“All I can say is, “Duh.” It’s called physics – optical fiber is going to provide the highest quality of user experience and reliability, and will scale bandwidth growth than any other medium…pure and simple.

Wall Street – are you paying attention?”

Fibre-optic service providers top satisfaction polls in US

07.01.10 A survey by US magazine Consumer Reports has found that the nation’s fibre-optic service providers scored highest overall in terms of customer satisfaction for Internet, TV and phone services.

Verizon FiOS and AT&T U-verse received top scores for Internet and TV services with respondents, and were found to be among the better phone providers. The survey was conducted with 69,000 readers of the magazine.

In areas where a telco-delivered service is not available, a highly-rated cable company is described as being the next-best choice for many households, although many consumers may not have an option to choose their cable provider, because a majority of homes only have one cable company available in their area. According to Consumer Reports, the country’s better cable companies include Wow, Insight and Bright House, which – although small – received scores that rivaled those of the fibre operators, and are “fine alternatives” in areas that they are available.

The survey also found that satellite TV has strong points – while DirecTV and Dish Network scored below fibre and the best cable services for TV service overall, they were on par with those top providers for channel selection and picture and sound quality.

Here is what my policy would look like:

1. Implement bill and keep – end of debate and fraud.
2. Outsource management of the USF and apply funds only to projects that bring scalable bandwidth to where it is needed – not just rural America. The emphasis on funding should be by public/private partnerships with a proven, successful private partner in the Telecom business. The cornerstone of fund use – all networks deployed whether wire line or wireless are open access, non-discriminatory, wholesale availability and interconnection points charged on a cost-plus basis. Wire line, if you are talking less them 100 megabits – sorry. Wireless, if you are talking less than 40 megabits – sorry. In ten years, we would like gigabit service to dominate 90% of the United States. If we can put a man on the moon in 10 years, we sure as hell can deliver a gig in less time. USF may be applied to satellite access, to the most remote areas of America, where the economics of building infrastructure does not make sense.
3. Put a sunset provision on copper loops, special access and UNE-anything whereby the ILEC, after three years (2013), must provide the products but at rates they choose to charge.
4. Put a sunset provision on copper loops, special access and UNE-anything whereby the ILEC, after five years (2015), no longer has to supply anyone with these products if they so choose.
5. Mobility. Open access device standards mandated by law so anyone may have device and application access within reason and within the security of the connections.
6. Net Neutrality. Let market forces determine it based upon the previous five points. If you use a lot of bandwidth, you should pay for it.
7. Internet Open Access. It needs to be a public/private partnership(s) for peering points delivering IP access on a cost plus basis. ISP rates are obscene today, and though I don’t like government fiddling, this may be a reasonable solution to the problem in the short term. Even the threat of intervention would have a positive effect. IP access is a staple of the Internet – everyone needs it and they need it inexpensively.
8. Lobbyist restrictions. No regulator with a vote should ever be alone in meeting with a lobbyist without a third party witness including a recording or notes of what is being discussed. This documentation must be open for public inspection.
9. Rights-of-way issues are state and local issues except on federal property. However, federal extortion laws should be applied against states and municipalities that extort value-in-kind and unreasonable fees such as a percent of revenue, real estate taxes, etc. The cost obligation should be to return the RoW to the condition as it existed prior to deployment. RoW should not be a money-making proposition or tax subsidy.
10. Pole attachments should be regulated whereby a closed network provider pays a higher rental cost premium to be on a pole over an open access provider. Being attached to a pole has nothing to do with the type of service going through a cable (present wisdom) – it should be about the type of network – open access network or closed network. The higher rental charges to closed networks providers can be used to subsidize attachments to open access providers. Open access providers will place fewer burdens on poles and are more efficient in pole use, maintenance, make/ready, aesthetics and safety.

My logic has everything to do with getting more and better reliable bandwidth – where and when it is needed. It is not based upon some crazy un-served and under-served definition and some type of speed limitation as a measure. The race is open-ended because bigger and more bandwidth connectivity will drive more innovation and more jobs – period. Look at some of the things we do today with limited bandwidth and imagine the possibilities with gigabit synchronous speeds! This bandwidth thing does not have an end point – it will go on forever – optics and lasers have changed things forever.

