TC2's David Rohde on Telecom

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News and Analysis From the Enterprise User Viewpoint

Sprint: Network step-up will happen, but not too soon to kill us

By Posted May 8, 2015

You’ll be glad to know that Sprint has a new network-upgrade plan called the “Sprint Next-Generation Network.” It will “massively densify” Sprint’s national wireless footprint.

Now tell me what you’re going to do with this information in your current wireless procurement. Very little, as far as I can see.

CEO Marcelo Claure and some of the savvier Wall Street analysts had quite a tug-of-war over this during Sprint’s first quarter earnings call this week. It’s unfortunate because it repeats a long-standing pattern at Sprint of grandiose plans that wither at a few touches. In Sprint’s view, it’s always the Next New Thing that is supposed to be the reason you buy from them. But in the real world, enterprise users need the Current New Thing to make a large commitment or a switch from somebody else.

Claure positioned the Sprint Next-Generation Network by talking up Sprint’s own RFPs to wireless carrier network vendors for great new stuff. Then the analysts basically asked, “Where are you going to get the money to pay for this? You just burned almost $1 billion in cash in the first quarter. And you have $4 billion in debt coming due in 2016 – and $33 billion in debt overall. What gives?”

Here were the collective answers to these challenges from Claure and Sprint CFO Joe Euteneuer:

  • We’re not actually spending real money on the Sprint Next-Generation Network until 2016.
  • We haven’t decided whether to participate in the 2016 spectrum auction or not, depending on the rules. In fact, we may sell some spectrum instead.
  • We don’t really have major debt maturities until December of 2016.

Okay, fine. But then what good is this talk of “massively densifying” Sprint’s network if they might not actually start or finish it in a time frame that justifies anyone’s purchase decision anytime soon?

You might remember other incidents like this at Sprint as it has progressively receded in relative performance, sales energy, and brand image. A few years ago it promoted WiMax as the savior technology providing fixed wireless broadband access to enable the carrier to compete for corporate WANs. If you’re like us at TC2 and LB3, you then asked about reasonably national geographic coverage and SLAs. I still remember the deer-in-the-headlights look of Sprint people when they had no answers for this. Eventually WiMax was thrown out in favor of a late start on LTE.

Some years earlier, Sprint hyped a fantasy product called the Integrated On-Demand Network or “ION” that was basically a working idea of reducing a big ATM carrier box into a premises device integrating voice and data access channels. I was a senior editor for Network World at the time, and boy did Sprint get mad when I kept challenging them as to how someone could actually buy this and put it to work. But they shelved it six months later because it was really just vaporware. Or, as one Sprint employee at a recent trade show told me: “Yes it existed – at Bill Esrey’s house.”

I’ll give Marcelo Claure this – in the mass market, he knows how to get people in the door. It transpires that Sprint’s “Cut Your Bill in Half” promotion has had the effect of luring consumers in for a discussion, only to realize that Sprint itself has a plan that they might be happy signing up for instead of “half off” the terms of an AT&T or Verizon plan.

The problem is whether each of these new customers helps Sprint or hurts them. Sprint finally got positive net new customers this past quarter, but not primarily in the demographic of postpaid power users that Verizon shoots for. Citigroup analyst Michael Rollins said in a report that Sprint’s negative cash burn of $914 million in the first quarter will widen to a total of $6.1 billion for calendar year 2015. Yikes.

We want Sprint to get this all fixed. Right now enterprises are unable to treat U.S. wireless as a fully commoditized market because Verizon and AT&T are able to claim sufficiently superior network metrics to toss around a good deal of FUD. (That’s our old friends in the competitive telecom market: Fear, Uncertainty and Doubt.) T-Mobile is still learning to speak enterprise, and Sprint logically should be the company that lights the competitive fire by making great offers over a comparable service to the Big 2.

But to do so, the company’s mentality has to come in line with the rigor of the enterprise market, with concrete improvements they can readily implement. Chasing rainbows isn’t going to do it – and to that point, may I ask what kind of a name is the “Sprint Next-Generation Network” anyway? Isn’t that term awfully played out?

I hope someone in Kansas City has the nerve to tell Marcelo Claure that, but I fear that no one does. Nobody seemed to tell former CEO Dan Hesse that Sprint’s previous network investment plan, “Network Vision,” was a pretty tiresome cliché as well.

