will flow to political cronies and schemers, who will eventually surface in future years as flat-out criminals.  I am not psychic.  It just seems to be an acceptable norm in America (think Fannie Mae and Freddie Mac).

Hell, if you can get a Cabinet post or Congressional seat without previously paying your Federal income taxes, what are a few misplaced bucks amongst friends?

The Telecom piece of the pie has more mystery at the moment.  The Rural Utilities Service (RUS) portion for RLECs is pretty straight forward.  The RUS has been conducting programs for years, so they are applying existing “rules.”  RUS history on these loans has had a default rate of 30%–and that’s after the RLEC audits where RUS funds were used to pay dividends and for other non-qualified uses of the loan/grant programs.  I expect history to repeat itself.

The other piece (non-RLEC) of the Telecom slice is being administered by the NTIA.  The NTIA is commencing meetings next week to receive input on “various issues” and definitions of the program.   At this point there is more unknown than known.

Yes, yours truly will be traveling to the beltway in the next week or two to express my views and provide input.  Quite frankly, I just want to be on the record for posterity if some pink elephants enter the room and get ignored.

I read a book a few years back–a kiss and tell book about the Investment Banking financial community. Nothing I read surprised me as much as it validated my observations and informed opinions.

The book called, “The Accidental Investment Banker: Inside the Decade that Transformed Wall Street” was written by Jonathan Knee, who became an accidental investment banker himself. Knee exposes the banking industry for the ilk they are based on his experiences while working at Goldman Sachs and Morgan Stanley. Like I said–this is a kiss and tell book. But–to be fair–if you choose to read it, don’t confuse the moral quandaries and questionable ethics with boutique investment banking firms who actually work honestly for a living.

Sh!**y Little Companies or SLC’s is a term used in the banking industry to describe small companies (less than $500mm market cap) that are of no interest to big time bankers unless one of two things is present: The first is if there is an economic slow down. The second, when there is a need to understand innovation.

Let me dive deeper into these two points.

During the telecom downturn of 2001-2003, when Bankers were sitting on their hands, all of a sudden SLC’s (such as AFS) started getting phone calls from Bankers (who would not have given AFS or me the time of day just a few short years ago). Though they tell you one thing, like raising equity/debt while bantering their brand, what they are really doing is calling for a free seminar and industry update since they have nothing to do. My warning to other SLC’s is to be wary as our economy slows – because will start up again: don’t give any free seminars to anyone making financial claims too good to be true – no matter what they tell you. The bigger they are, the more suspect you should be. After the free seminar, you will eventually be told you are to small, not the right fit, it’s too early, too late or some other garbage along those lines.

Read the book if you don’t believe me.

A byproduct of giving the free seminar is disclosure. I have a saying about big Wall Street Bankers – they all share the same spreadsheets and spit. If you get suckered into giving a free seminar, a Banker may be trying to pimp you for some of your tricks-of-the-trade. If you disclose the family jewels to impress the Banker, you will be provided with all sorts praise about your creativity and innovation. What will really happen is value creation…but not for your shareowners.

Since big companies find it difficult to innovate or move quickly, the Banker will share what you revealed with their big company clients, but as their idea. Why? Because they endear themselves as knowledge-value-adding after pimping the SLCs because they get bigger fees from these clients.

Never share the family jewels.

Sorry, I don’t buy NDA-anything within the financial circles.

Read the book if you don’t believe me.