There are a few of you, however, that would not like the policy I have proposed. Why? Perhaps it is because you are living in your old business model and sitting still with special access and loops that would enable the ILEC and Cable Companies to eventually crush you in a slow, methodical manner. Organic bandwidth growth all by itself is outstripping the T1 crowd, DSL crowd, DOCSIS crowd and IAD crowd…organic demand is on a tear.

As an industry since CA1996, Telecom has become a welfare recipient of sorts from the federal government. What is it that makes business grow? Drives innovation? Creates jobs? Expands the economy? Let me clue you in…President Obama–pay close attention…

The answer is private capital formation and application of private capital into the economy. The biggest obstacle of capital formation to advance our nation’s communications infrastructure is the uncertainty of regulations and policy. In as much policy can create opportunity, ill-conceived policies can cause uncertainty. The CA1996 Act has burned this mantra into the souls of many in the private equity and venture capital industries: if regulations are not clear and transparent or policies are not concise, it is smartest to stay away. (Author’s note: I am assuming PE folks and VC’s have souls!)

Infrastructure is a high fixed-cost business that requires gobs and gobs of capital. We are not advancing our cause by demanding loops, special access price breaks, or grabbing the edges of spectrum bands. We are not serving our nation competitively on a global basis; our industry is part of the problem right alongside government policy.

I submit a more direct policy as I have outlined above would attract capital and also rationalize the deployment of capital. The latter is particularly important given the painful lessons learned since the CA1996 land-grab mentality of co-location, renting/ building fiber on top of each other as closed networks (yet oversupplying certain routes with enough fiber capacity for the next 100 years).

If I hear from the FCC on this, I’ll let you know…

I just finished reading an article in the Financial Times about British Telecom (BT) and a relationship they have with Carphone and Sky. Carphone and Sky have been asked by BT to make a buy commitment of ₤1.5bn ($2 billion+) as potential customers for wholesale broadband products that BT is planning…the subject is investing into fiber networks – not wireless. I discovered, however, that this nugget is not the real story.

The really interesting part of this story is the regulatory influences on BT. OFTEL (which is the equivalent of the FCC in the United States) had BT split itself several years back into basically two companies – a retail and a wholesale company. The wholesale company is called Openreach and it controls/owns the backbone and copper access networks. They treat BT retail like any other customer under an open access model (I have written about this concept previously–open access at the curb to any premise). Openreach maintains a quasi-regulated, monopoly-like wholesale business for wholesale access services yet open to competition.

This model has been in effect for several years now. According to the article, BT retail has a 30% market share in retail, and is now a dwarf in relative terms, to other Euro-based fixed line providers that were not split like BT.

The numbers really caught my attention. Openreach, in the first six months of its current operating year, has posted revenues of ₤2.6bn ($3.6 billion+) with an operating profit of ₤586m ($980+ million). The numbers and results are really interesting, especially in relation to the whining in the United States about the ILECs.

Once again, as I have admitted in previous posts, I am a bigot – a fiber bigot. Fiber is first and, in my opinion, anything else is a waste of money until the fiber is installed.

In regards to splitting up the ILECs in the US in a similar fashion as BT, that horse has already left the barn due to laws such as unlawful seizure of property and FCC agreements.

The whining continues while the FCC is formulating a broadband policy over the next few months. Based on what I have read, we still have the same whining going on relative to the ILEC and future broadband policy. My favorite – lower prices on special access!

Here is my opinion. If you are a carrier that likes the ILECs infrastructure so much (yet claims the ILEC is ripping everyone off), why won’t a CLEC or a consortium of CLECs or a consortium of CLEC’s and Cable Companies make a cash offer to the ILEC to buy the equivalent footprint of an Openreach? Think about the benefits: lower prices, full last mile access control and, most importantly, you would get the ILEC as a built-in customer right out of the gate. Sounds like heaven to me!