Level 3 profits – yes, profits – must be matched by consistent enterprise bids

By Posted May 4, 2015

Rub your eyes in disbelief, and then come back to this post and re-read the following First Quarter 2015 results of Level 3, once the financial basket case of the telecom industry:

  • It made a no-baloney, no-asterisks net profit of $122 million.
  • It has no debt due to mature until 2018, and very little until 2020.
  • Its average bond interest rate is down to 5.3%, compared to 6.8% a year ago.
  • It projects free cash flow after all interest payments of over $600 million for the year.
  • Its stock market value crossed $20 billion the day after it announced earnings.

Talk about identifying an opportunity and riding it. Quite simply, Level 3 stepped into the gaping hole left by Sprint when it abandoned bids for large enterprise wireline procurements. (No, Sprint, I don’t need you to stand up yet another empty suit to argue that you’re “really” in the wireline market when you’re “really” not.)

Under CEO Jeff Storey, Level 3 has learned to speak “enterprise” and actually understand what that term means. Most pretenders to the No. 3 position behind AT&T and Verizon misuse the term “enterprise” as a synonym for “business customers” with no real understanding of scalability. Level 3 came in with an unabashed, full-featured SIP Trunking product and then branched out to full engagement in large transport and transformational procurements for Fortune-class companies.

Buttressed by its acquisition of TW Telecom’s very granular U.S. network (and, for what little it’s worth, TWT’s primarily non-large-enterprise customer base), Level 3 has played where the two other carriers that should be the natural new “Number Threes” – CenturyLink and XO Communications – have sometimes faltered.

CenturyLink has acknowledged that it’s going through a transition of its national sales teams, basically cutting out the deadwood that didn’t even know how to sell MPLS, much less other current products. XO just gets stuck on real scalability and its smaller metro footprint than Level 3, even though it can make some smoking bids for individual circuits.

Perhaps executives at these two companies should listen to Level 3’s earnings calls, where even the company’s CFO, Sunit Patel – between rounds of refinancing nearly all of Level 3’s previous short-term debt to the next decade – talks of “capillarity” in the far-flung Level 3 metro network. That alone tells me that the company “gets it” when it comes to the enterprise market. And talk about a 180-degree turnaround from the days when Level 3 thought it was hot stuff because it had the ultra-commodity of wholesale long-haul bandwidth – and nearly had a date in bankruptcy court to show for it.

So does Level 3 have it made? Hardly. Last week, at the Negotiate Enterprise Communications Deals conference in Orlando, it was striking how almost every corporate user is now engaged with Level 3 at least in RFPs if not already in their networks. But it was equally striking how unequal their actual bid experience is with Level 3.

Many enterprises have brought in Level 3 on one thing or another, and then used that tactical relationship to give Level 3 the opportunity to make a winning proposal on a large new network rollout. But other users reported that they were amazed at how high Level 3 bid on at least the first pass, and scratched their heads on whether to continue to use them as a competitive offset to their incumbent.

Are there reasons for this inconsistency? Almost certainly the complicated merger integration of Level 3 and TW Telecom is one of them. Throughout the industry, not everyone at either the account team or product manager level is hip to the way that enterprises “discover the market” via their RFPs, not just for fun, but for keeps. If I’ve got MPLS and Internet ports out to bid, with Ethernet access of 5M and up attached to a whole bunch of them, an RFP to AT&T, Verizon, Level 3 and perhaps one other is going to really show who means business.

Often that’s a question not just of the companies on the bid list but also the individuals involved. Many customers of all carriers talk about the ability to harness an account team that can really work their own internal organizations. That holds true across large incumbents and what we once called “second-tier” carriers but are really now “contending” carriers for major network upgrades and transformations.

At the top of the Level 3 org chart, Storey and Patel last week talked extensively on the subjects that stock market analysts naturally ask about – the next “deal.” Storey told them that Level 3’s next acquisition is more likely to be outside the U.S. because “we will not do anything that causes us to damage our integration of TW Telecom.”

