EuroTelcoblog

Surprise package

2012-01-16T14:15:00.002Z

I was very pleased to receive these via DHL last Friday - the first high fiber chocolates in history. Thanks to all the good folks at Diffraction Analysis and Tactis!

Misadventures in asset management

2012-01-03T09:23:00.003Z

A belated Happy New Year to whatever vestigial mega-uber value readers may remain out there. I hope 2012 brings you all you wish for, though personally I am trying to keep my wishes humble, in line with the New Austerity zeitgeist.

As with every new year, I begin 2012 with good intentions of blogging more this year. It's not that I have nothing to say - quite the opposite - I am involved in some very interesting things, but sadly almost all of them are bound by strict non-disclosure obligations. Nevertheless, both this humble bloglet and the Memphibian both deserve more attention than they have received in recent months, so I will endeavour to do better.

In terms of telecom, I miraculously made it almost all the way through 2011 without a single catastrophic service provider incident - up until December 30, that is. On that day, my HTC Desire HD handset decided to stop working. Not entirely, but the on/off button stopped responding, meaning that the handset was switched on but I could not activate the touchscreen. At this point I decided to visit an Orange shop to see if they could do anything for me.

Being in The City, I stopped by the Moorgate shop, and the staff helpfully phoned the Orange customer care call centre for me. I spoke to an affable Geordie who was only too happy to order a replacement handset for delivery the next day. I told him that I was not at home, but rather was staying with family in the West End, and I asked if he could arrange delivery to one of the Orange shops on Oxford Street. That, as the old song goes, is when my heartaches began.

The call centre man then asked me if I knew the postcode of the Orange shop where I would like the phone to be sent. Surprised, I answered, "No, just any shop on Oxford Street will be fine." There followed the sound of keyboard tapping, and I asked him if he was Googling for Orange shop locations. His answer was unclear, but after a few seconds he said, "89 Oxford Street." I said that was fine, and we agreed that I could collect my replacement handset there the next morning. I even received a confirmation by SMS.

The next morning, I made my way to the Orange shop at 89 Oxford Street, with only one minor complication - the shop doesn't exist. Wandering down the road to the nearest Orange shop (at 155 - 157, for the record), I asked the puzzled staff if there had ever been an Orange shop at No. 89. It felt a bit like a scene from "It's a Wonderful Life." I explained my predicament, and the friendly and helpful shop assistants put in another call to the mothership.

When I asked how Orange could possibly ship a handset to a non-existent store, the very apologetic customer care person speculated that there must have been a "training issue" in the call centre. She said that the only thing to do was to allow the delivery to fail, then arrange delivery to another store. She then asked me for the postcode of the shop I was calling from. As the situation got more Kafka-esque, it occurred to me that I wasn't sure if I was still under contract with Orange, so I asked. "No, you're not under contract," came the reply.

It was then that the penny dropped. I had visited two Orange shops and spoken to five Orange employees about needing a replacement for a handset which was clearly not the most current vintage, without anyone checking to see if I was a candidate for an upgrade or contract renewal. All the staff were knowledgeable and pleasant, but seemingly no one had the commercial killer instinct to upsell, or at least to try to retain a customer who was likely to be a bit disgruntled over being sent to a shop which only exists in a parallel universe.

The Telco 2.0 team have written a number of very interesting and thought-provoking reports about the plethora of potential incremental revenue opportunities for telcos in unleashing the power of customer data and metadata, but in my sorry tale, the company failed to exploit even the most basic customer data - something which should be a well-established operating routine in such a mature and competitive market.

Then again, confronted with the prospect of more pain, cock-ups, and wasted time in the event that I chose to leave Orange in protest, I knuckled under and renewed my contract, and I am now the proud and satisfied owner of an HTC Sensation. Maybe inertia trumps metadata and processes...

Nothing really matters, anyone can see, nothing really matters but FTTP

2011-10-28T10:53:00.005+01:00

That's an appalling musical reference, but sadly it's the only tie-in I can think of to announce that I will be presenting at the FTTH Forum in Budapest on 9th November. (Edit: Okay, it's Friday at the end of a long week, and I conflated "Hungarian Rhapsody" with "Bohemian Rhapsody." My bad. In retrospect, perhaps I should have tried to invoke Ligeti's "Lux Aeterna.") My talk will broadly cover some of the points I raised here, but I'll mainly focus on CityFibre's strategy around a holistic view of fibre across an entire community, with buy-in from local government as the key bedrock upon which other developments rest. Our recent project in York is a compelling example of how this can work to create tremendous optionality for all stakeholders.

I'll also be speaking at the NextGen conference in Bristol on 15th November, covering broadly the same ground, but also revisiting some of the themes I covered in my previous NextGen appearance in Manchester two years ago (slides). As I tried to stress then, I expect there may be a large gap between the perceived value of fibre today (i.e., the tiresome "it's a better triple play") versus the "option value" of fibre as an enabler of applications and services we haven't even dreamt of yet.

As I've stated numerous times over the years, the flaw in the current structure of the "telecom industry" is that conventional telcos, as constituted today, will find it impossible to capture the benefits of those developments in a way which translates directly into "shareholder value." As such, they have limited incentive to invest in enabling the benefits of such innovation across an entire community. Ergo, I would argue that a strategy focused on "stakeholder value" is the appropriate framework for moving forward. Call it "A Unified Theory of Fibre."