Wall Street can put a value on the ILEC Openreach equivalent assets, given the Openreach results. So call your favorite Wall Street Banker and hop to it. Have I mentioned that I am tired of the constant whining about the ILECs? Debt markets are open and I am sure your banker can advise you accordingly. The ILECs have already demonstrated a willingness to sell off these types of assets just this past year. So what is stopping you? Or is it just easier to complain and blame than adjust your business model (that may have been flawed in the first place)? Free will, free choice – you don’t need government intervention. Pardon the pun – you just need to get a “backbone.” And the fastest way to get one is to buy it out from under your supplier the ILEC.

My fantasy is that the FCC actually reads this blog…I am fairly confident President Obama checks it daily. Here is the straight deal – since the Communications Act of 1996, decisions have been made. These choices have been made freely based on different business models – no one was Tony Soprano’d into anything. Business models were conceived of free will, free choice and in some cases, knowingly subject to swimming with the ILECs (under regulatory oversight that had never been tried). Many business models were “advised” by the really smart people on Wall Street as well.

It is now 2010 – it has been 14 years since CA1996…and just like a bottle of 14-year aged fine wine, I continue to hear the same 14-year bitter whine. After 14 years, don’t you think a different approach might be justified, especially given where the United States falls relative to high-speed network rates when compared to other advanced countries? This small-scope thinking of copper loops and special access is hurting America. 14 years of ILEC network infrastructure arbitrage has gone on long enough!

Now that I’ve explained and articulated the BT scenario, join me for my next post as I offer my recommendations to the FCC and President Obama for a sensible broadband policy.

Speaking for AFS, we have about 80% of our new MRR plan booked and awaiting delivery over the next several months. Our sales professionals will pick up the remaining 20% by June or July, and then, we will focus our attention on the 2011 operating plan. For our tenth year in a row, I am happy to say, we are poised for double digit, continuous revenue and margin growth. (Writer’s note: Any monkey can grow a revenue line by cutting prices—the issue of staying in business and providing quality service is a function of the quality of revenue, margin growth, and of course, churn rates).

I anticipate a busy mergers and acquisition year ahead of for all of us. AFS will be participating as a buyer, if and when the right opportunities fit our M&A strategy and financial model. We have a highly defined model for M&A – you won’t see us acting like a kid in a candy store – we have focus, strategy, and discipline.

AFS has completed a few acquisitions in the past and they all have turned out very successful because of our model and restraint. We have lost more opportunities than we have gained because of our disciplined approach. Typically, once we acquire a property, we have it fully integrated and profitable within 60-90 days.

I wanted to share a few tips (in no particular order) about how we view acquisition opportunities and how they translate into benefits for our customers:

1. Business model. We first make sure the property fits our model. If not, we pass…plain and simple.
2. Numbers. We look at the financial numbers to determine if we can make the company work financially. First, before we set a price or price range, we try to determine what needs to be invested into a property to make it healthy. This step is a major factor most people ignore, especially if they are or behave like a financial buyer.
3. Culture. The business is being sold for a reason. Those reasons can vary from bad strategies and leadership to poor execution or an investor’s exit. All of the mechanical challenges can be fixed so we really want to delve into the core values and principles that serve as the center of the business. We look for a customer-centric culture – we avoid the cultures that worship the CEO as some type of deity.
4. People. In my opinion, this step is where many CEO egomaniacs and financial buyers lose it. At AFS, we don’t have a “slash and burn” mentality when it comes to the employees. We recognize, especially in smaller companies, that a lot of knowledge about the business resides in the heads of its employees. This knowledge is a major intangible that should be respected…or you might face losing it entirely if you slash and burn to meet some ill-conceived financial model!
5. Best Practices – Objectivity. If a company we acquire does something better than us, we will “shoot our own dog” and adopt their methodology. Many slash and burners feel they already run a perfect operation and no one could possibly be better than they are – after all they aren’t the one for sale (so their logic goes).
6. Quality of Customers. We really don’t care about volume and low margin customers with zero loyalty (waiting for the next lowest price rabbit). We usually factor them into the financial model as a future forced churn.
7. Network Quality. We only acquire companies that own fiber optic networks with an emphasis on metropolitan services. To elaborate, I mean they own the sheath containing all the fibers…not a “network” consisting of 2-4 strands of fiber that has been IRU’d. So many PR companies will spin M&A announcements to sound like a company has acquired the network from Company X. But, in reality, they bought a company living on an IRU…or in some instances just an IRU with customers on the fiber!
8. Quality of the Sales Team (Part I). We sell network reliability, on-time delivery, on-budget delivery and proactive customer service. A sales team must adhere to these value propositions first as opposed to price. We churn low price sales champions because they are acting primarily in their own interests. This type of attitude ignores the true value proposition of AFS and our culture—delivering reliability each and every day. Telecom network reliability is NOT a commodity and it has not been for over 100 years. Let me repeat, real network reliability is not a commodity…contrary to the opinion of many Wall Street analysts who believe Telecom services are a basic commodity like wheat or corn. For example, when your Gmail is down for 36 hours or your point-to-point network connection is out for a business day, what is the cost of not providing network reliability for the customer? So many people are swayed by low price and believe that all networks are equal…and the behind-the-scenes people (or culture) who support the customer are a commodity as well.
9. Sales People (Part II). We avoid sales representatives that have “rabbit” resumes. They seem to jump from hole to hole every two years and wind up with yet another carrier. For customers or prospects, this sales person is not acting with your best interests in mind. Instead, they are using you for a well-disguised, superficial relationship to advance their own interests of earning commission. They will likely tell you anything to get you to switch to their new employer. We avoid the rabbits and so should a customer or prospect. By the way, the rabbit and other sales people are separated by this truth: the rabbit is simply performing a job whereas the others are sales professionals that have developed skills and business acumen (and place your needs above their commission goals).
10. We Don’t Lie. AFS will not make empty promises or say things a seller may want to hear (staff, business model, etc) only to blind-side the acquisition after the ink dries on the closing documents. A common practice is to say one thing but do another once the deal is inked. This dishonesty hurts the customer base you just acquired.

There are more points but following these basic rules seems to work well for us.

2010, no doubt, will be an interesting year. Demand for local bandwidth will continue to grow because the economy has caused a pent-up demand bubble where many customers need more bandwidth and access. I believe recent economic woes and tight budget constraints forced many companies to delay certain IT aspects of their business. Each year, reliable network connectivity becomes more important than it was in the year prior, and I predict, this trend will continue for years to come. Historically speaking, economic hardship and “doing more with less” has resulted in a bandwidth boom as economic conditions improve. Doing more with less places pressure and demand on communications networks…the networks rethink expenditures and save money on expenses such as travel, inter-company communications, intra-company communications, mobility, document management and knowledge-sharing.

Think about this nugget as we enter 2010 – how long could your business survive if your communications provider has service outages of 2 hours, 4 hours, 18 hours, 24 hours or maybe 3 days? These major downtimes have occurred in recent years.

Just make sure you know who actually OWNS the network your business uses…and don’t be fooled by branded resellers, asset-light carriers or IRU’d strands someone may tell you is a “network.” You need to see the physical network map and proof that your carrier owns the infrastructure. And, lastly, stay away from those sales rabbits!

To the carriers who simply compete on the lowest price, I hope you finally hit rock-bottom in 2010 to protect the health of our industry and the strategic broadband interests of our country. Try an economic concept to sell by: comparable differences. It’s a little more sophisticated than, “I have the lowest price” or “Just tell me what price you want.”

To enterprises, institutions, healthcare, government, hospitality, education systems, etc, I propose that you do your homework in 2010. The lowest price does not translate to network reliability, network diversity, on-time delivery, service availability or customer service. I submit that anyone with the lowest prices is cutting corners – caveat emptor.

I will and shall remain a bigot in 2010 – that is, a fiber bigot.

To a few of my favorite CEOs, may you find the following in 2010:

For Carl Grivner, CEO of XO Communications – some definition and clarity from Carl Icahn.

For Jim Crowe, CEO of Level 3 – a scratch-off lottery winning ticket that helps you pare down your debt so Wall Street can focus on your assets and potential.

For Dave Schaefer, CEO of Cogent Communications – a price increase to enhance your margins and increase shareowner value.