But the “deal” I want them to focus on most of all is the next deal with an enterprise customer. Level 3 needs to build consistency and predictability into its responses and not count on slips by their competitors just because – oh for example – Verizon is letting itself get pushed around by its uber-profitable wireless side. We welcome Level 3 into so many more of our own procurement projects for our clients. What happens next in all of these will be fascinating to watch.

Maximizing Competition in Transformational Procurements

By Posted April 28, 2015

The following is a guest post by TC2 managing director Ben Fox.

Increasingly, enterprise strategic sourcing projects are focusing on transformation to deliver lower costs and improved services. Such projects can achieve savings and service improvements that dwarf what’s available from the low-hanging fruit of rate re-negotiation and sourcing like-for-like services.

Transformational procurements include a wide range of initiatives and technologies. They might include one or several of the following: 1) Feature-rich MPLS reached via Ethernet access; 2) Alternative network access technologies; 3) SIP trunking to replace legacy TDM voice; 4) Unified Communications and Collaboration; 5) Transformed data centers, and 6) A mix of public and private cloud services, provisioned and managed in many cases by an array of best-in-class providers using next-gen managed services and outsourcing.

That’s quite a set of opportunities, and they all offer the key dynamic that drives the return on transformational sourcing programs – enhanced and intense competition among service providers. This occurs in several ways:

  • Transformation projects level the playing field by significantly reducing the inherent advantage that the incumbent vendor normally has in a like-for-like procurement where there would be no cost, risk or work to stay with the incumbent. In transformational procurements the customer is already prepared for the cost and effort of the transformational change, whether that is with the incumbent service provider or a new service provider.
  • Customers that are proactively embracing transformation are seen by service providers as far more likely to change from one service provider to another. This encourages non-incumbent service providers to deploy their best bid teams and provide their most competitive proposals. And it equally minimizes any complacency from the incumbent service provider.
  • Transformational procurements put far greater emphasis on the service providers’ capabilities and solutions, compared to procurements for commodity network and IT services which tend to become mostly about price. Service providers resist simply competing on price for largely similar services, but they are far more attracted to competitive opportunities that will allow them to present the competitive differentiators of their transformational solutions.

Maximizing the competitive opportunity is the first step in maximizing the transformation benefits to your business. And not taking advantage of the competitive opportunity by sole sourcing transformational technologies and services would be a crime!

But in order for the transformational sourcing program to maximize the competitive opportunity, the procurement structure and process must enable service providers to deliver innovative solutions, while still enabling an accurate comparison between competing bids and solutions. That comparison has to include total cost of ownership, technical solution and capabilities, service levels and the commercial and contractual proposition. Striking a balance between highly prescriptive technical and solution requirements that risk stifling innovation, versus high-level aspirational, unspecific desires and end-state objectives that result in proposals that are impossible to objectively compare, is a very fine line.

Transformational sourcing programs that successfully tread this fine line exhibit the following key attributes:

Well-defined needs and objectives that have been “signed off” by all stakeholders. That minimizes the requirements changing and evolving during the procurement process.

A high degree of engagement and collaboration with service providers. Simply delivering procurement documents to potential service providers and sitting back and waiting for written responses does not breed success. Be prepared to present your needs and objectives to service providers at the start of the process and have multiple working sessions with them, both while they are developing their initial proposals and during the subsequent proposal evaluations and negotiations.

A robust benefits and business case that is sophisticated enough to evaluate a variety of different solutions and options. The business case must include current costs, future state costs, and the cost to move from the current to the future state, combined with the benefits case that examines operational resilience, performance, functionality and usability.

An integrated evaluation of solutions and costs. The negotiation team must include technical and pricing subject matter experts working very closely together, because different solutions drive different cost / benefit models. Keeping the pricing and technical evaluations separate does not work in transformational procurements – holistic evaluations are critical.

Transformational sourcing programs always have the potential to deliver best-in-class solutions at a market-leading price, but only when customers invest the time and effort in the sourcing process and in laying the groundwork for a highly competitive and successful procurement.

Six points to negotiate a market-leading ETF clause

By Posted April 27, 2015

The following is a guest post by Dorothy Hildebrandt, a TC2 Senior Consultant based in Washington, D.C.