If you're planning on being at either event, by all means stop by and say hello.

Joining the Rainbow Revolution

2011-07-06T09:34:00.002+01:00

In a recent post, I alluded vaguely to my involvement in activities which aim to speed the delivery of fiber access in a couple of countries. One of those is the UK, where I am happy to say that over the past two months I have become a foot soldier in what I am tempted to call the UK's Rainbow Revolution.

Beyond the most obvious evocation of the visible light spectrum as conveyed by optical fiber, the name also highlights the sad truth that many in the country have long been dreaming, mostly in vain, of a place, somewhere over the rainbow, where we someday find ourselves with broadband infrastructure which is something more than "just good enough."

Most pertinently, I like the name because, just as the rainbow is a spectrum of different colors, each with its own character and place in the broader palette, what I see taking shape in the UK fiber market (at long last) is a range of players, all broadly in pursuit of the same goals, but operating in very different parts of the spectrum.

For my own part, I am now devoting pretty much all my time to corporate development work with CityFibre Holdings. The term "corporate development" is probably overly vague to most people, but my role involves a number of aspects, including business and commercial strategy, service provider relations, vendor relations, financial market relations, as well as collaboration with pretty much every part of the business. It is fascinating and enjoyable, and Greg and Mark have assembled a team and investor group which is a genuine pleasure to work with. We are currently in the middle of a re-branding process, but suffice it to say that we will be much more visible in the coming months as we unveil our plans.

In the course of analyzing the market and how it is (finally) changing, I have been fortunate to come into contact with some of the other emerging players in the space. I have met Boris and Dana from Hyperoptic, who are hugely impressive and have a really interesting business model for deploying fiber in high-density MDUs, which I guess I would describe as "hyper-local." At the other end of the rural-urban spectrum is Matthew Hare and his equally impressive, equally hyper-local Gigaclear. I think both of these companies are very well-placed to succeed in their respective market segments. What has surprised me in studying their approaches, and it speaks volumes about the early state of development of the UK market, is that there are no visible competitors to them in their chosen niches.

And just this morning, we see the arrival of a new entity to the market, BroadwayPartners. Led by the tireless and talented Adrian Wooster and supported by an equally-talented team (each of whom I have met in various contexts), it looks to me, as a total outsider, as though they are harnessing the network of interest built around INCA's important demand aggregation efforts to a corporate structure which can plan, finance and implement projects in conjunction with local (presumably rural) communities. Based on my observations, this is a critical element which has been missing at the local level, and I think the market can only benefit from the arrival of such an entity.

I am also keen to learn more about their plans for a national investment fund. This is the sort of development I have discussed with people in a number of countries, but so far this concept has remained just that, with one notable exception. I'm more than pleased to see someone rising to the challenge in the UK, and this alone is a pretty good measure of how things are changing. The gauntlet is now being laid at the feet of the investment community, and I think the opportunity is huge.

INCA's Malcolm Corbett has a graphic he uses in presentations, which we have appropriated (with his blessing) for our own slide deck, which shows a "fund-raising thermometer" of the kind you might see on the wall of a church or in the hall of a school, to track progress towards a funding goal. Taking the "worst case" (which I think might still be on the optimistic side) from Analysys-Mason's work on behalf of the Broadband Stakeholder Group, and mapping this against the total of investment publicly "committed" by BT, Fujitsu and BDUK, we only have visibility on perhaps 1/6 of the capital required to take us "over the rainbow."

To quote the Chancellor of the Exchequer (as inspired by "High School Musical," apparently), "We're all in this together." BT's balance sheet can't carry the entire project. Virgin Media is 3.7x levered on an LQA basis, suggesting it will remain constrained, at least in terms of major infrastructure projects such as required here. There is a yawning funding gap to be bridged, and the only response I can see, apart from giving up and resigning ourselves and our descendants to inferior infrastructure, is for the investment community and the talented people capable of successfully deploying infrastructure to get busy and get on with realizing this opportunity.

Which is what I finally, after years of frustration, see happening around me and in my own working life.

None of this is to denigrate or ignore in any way the early efforts of local entrepreneurs, activists and visionaries across the country. To the contrary, in my view, it is only pressure from the edge which promotes awareness of the opportunity and catalyses broader action. So, thanks to all of you. I've seen many false dawns in my long involvement in telecom, but this feels like something new and positive. I'm tempted to say that the train is ready for departure.

Bad telecom metaphors in religious propaganda, part 1

2011-06-04T13:06:00.003+01:00

From what I remember of my early years Sunday School experience, I think they really mean "upload," surely. But my burning questions are: is there traffic shaping or throttling involved, what's my SLA in the event of a network outage, and does the Almighty's Skynet operate at the same frustratingly slow speeds and high levels of asymmetry that we suffer down here on Earth? If not, maybe He can help us sort out our broadband infrastructure problems.

Jump

2011-06-02T23:22:00.003+01:00

In the age of the ubiquitous cameraphone, there is a lot of nonsense and noise, but sometimes even fairly mundane situations provide us with priceless opportunities to document profound unintended irony. Close examination of the placard below the larger picture shows that the text states "Orange fire evacuation procedure for meeting rooms." This made my day.