For John LeGere, CEO of Global Crossing – reparation payments and psycho therapy reimbursement for pre-LeGere Global Crossing./Frontier employees that were financially screwed by Gary Winnick and Co.

For Larissa Herda, CEO of TW Telecom – a new calculator that goes past two digits in the display and a better valuation by analysts.

For Bill LaPerch, CEO of AboveNet – more on-net buildings, you have the perfect business model (just like AFS).

For Randall Curran, CEO of ITC DeltaCom – the Civil War is over, head north.

For Jim Geiger, CEO of CBeyond – another year of growth. You have an algorithm, but be mindful, copper has its limits

For Arunas Chesonis, CEO of PaeTec – some more fiber in your diet.

For Danny Bottoms, CEO of Cavalier Telephone – a vacation trip to Dubai, I hear real estate prices have dropped substantially recently.

For Ivan Seidenberg, CEO of Verizon – another great year with FIOS…outstanding strategy – kudos to my Zen Master that made FIOS a reality.

For Randall Stephenson, CEO of AT&T – copy Verizon with a look-a-like FIOS, the regulators just might make you share your FTTC with others. See what they did in Britain as a clue.

For Glen Post, CEO of CenturyLink – a successful integration of Embarq…at AFS, we’ll miss you Embarq.

For Carmen Perez, CEO of FPL FiberNet – getting out of Florida for some network diversity and adding more women CEOs in 2010.

For Dan Caruso, CEO of Zayo – more pieces for that puzzle you are putting together.

For Howard Janzen, CEO of One Communications – more reliance on the knowledge and experience center in Rochester, NY. Most successful CLECs have CEOs, CFOs and senior execs from Rochester (Frontier Corporation).

For Peter Aquino, CEO of RCN – less cable TV and more enterprise.

For Ed Mueller, CEO of Qwest – a target of sorts … that’s what the Wall Street experts say.

For John Scanlon, CEO of Reliance GlobalCom (Yipes) – getting a 3x return on the $300 million for which Reliance bought Yipes a few years back, I know you can do it!

For John Purcell, CEO of FiberTech – just like AFS, another boring year of double digit growth in all categories.

For Mike Miller, CEO of FiberLight – larger pipe enterprise sales and a drink at MetroConnect in January.

For Jeff Gardner, CEO of Windstream – continued consolidation of the Tier 2 markets that translates to a high margin, low churn business with a national facilities-based footprint presence.

For my friends, Wall Street Bankers – more and better creativity on valuing companies … someone needs to look and act differently. You all look the same…why pay a fee without differentiation?

For my Venture Capital friends – avoiding ordinary income gains from the Obama Administration.

For my Private Equity friends – could one of you step up and buy a platform company to drive consolidation? You are all talking about the same thing yet no one is taking first mover advantage. (Please see Wall Street Bankers above)

For FCC Chairman Julius Genachowski – a Ouija Board to figure things out. Start spending time with the backbone of telecom…small companies. Simplify, simplify, simplify.

For Joe Nacchio, former Qwest CEO – a Hawaiian shirt to go with those khaki pants and a pre-paid calling card to call home.

For Bernie Ebbers, former CEO WorldCom – continued memories of better days gone by when things were simple and honest running a motel.

For John and Timothy Rigas, former CEO and CFO of Adelphia Communications – a basic channel package from Direct TV in your cells.

Finally, I’d like to wish a dose of reality for all the non-ILEC public communication companies and privately-held communications company for 2010…learn to partner. Our answers are not found by relying upon the government and FCC or by renting pieces and parts from our largest competitor – the ILEC – regardless of price or copper ubiquity.

The combined market cap of AT&T, Verizon and Qwest is over $262+ billion. Some brilliant, superstar Wall Street banking firm could orchestrate a super-mega-merger of the three and the rest of us won’t come close in market cap. What’s the lesson here? There is not any room for arrogance or condescension. The better focus is tackling ILEC market share instead of each other. The ILECs enjoy when the termites fight each other instead of eating the foundation out of their house.

Happy New Year! And cheers to a great start to the new decade!