Early Termination Fees, or ETFs, are ubiquitous in wireless contracts. As long as device costs remain so high that they require carrier subsidies, ETFs to recoup these subsidies over less than a full term are probably a necessary evil. But have you looked at your ETF clause in your contract recently? Has it changed in the past 2-3 years? Chances are the fee has at least been increased.

Historically, the major carriers charged $175 ETFs. If you still have this flat rate in your contract, you are very fortunate! But chances are it’s been increased by a recent amendment. AT&T now charges $325 for a terminated smartphone, while Verizon and Sprint are higher, charging $350 per smartphone. This makes T-Mobile look pretty attractive with their “no ETF” campaign, right? Not unless you want to start paying full price for unsubsidized devices (think $600+ for that new iPhone). Tablets and data cards have their own ETF fee ($150-$175 per terminated device), and machine-to-machine devices are usually $50 per terminated device.

Early termination charges can clearly become a significant and unwelcome expense due to employee turnover, changes in your workforce, downsizings and other business changes. So, what best practices can you follow to minimize exposure to ETFs while maximizing flexibility to give your users the latest devices? Here are 6 points to negotiate a market-leading ETF clause:

  1. Negotiate an effective ETF waiver pool that is percentage-based. Best-in-class ETF waiver pools can be up to 20% of the total number of Corporate Liable Devices (i.e. in any annual period up to 20% of lines can be ceased but the associated ETFs will be waived), but 10% is more common and we’ve been seeing a trend of the carriers attempting to reduce the percentage in contract renewals.  Which can hit your bottom line as employee line counts fluctuate over time. An alternative (and inferior approach if your line count is growing) is to set the ETF waiver pool to a set number of lines, regardless of whether your total line count with that carrier increases over time. To maintain both cost control and flexibility as you manage your user base, make sure you negotiate an ETF waiver pool that is percentage-based, not a set line count that equates to a specified percentage of the total count. Verizon is the guiltiest of offering only a specified number of ETF waivers and requires a lot of effort (and leverage) to achieve a percentage-based ETF waiver. Sprint and AT&T tend to be better in agreeing to a percentage-based discount, which works out well as the total corporate line count tends to fluctuate over the term of the Agreement. But we note that recently AT&T has been seen following in Verizon’s footsteps and offering a set-number of devices for which the ETF fee may be waived. Be prepared, as this tends to be a significant negotiation point.
  2. Make sure that ETF waivers are available during any month-to-month period. What happens if you are thinking about a renewal term, but suddenly realize that your existing contract expired and is now month-to-month? Are you still able to use any of your ETF waivers? It depends on what your contract says.  ETF waivers should be available to you and your users as long as your contract is in effect, which should include any month-to-month period.
  3. Make sure that line terms are only extended when users take subsidized equipment. Because the ETF is tied to prematurely terminating an individual line term commitment (usually 24 months), the carriers do their best to ensure your users are continually kept on a line term commitment to lock you in.  You know that great lower-cost custom rate plan that you just negotiated? Before moving any users to that plan, make sure to remove any language that would extend the line term if existing users are placed on that more cost-effective plan. You’ll see this often with Verizon, who is known to have a sentence in the fine print of custom rate plans stating that “new activations or equipment upgrades on this feature or a feature change for current subscribers require Corporate Subscribers to select a twenty-four (24) month Line Term or Line Term extension.” To avoid the early termination fee, make sure that the only time line terms are extended is when users upgrade or activate subsidized equipment to warrant the ETF fee.
  4. Avoid the ETF waiver pool being tied to sub-commitments. We’ve seen ETF clauses that require a minimum number of lines be retained in order to be eligible for an improved ETF waiver amount. If that minimum existing line tier or net new active device count isn’t met, the number of devices eligible to receive the ETF waiver declines significantly or goes to zero.
  5. Can you use ETF waivers for early device upgrades? The answer should be “yes.” You’re not terminating a line. In fact, you’re upgrading to a new device with a new line term. This should make your carrier happier, right? But often ETF clauses only apply waivers to early terminated devices and not to upgrades. To protect those users who may require a device upgrade before their line term expires (making them eligible), make sure that your ETF clause includes explicit language stating that the ETF waiver may also be used for early device upgrades.
  6. What do you mean I have to wait to use the ETF fee? The carriers are clever and want to keep your business (and revenue stream).  One way to do this is to require that users keep the new device for at least 180 days before it is eligible to use an ETF waiver. Make sure you remove such language to ensure the most flexibility as you manage your wireless environment.