Fiber envy

2011-05-24T12:34:00.002+01:00

Hats off to friend and colleague Herman Wagter (and Dirk van der Woude, who makes a cameo appearance via video conference link) for this recent appearance on PBS' "Need to Know" program. I couldn't agree more with the views he expresses here. It's a powerful measure of the sense of frustration experienced by broadband consumers in the US that PBS would see a case for viewing the UK as a success story based on more competition and lower prices, while, conversely, many I know in the UK would gladly pay more for a better product. You get what you invest in.

Watch the full episode. See more Need To Know.

Welcome to the gig time

2011-05-23T16:26:00.004+01:00

Enfant terrible HKBN's press release today heralding 10,000 users of its 1Gbps service started me riffing on "catchy" marketing tag lines for a one gig service:

"Think gig"
"Gagging for a gig"
"Go to work on a gig"
"Gigs might fly"
"Welcome to the gig time"
"The gig chill"
"The gig bang"
"The Gig Society"

Feel free to join in...

What ever happened to...?

2011-05-04T12:05:00.004+01:00

My friend and eComm founder, Lee Dryburgh, recently made a very brave post, in which he sought to explain the personal background to his recent relative inactivity. It makes for tough reading, and it's not the sort of thing many people would be comfortable publishing into the wide world, but Lee's no ordinary guy, and I admire him tremendously for writing it.

It made me think that perhaps I should also attempt to explain my neglect of this blog and its (probably) declining, but loyal, readership. It's not that I don't love you all - it's just that life has been challenging over the past three years.

In summer 2008, my seemingly promising career was disrupted by the unravelling of Merrill Lynch. My role in the PCG principal investing unit was all about developing new investment opportunities, but with c.$10bn in (mostly) illiquid assets across its various principal investing groups, the Thundering Herd was obviously going to be in run-off mode (things obviously got much worse from there), so onto the street I went. At the time, I put a brave face on it, saying that I needed "THE job," not "A job."

This was a nice sentiment, but hugely overly optimistic, as I soon discovered through spending nearly two years engaged in an effort to launch a new fund. When we began, it seemed unthinkable that investors would not be falling over one another to back such a high-quality team, but for whatever reason, we struggled terribly. In retrospect, I should have left at the end of 2009, when the cash burn was still just about bearable, but I believed in the people and the proposition. Most of all, I believed I was doing the best thing to secure my family's financial situation in the long run - after all, I was a founding partner in a fund which was bound for greatness, right? Ultimately, as the launch date approached, it became clear that the economics were not going to be anything like what I had assumed. After two years of cash burn, rather than committing to something punitive which would have made me unhappy from day one, I decided to walk away. This was an extremely difficult choice to take, and it was an embittering experience, but I determined that I would be better off taking my chances alone.

During all this process, my marriage collapsed in August 2009, with all the pain, regret, disruption and stress unavoidable in such a situation, especially where young children are involved. I moved out, we sold our home, all very devastating stuff. As these things go, I think it has worked out about as well as one could hope, but it's been extremely tough for everyone, and one can never be absolutely sure whether the course taken was really the best one. I guess our kids will give us some idea when they're much older.

Beyond the emotional trials of all the above, it has genuinely been financially devastating. I had to laugh a couple of years back, when Andy Abramson referred to me in a post as "Mr. Money," or something along those lines. "If they only knew." Without the support of family and friends along the way, I'm not at all sure where I would be today. This kind of crisis also allows one to separate true friends from those who fall into other categories. Unsurprisingly, I now consider myself to have far fewer friends.

So, leaving the fund in December last year, I had to confront the lack of a Plan A, and began having interviews with various parts of the financial world. Unfortunately, these have largely consisted of time-wasters and boneheads: a team looking to recruit a TMT specialist with a lot of experience, who ultimately determined that my focus would be "too narrow," an accusation I have never encountered before (typically, it's just the opposite); an aggressive Etonian hedge fund analyst who laughingly dismissed credit analysis as an irrelevant exercise for equities analysts; the inevitable stupid questions about whether or not I still have a "franchise" as an equities analyst. Maybe my CV is just too odd, or maybe I'm too experienced, but so far there have been no obvious routes back into the finance arena.

Hard as these years have been, I wouldn't want to give the impression that I view them as a lost cause. Many valuable lessons have been learned. I've rediscovered some interests I had neglected previously. I have played a significant part in the recording of what I think is a truly great album. I have reunited with old friends to play music live. I have realized a long-held plan to create a purely personal blog with a focus on music and associated recollections. I have learned a lot about myself and human nature. My children have grown beautifully. The sun is shining today, and I am still alive.

Fortunately, my advisory/consulting activities have also heated up since the start of the year, and I'm involved in some really interesting projects, all around bringing fiber to market faster in countries where it has been woefully underdeveloped to date. Hopefully, I will be able to write about some of these explicitly in the future, but for now I can't really share any details. As we approach the third anniversary of life derailment, things feel as though they're finally starting to turn around.

So that's it in a nutshell. I often haven't felt like updating this blog, have been otherwise distracted, or have had something interesting to write about which I couldn't write for commercial reasons. I will work to rectify this situation, but probably only when I feel there is something genuinely interesting to say. There is far too much noise in the world, and not enough meaning.

Finally, so this doesn't end up as a purely self-indulgent exercise, have a look (if you haven't already seen it) at the announcement by KPN of its acquisition of cable company Caiway earlier this week. This is another typically market-leading step by the Dutch in the development of alternative approaches for funding fiber infrastructure: KPN commits to open-access as a network opco, but the passive network assets remain in the hands of the Common Infrastructure Fund. Thus, the long-term money aligns itself with assets whose return horizons match its own obligations, and strips out the service provision layer and customer relationships. KPN immediately gets access to incremental infrastructure without having to build or own it. Mark my words, in the long march to a fiber future, we are going to see much more of this. I just wish there were more infrastructure investors with the vision which CIF seems to possess.

Onward!

Who said there ain't no free?

2011-02-24T16:47:00.003Z

On the off chance that you haven't seen this mentioned elsewhere, drop whatever it is you're doing and head over to the Diffraction Analysis site to claim your free copy of "A World of Fiber," penned by my friend and associate Benoit Felten, a.k.a. "The Godfiber." Hurry while supplies last!

Wednesday wondering

2011-01-26T11:10:00.002Z

I know there are a lot of sell-side analysts, buy-side analysts, fund managers, industry analysts, consultants, IR and PR people who read this humble bloglet, and I would like to ask for your valued feedback on a question. Across the broad TMT supersector in Europe, which companies do you think have the best IR/PR/analyst relations functions, and why? Conversely, which have the worst, and why? I value your views and guarantee complete confidentiality. So, hollah at me!

Tuesday trivia - Thomas Watson on the development of the telephone

2011-01-25T13:12:00.002Z

Reel 1

Reel 2

Monday ramblings

2011-01-24T14:07:00.003Z

I've got plans for a couple of more substantive posts, but until those materialize, I may content myself with sporadic and short, quasi-Tweet output.

If you're a European interested in broadband, and you want to depress yourself beyond what you might normally expect from a Monday in January, then check out the latest update to the reliably humbling Akamai State of the Internet Report, just out today (registration required). If you consult the ranking of the world's 100 fastest cities by average connection speed on page 12, you'll see that you have to read down to number 48 before finding a non-Asian name, and even then it's a Romanian city. (I'm curious to see Hong Kong listed as number 46, with an average speed of 8.9Mbps. Given that fiber purist City Telecom has c.25% of the broadband market, and fiber offerings from competitors in the market are of similar scale (combined), this seems to imply that the DSL and cable customers in the market are getting pretty dismal throughput.) Also of interest will be the mobile statistics on pages 28 - 29, particularly the observation that just over one-third of mobile networks monitored saw content consumption double YoY in Q3 2010.

The United Colors of Diffraction Analysis

2011-01-18T12:40:00.002Z

If there's one thing of significance that I can point to about this humble bloglet, it's that, once upon a time, it was a relatively ground-breaking thing, and as such, it apparently inspired others to launch their own. Or, at least, so I am told by some of those who did.

I remember an email exchange, I think on a Friday, with Benoit Felten, in which I urged him to start his own blog, and sure enough, the following Monday, Fiberevolution was born. Prior to this, he and I had been in touch for a number of years, kicking all-things-fiber back and forth via email, and he provided me with a number of insights which ended up in the pages of this blog. So, for me Fiberevolution was, in fact, a very natural evolution whereby Benoit emerged to meet the gaze of the public eye. His success in building the site into a trusted and credible brand within the industry has been little short of stunning.

One inherent trait of evolution is that it is perpetual, never-ending. As you may have heard already, Benoit has now taken his evolutionary journey to the next stage, establishing his own business dedicated to NGA research and consulting, Diffraction Analysis. I'm excited for him, as a friend and a respected colleague, and I have no doubt that it is destined for great things.

I'm also hugely gratified that he has chosen me to be an associate in this effort, alongside two other people I hold in very high regard, Herman Wagter and Costas Troulos. Thus, we start life as an Anglo-American/Dutch/French/Greek mash-up, with equally disparate backgrounds and areas of interest, but all unified under our shared interest in the fiber access (r)evolution and all the change that it may engender.

We'll all be at the FTTH Council event in Milan, and I'll hope to see you there.

Monday morning levity

2011-01-10T10:42:00.002Z

I've posted both of these to Facebook previously, and no doubt some of you will have seen them before, but it's approaching 11:00 AM on Monday morning, so I reckon you could probably use a harmless laugh or two by now.