Some areas are much harder to fight for. For example, don’t expect to use ETF waivers if you are trying to port devices from your current carrier to another. But if you have these six areas buttoned up, you’ve gone most of the way to improving the ETF clause – one of the most important negotiation areas in a wireless contract.

Choose the items above as ones you want to negotiate in conjunction with the overall deal you’ve been offered. The corporate use of wireless is so dynamic these days that I’m sure that several of these improvements will pay dividends for you down the road big-time.

Consumer broadband and the enterprise market: It’s all a matter of focus

By Posted April 24, 2015

About a year and a half ago, I noted a newly arising double-edged sword for enterprises, particularly those with very granular networks like retail locations. The issue was – and still is – the potential peril and reward of consumer broadband services like Verizon’s FiOS, AT&T’s U-verse, and Comcast’s XFINITY. (FiOS, U-verse, XFINITY – who comes up with these names? Oh yeah, the same people who make up words like “Verizon.”)

The issue arises when these consumer broadband product houses have a “business” (not enterprise) sales division and they see your branch offices as prospects, no matter how famous a corporate enterprise logo (yours) appears in these locations’ doorways. With many of these broadband services passing business locations, people at your branch offices often find these “business” offers compelling from a price-per-bit standpoint.

The problem, of course, is that signing up for these onesy-twosy offers would remove these locations from being contributory to your enterprise telecom contract commitment. And they virtually always come with their own individual “form” contracts, whose legal and business terms and conditions are, from the customer’s standpoint, awful.

Still, there’s all this end-to-end bandwidth out there. So we’ve been watching to see if these potential connections could ever develop into something more rigorous for the enterprise market. Two developments this week advance this ongoing saga.

The first is the frankly rather comical spectacle of watching Comcast’s proposed acquisition of Time Warner Cable go down in flames. Comcast CEO Brian Roberts was considered to be very well connected politically, and he clearly sold Time Warner (which, remember, has nothing to do with the TW Telecom that was sold to Level 3) on the idea that he could ramrod this deal in Washington as he had previous cable acquisitions. Thus, there was no real break-up fee for TW Cable if the deal failed, which is exactly what happened. (Which, by the way, is a mistake that T-Mobile never made, always insisting on a huge break-up fee for its two “failed” sellout attempts to AT&T and Sprint!)

On Monday I noted that the enormous amount of time that it took to decide on this merger would be matched by the huge post-merger integration time frame, distracting a combined cable company from any focus on the real challenges in selling to actual enterprises – comprehensive, no-excuses national bids with best-in-class terms and conditions. That at least equally offset any theoretical benefit from a “larger” in-footprint map, especially given that Time Warner Cable on its own had put out the word that it would be willing to make national Ethernet offers.

It’s ironic that the only two sources that seemed to pay attention to TW Cable’s national offer late last year were us and the website Telecom Ramblings, given that Ramblings’ reaction to this week’s merger failure was even more definitive – saying that it makes it more likely to impel Comcast into the enterprise market for real as either an organic growth opportunity or as an acquisition play for an entity like XO, Zayo or Level 3.

Meanwhile, back in the traditional telecom world, Verizon had some words about what it’s doing with FiOS. Verizon has often been criticized for limiting FiOS buildouts to nice-looking zip codes in their sprawling ILEC territories.

But in an earnings conference call, Verizon’s CFO Francis Shammo was at pains to explain that Verizon feels freer to build out FiOS to entire metro areas now that its ILEC map is much more completely contiguous from Virginia to Massachusetts – having sloughed off the former “GTE” telcos in Florida, Texas and California to Frontier Corporation and previously shed more rural locations in the old NYNEX territory as well.

Shammo derided the sold territories as non-strategic “islands” and said it’s “extremely viable” for Verizon to densify its core Northeast corridor FiOS bailout. Hey, that’s nice to know after all this time.

Note the common thread between these two developments: focus. Comcast in effect is being told to stop the financial engineering and decide what businesses it wants to excel at in true competition with others. Verizon is being dragged to fulfill its obligations to actually deliver broadband throughout the areas it’s decided to remain in as an ILEC.