First, Steve Mobs of Mapple, addressing the faithful:

Secondly, Ronnie Corbett, from his Christmas special, with Harry Enfield standing in for the late Ronnie Barker:

7:35 of sanity on "Mad Money"

2011-01-09T12:46:00.004Z

I have followed the City Telecom story with a great deal of interest for many years, and have been fortunate to get to know NiQ Lai and to visit the company to see how it works. So I was pleased to stumble across this interview with Jim Cramer from late last year, following the release of the company's 2010 results - in which it blew the lights out. Cramer is a bit confused at a couple of points, but NiQ handles him graciously and is given the space to make his case very well. No sci-fi bullshit, no delusions of content-aggregation grandeur. Rather, an overtly stated love of over-the-top services, and an admission that offering the "fattest, dumbest pipe in town" is "kinda boring, but profitable." By the end of this year the company will end a decade-long build-out in Hong Kong, which appears ingenious in retrospect, but at the time it commenced, was well wide of industry consensus, and considered a suicidal act by some. The stock is nearly a "ten-bagger" over five years. Yet more proof, if it were needed, that consensus is often wrong.

The best is yet to come

2010-12-31T16:45:00.001Z

Or something like that. Happy New Year from EuroTelcoblog. See you in 2011, and yes, that includes you, persistent comment spammers!

All I want for Christmas is...

2010-12-10T20:16:00.003Z

After two years, I have now left the mCAPITAL project. I wish the team success with their imminent launch.

As for next steps, I have a number of irons in a number of fires, but I am also a big believer in crowd-sourcing, so if you, dear reader, have any suggestions, opportunities or propositions in mind, I am very happy to listen.

Happy Holidays from EuroTelcoblog

2010-12-10T17:24:00.001Z

BT Infinity, to the 'hood and beyond!

2010-12-09T10:50:00.004Z

While walking around my neighborhood in the past couple of days, I've seen signs that the good people of Greater Dulwich are heading for Infinity. The first I noticed is on Townley Road, along the fence surrounding Alleyn's School. No doubt the local kids will find the added bandwidth advantageous in videoconference interviews for those precious places at Oxbridge. Future members of the elite should not suffer undue latency.

The second is on Upland Road, just a few meters up the road from my humble hovel, and only about 500 meters from the local BT exchange. Still, I can practically reach out the window and touch the Virgin Media cabinet I am connected to, so I see no incentive to consider switching, at least until it is real FTTH. By which time, no doubt, I will be in a nursing home.

So the next time you're passing through SE22, you might just catch sight of a mysterious white horse wandering inexplicably through shafts of light cascading from the heavens, as people of all ages, classes and races smile approvingly. Surely this is the biggest buzz since currency decimilization, or the introduction of the banana.

Absence of Persuasive Incentive

2010-11-29T10:29:00.003Z

As I monitored the intermittent tweetstream from the Telco 2.0 event earlier this month in London, one exchange between attendees caught my eye. One tweeter posited, "Are telcos still mainly driven by fear?" to which another responded, "Gone beyond fear - into risk avoidance because of job insecurity." I initially thought about writing this post upon reading this exchange, but got bogged down with other projects. Then a couple of weeks later Benoit Felten suggested he was generally on the same wavelength, and this prompted further reflection.

I, and a great many others, have pilloried or mocked the industry over the years for what seem to be inherent and persistent cultural or structural inhibitors to innovation. At times I have questioned whether it was even worth the effort for telcos to try to innovate on the services front (as I stated in point nine here), given my view that their true source of cash generation is infrastructure, with their retail units merely another end customer (albeit typically the largest) for their genuinely profitable wholesale services.

Contrary to impressions some may have, based on bland conference presentations, telcos are actually populated and managed by human beings, and what I have lamentably failed to consider over the years is the influence of the basic element of human self-interest in defining their behavior. In other words, what incentives do the people inside telcos and their shareholders actually have to promote change? I'm coming to the conclusion that in this question lies the key to the issue - while pretty much everyone I know in the industry would acknowledge a need to promote change and innovation for its long-term health, there stands in the way a problematic "telco API" (Absence of Persuasive Incentive), which leads to inertia. And viewed through the lens of human self-interest, I think this is an entirely reasonable reaction.

Consider, for example, the lack of alignment between radical thinking and investor conservatism. Investors on the whole view incumbent telcos in mature markets as reliable sources of cash, like utility businesses. As an extreme example, France Telecom's dividend yield is currently 8.7%, and having just pledged to maintain the dividend at the current level of EUR1.40 for three years (from which the French government stands to collect EUR1bn per year), it is hard to see the company backing away from this. So as, say, a pension fund portfolio manager, you have a company with a reliable dividend yield higher than some of the yields on offer in the "high yield" bond space at the moment, theoretically with lower risk, so why wouldn't you want to own it? And why would you encourage the management to do something which might put that at risk, particularly if you have limited confidence in them to actually execute it? So you urge them to just keep doing what they do, better, with fewer people, and to hand over any excess cash to you, because you can invest it more efficiently than they can. I think this is a fair representation of the general attitude of institutional investors, like it or not, and I can't find many flaws with this argument on the whole, taking their position into account. They have a fiduciary duty to allocate capital among different sectors, and if they see what they regard as reckless or irrational behavior in one sector, they will put money elsewhere. So from their perspective, "If it ain't broke, don't try to fix it." That doesn't mean they don't acknowledge the longer term risks to the industry, but they are charged with protecting people's pension money in the near term and adapting to change longer term, so when they see an industry capable of pumping out this much cash for now through maintaining the status quo, they will hardly demand change which increases risk.

Even if there were a consensus from shareholders of a need for urgent action, some of the projects involved would no doubt require continuity of management over the long term (e.g., a truly committed FTTH strategy is at least a 10-year project in countries of any significant size). Contrast this with the reality among telcos - data from the US in 2009 shows that C-level IT execs in telecom have the shortest life-span of any industry, at 4.7 years, and my experience with Europe suggests the same is true here. Think about the incumbents you know, and count how many people in senior positions in 2002/3 are still there now (indeed, in 2004 the telco CEO lifespan was four years). Just thinking of the companies I have covered in my career, I would put the average tenure at under five years, and in many cases more like three. So if you're one of these people, under pressure to stabilize cash flows and satisfy your shareholders, just from the standpoint of human self-interest, what incentive do you have to promote radical change, the effects of which you know you will never be around to see or be rewarded for? If you have four years to make an impact, and a choice between investing in an emerging segment with perhaps undefined revenue opportunities (M2M, cloud, smart grid) and an OSS/BSS overhaul which you are fairly confident will lower costs against a flat/declining revenue line, I think I can guess which choice you will make. Play the game, pull down that bonus, and work on your post-exit strategy.

So the executive suite has a revolving door, the organizational chart is written in pencil, corporate governance guidelines ensure short tenures for board members, and investors on the whole don't want to derail the gravy train in the short term as they regularly reassess the long-term prospects. Arguably none of the key stakeholders is truly incentivized to look beyond the five-year time frame, perhaps with the exception of the rank-and-file employees who hope to retire with a pension, and the pension trustees themselves.

I had lunch recently with a very bright friend who has done a lot of work on the publishing industry and its attempts to get to grips with reinvention in a crater-scarred landscape of paywalls, e-readers, iPads, and smartphone apps. His platinum comment was along the lines of, "The discussion about transformation only got serious once managements were confronted with having to sack 70% of the newsroom." By which time, presumably, it is very late in the day. However, for a "beleaguered" telecom industry wherein a company like France Telecom can generate enough cash to commit to a EUR3.7bn dividend for the next three years while still having flexibility to invest in infrastructure and engage in M&A, that day still looks very far off indeed.

I, for one, feel as though my error has been in wanting too much from the telco, expecting it to react to a long-term threat with a quantum leap, when in fact, I now see, it has limited incentive to acknowledge or address anything more than a need for cautious incremental change and adaptation. I will cut it some slack in future. After all, it's only human.

The reports of my death have been greatly exaggerated

2010-11-05T16:37:00.003Z

Turn off your mind, relax, and float downstream to the good old, bad old days. October 4, 2006 - day one of the first-ever Telco 2.0 event. I was honored with the opening presentation, as "analyst in residence" for day one. In the presentations which followed, Abdul Guefor from Intel Capital further piled on the agony, highlighting some of the cultural and structural issues which hamstrung telco transformation, and warning, "If you don't address these issues, Private Equity will." An icy sense of dread enveloped the room, and the already-battered audience shook its collective head in pained recognition of the inevitable. And we were still at least an hour from the first coffee break.

"Private Equity" - two words which could inspire fear in the most self-assured telco management teams in 2006. The elephant in the room, wielding in its well-fed trunk a Sword of Damocles over the head of an industry still in therapy from the near-death experiences of the tech implosion. Anything was possible, nothing was unthinkable, even the unthinkable.

And the unthinkable continued a few months longer, until the credit market began to seize up, and the inevitable populist backlash began. Previously feared and respected, PE was now vilified, pilloried, and dragged before Parliament to explain itself. Schadenfreude gushed forth as access to LBO financing ran dry. The dreaded PE juggernaut found itself neutered, and the angry masses danced in the streets.

Well, not exactly, and not for long. As the quaintly named "credit crunch" (God, I cannot hate this phrase enough) intensified into a bona fide financial crisis, evil, greedy PE was replaced in the stocks by investment banks, financial regulators, hedge funds and politicians, to be taunted by village idiots and the swelling ranks of those who had miraculously become experts on financial markets overnight (and who, of course, had never fudged a self-cert mortgage or exploited equity release to buy a nicer car).

The perceived atrocities of PE were downgraded to misdemeanors, and the world moved on. With no access to finance, they could do no more harm, and anyway, their over-leveraged investments, apparently justified on champagne-and-Ferrari-fume-fuelled delusional assumptions of recurring access to refinancing, were doomed in this new era.

Well, that was the consensus view, but it's interesting to take note of a few recent developments in the telco space which suggest that the consensus was, once again, wrong. To be sure, there have been a few situations where things have gone spectacularly wrong. But there are a number of situations where things appear to have gone much better than anyone would have ever expected, particularly given the macro headwinds.

For example, German cable, an industry strewn with the corpses of investors who previously tried to improve competitiveness, has come of age and produced returns for PE sponsors. BC Partners and Apollo built a great business in Unitymedia, and were well down the road to an IPO when they opted instead to sell to Mr. Malone for 7.7x LQA EBITDA. The other German cable behemoth, Kabel Deutschland (KDG, an early 2006 secondary LBO by Providence Equity, which bought out partners Apax and Goldman Sachs) this year has successfully pushed out maturities on debt, defied market jitters by getting an IPO away, followed with a secondary private placement, and just this week, asked senior lenders to give the company greater flexibility in refinancing debt and paying dividends to shareholders. The last point is crucial - as the company approaches its target leverage levels, the sponsors want the flexibility to refinance more expensive junior tranches of debt and take cash out of the business in dividends, on the basis that the capital structure of the business will be self-sustaining. In summary, the PE sponsors have generated nearly EUR1.2bn in gross proceeds this year from sales of shares, and are now opening the door to a future dividend stream. I don't know what it's like to be a KDG customer or employee, but as an outside observer, this looks to me like pretty much the way LBOs are meant to work out. The sponsors have seen a partial exit, and minority shareholders are pretty well aligned with the sponsors' interests. The stock is up 50% since the March IPO (most of that since August), while Deutsche Telekom has managed only a 3.9% gain. I can think of far worse outcomes.

Or take Dutch cable company Ziggo, an early 2006 LBO by Warburg Pincus and Cinven, which many (yours included) dismissed at the time, given the 7.5x leverage the business was carrying. This year the company has joined the refinancing frenzy, placing EUR1.2bn in senior notes in April, at an 8.125% yield, and then returning in October for a EUR500m offering of senior secured notes, which was upsized to EUR750m due to demand, and priced at a cheeky 6.125% yield. Net leverage was down to 4.7x in the September quarter, so not entirely out of the woods yet, but very close to the level of debt UPC carries today as a matter of policy, with no adverse effects. The business itself continues to perform well, so presumably the next major milestone is an IPO, as the sponsors have now been in the asset for nearly five years.

Or how about TDC, still the largest incumbent telco to ever have been the subject of an LBO, and a flashpoint for criticism as well as various predictions of failure? I will hold up my hand and say that Denmark, one of the toughest markets in Europe, would not have been my first choice of target markets in 2005, and I was one of many who expected the company to have its lunch eaten by the rise of FTTH deployments by local utilities. Well, it's the job of the incumbent to play the long game, and TDC did this by allowing the challenger to fail, picking up assets in the process. The sponsors also commenced the dismantling of TDC's international mini-empire, which developed during the era when Ameritech controlled the company. Proceeds from this process are to be applied to further de-leveraging the company, which is apparently on the runway for IPO, and eventually a return to the ranks of investment-grade companies. I wish there were some Danish proverb I could quote about a vulture giving birth to a phoenix, but I don't expect it exists, and my Danish is very poor in any event.

Or what about beleaguered Spanish cable company ONO? Here is a company which every member of the distressed investing and restructuring community in Europe fully expected to end up in a debt restructuring in late 2009 or sometime in 2010. Of course, however, debt restructurings mean lending banks take write-offs/haircuts and end up owning assets they don't want to have to actively manage, like Spanish cable companies. So ultimately, ONO managed to pull off a forward start agreement with lenders, returning to the market to refinance in October with a EUR500m senior secured offering, which was up-sized to EUR700m (do you see a pattern here?), and priced inside 9%. That's one helluva comeback for a company which in mid-2009 saw its CDS trading in line with that of WIND Hellas - revealing similar expectations at the time for two companies which have subsequently seen very different outcomes. Apparently ONO's chairman was quoted by Expansion last week as saying the company would look to IPO when market conditions permit.

Hell, we've even seen the return of the dividend deal, which gives everyone in the credit market an uneasy sense of deja vu, but apparently not enough to keep them from joining in. Asian undersea cable operator and data center hopeful Pacnet last week closed a $300m senior secured bond offering priced at par with a 9.125% coupon. $100m of the proceeds are earmarked for a dividend to shareholders Ashmore, Spinnaker and Clearwater, typically something which bond investors frown on, but I understand that the deal was 2x covered at mid-week, with demand from Asia alone covering 80% of the announced deal size. Eventually it ended up 5x oversubscribed. And this is for a single-B-rated company (albeit a good one, I think) in a sector where investors have a large store of really terrible memories.

These are but a few examples of how things have gone right so far for PE investments in our beloved telco space, and I am not making any value judgements here about the PE industry, its tactics, or its ethics. It is full of smart people, and intelligence is a large part of survival, but in this case, I think it has also gotten lucky. "Lucky" in the sense that the popularity of the high yield market seems to have attracted a significant participation from non-traditional participants, many of whom will need to put money to work and are more interested in income than they are worried about short-term market risk or the yield compression in new deals which many of the rest of us have found so disturbing this year. In other words, there is a wall of money which seems to chase any deal which comes to market, and if you're a PE sponsor looking to refinance, it's a nice problem to have people queueing up to hand you money, sometimes even more than you asked for in the first place.

While I don't expect a return to the Golden Age of the telco mega-LBO any time soon, if ever, it does seem that finance is available for the right types of assets, and I expect PE to continue to be more visibly active. For one thing, as the examples highlighted above suggest, the 2006/7 era deals are moving into their fourth or fifth year, and the sponsors must surely be feeling pressure to generate liquidity events of some sort, or at least to put the building blocks in place. It's also important to recall that some of the funds raised in 2006 and 2007 are still nowhere near being fully invested, so there must also be mounting pressure to put money to work in new deals. Nor is it the case that inflows to the space have totally stopped since, though the climate is obviously more challenging.

So where should we expect new activity to come from? I think there may be three broad categories:

1) I think it may be of fairly limited impact in the telco space, but the trend towards secondary buy-outs (welcome to the FT paywall) may turn up some deals, as companies increasingly look to deploy older vintage capital;

2) Deals driven by a desire to augment the value of existing portfolio companies, one example being Silverlake's presence in the Skype acquisition, which has given rise to a partnership with legacy investment Avaya. Trying to predict where and why these occur will take careful analysis of existing PE/venture portfolios and a detailed matrix of good matches;

3) New deals, with a focus on strategic enablers, not the "big game" network LBOs of the past. I was intrigued by the two deals Carlyle announced last week, the acquisitions of CommScope and Syniverse. The former is a key infrastructure solutions provider to some interesting subsegments including wireless, fiber, cable, and data centers, while the latter is a key enabler of mobile roaming services and datamining for telcos. Maybe I'm reading too much into these deals, but it looks to me as if, rather than following the playbook of buying up network assets and sweating them, Carlyle seems to be working from an industry matrix which points it towards companies active in defensible strategic choke points. Which is an approach I like.

So welcome back Private Equity, you make life more interesting and keep us common folk on our toes!

And now a word from our sponsor

2010-10-28T10:50:00.002+01:00

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Low Tescosterone

2010-10-26T19:31:00.007+01:00

I've been seeing this ad on TV for the past few days, and I thought I'd share it with mega-uber value readers everywhere. In case you aren't acquainted with it, Tesco is a highly successful UK-based chain of supermarkets/superstores, with operations in many other countries. For some, the company represents a vampire squid on the face of UK retailing, and to others, a textbook example of masterful site acquisition and marketing genius (Tesco's ground-breaking loyalty card/data-mining approach can now be found in many walks of life in the UK, and is almost as prevalent as CCTV!).

Love them or hate them, they are typically very good at what they do, and one thing they have been doing for over five years now is running an MVNO in the UK. The network now has 2.3m subs, and is branching, with some success, into the contract segment from an historical pre-pay focus. So, with that background, here the company takes good-humored aim at the inflated egos on display among telcos when it comes to branding and brand extension. (This is particularly interesting/ironic as Tesco's long-standing CEO, Sir Terry Leahy, succeeded mentor Lord MacLaurin, who was chairman of Vodafone during its period of frenzied international expansion and global re-branding of local subsidiaries.)

Anyway, it's all good fun, but with a relevant and fairly obvious point which must be a source of discomfort for UK telcos. The Tesco customer regularly interacts with physical manifestations of the Tesco brand and its values: its stores, its staff, its carparks. Tesco is literally something the customer can get his teeth into, and while in the carefully-structured cocoon of its stores, Tesco can get under the skin of the customer - guiding, manipulating, gaming, and, yes, rewarding. In contrast, the telco customer experience of an operator's brand is almost an entirely abstract and barren affair, most tangibly measured in the relative indifference/ineptness of call center staff. No wonder there is an almost desperate sense of need evident in the branding/sponsorship activities of telcos.

Not for our beloved Tesco Mobile. No such self-esteem problem or delusions of grandeur in evidence here. Just rewards for customers via the "real world" brand, delivered with appreciation - a virtuous circle reinforced. Masterful. It will be a warm day in December before we see BT Group or Virgin Media rewarding customers with Christmas turkeys, though in this time of austerity, that might be just the strategy which would resonate. Members of the Dumb Pipe Taliban Gospel Choir, chime in, "Leave the retailing to the retailers."

Git your st00pid on

2010-10-15T11:39:00.006+01:00

Catching up on some long overdue blog-reading, I stumbled across David Beckemeyer's interesting post of September 25. I tried using his own redirect link, as well as bit.ly, to post a link to Facebook, but both times I was greeted with the following error message:

"This message contains blocked content that has previously been flagged as abusive or spammy."

I'm hardly surprised that Facebook considers openbook to be abusive, given that openbook is simply using a Facebook API to reveal the portion of its user base which has failed to activate security properly. Then again, given some of the fantastically low I.Q.'s on display (type in the drug reference, racist hate speech, or sexual buzzword of your choice, and watch the st00pid flow), one could also argue that this group of users constitutes a special needs group who should be given assistance (preferably in txt spch, innit) to tweak their settings.

No matter how you slice it, it ain't pretty, and I am most disturbed, though not surprised, to see that Facebook seems to probe and index even shortened URLs embedded in status posts before they are even posted. I'm sure Mr. Z would argue that he's trying to protect us from ourselves, and while I'm pretty good at that on my own, it seems clear that many FB users are incapable of, or uninterested in, really protecting themselves. I assume law enforcement, potential employers, and the intelligence services of a number of less-enlightened countries take a keen interest in the effluent revealed here. The next test comes in a moment, when, after I publish here, I attempt to post this link to my own FB page. Let's see how far the probing extends...

UPDATE: I was able to post a link to this to my wall, so it would seem that there is no sophisticated indexing of the target page going on here, given that the post contains two separate links to openbook. Still, I'm curious to see how the situation evolves over time. I'm probably being paranoid, but, as the old adage states, "Just because you're paranoid, it doesn't mean that Facebook is not out to get you."