In neither case is the fundamental enterprise worry about these services resolved – they’re consumer broadband services that still pass businesses coincidentally. And of course Verizon is a company that you really buy services from an entirely different division (although that whole side of the company is getting so infected by the wireless bug that account teams are increasingly dominated by the haughtier, less scrappily competitive wireless side).

It’s clearly an ongoing story. And it’s just speculation that a Comcast would really turn around from this cable merger debacle and purchase a national wireline competitive player. But they could certainly afford it, and I’m sure the option to do so is going to make its way into some internal decision memos for Mr. Roberts. We’re keeping our eye on this ball for you.

Living in the new Golden Age of circuit terms and minimum payment periods

By Posted April 22, 2015

It’s getting to be as if every telecom circuit out there comes with its own wireless-style contract.

Take a look around you in this newly ramped-up bandwidth environment. You’ll find that it seems suppliers everywhere want to put an individual contractual term on almost everything you buy.

Why? Because – to hear them tell it – they’re pouring their entire balance sheet into your network. Nothing just seems to be in “inventory” any more. You want a port, a circuit, a feature? Somehow they have to build it and “protect their investment.” If you rip it out in less than X number of years, you’ve crashed their model.

You don’t want to cause your supplier to go bankrupt because you were nice to them and actually bought their stuff, do you?

Okay, I’ll balance the scales here a bit. Obviously we here at TC2 and I specifically on this blog have lauded those carriers that have walked the walk and put their money into the ground. A healthy level of capital expenditures, or network investment, has proven crucial to supplier procurement wins and enterprise-grade network performance.

The issue is whether, in the process, the competitive market threatens to get unwound by enterprises choosing up partners for the next round of technology and never being able to leave owing to complacency in contractual terms and conditions. Even if you’ve been diligent about “Ts and Cs” in the past, consider the generic factors that are causing clauses like “Minimum Payment Periods” for a single network element to make such a comeback:

Big step-ups in bandwidth. Enterprises spent many years watering down and knocking out individual circuit terms on T1 circuits as antithetical to the spirit of an overall dollar commitment for the contract term. As T1s evaporate out of corporate networks – either by necessity or by choice, given many suppliers’ proactive replacement of NxT1 requests with Ethernet access proposals – the carriers feel free to claim new construction requirements.

The notorious new-technology restart. Historically in the telecom industry, a generational change-out in technology has given carriers a perceived opportunity to rewrite terms since they’re typically issuing new attachments or entirely new contracts anyway. It’s beyond their natural instinct to carry over hard-won qualitative concessions when there are “templates” and “forms” they can grab from their new product houses.

The training of new carriers. Typically a new generation of enterprise networking technology features a new carrier that (to its credit) successfully steps up to the plate. Often the new player comes to the final negotiating table with less understanding of best-in-class terms than the first tier whose prices they’ve beaten. It takes either losing big deals at the last minute, or diligent and proactive coaching on your part along the way, for them to learn.

The wireless effect. Verizon (especially) and AT&T now get a majority of their profits from wireless. The entire culture of the wireless business is different than wireline. Carriers may talk a good game these days about changing or in some indirect way “eliminating” mobile contracts, but they start from a base assumption that a device and a line come with a contract and a term. That cultural framework is bleeding over into everything, running contrary to the classic best practice for all of an enterprise’s mission-critical WAN services – a single minimum revenue commitment over the contract term, set at a reasonable percentage of spend.

Note that I’m leaving room for targeted, common-sense compromise. It’s obviously not untrue that an ultra-high-bandwidth offering, particularly something like an optical metro ring, does require a specifically devoted piece of network investment.

And there’s something to be said for going in with your eyes open. If a carrier says they can propose good pricing because they will build to your locations – the industry term-of-art that you may catch is “success-based capital expenditures” – then you may be looking at a large set of rigorous circuit terms in your proposed contract at decision time.

Of course if you’re also paying for their “success” through your portion of the costs of “special construction,” that should be another red flag on onerous circuit terms. And keep your eye trained for individual terms on network elements that are fungible – something that it makes no sense to uniquely identify. Trust me, they’re out there.

Remember that this is not always an either-or proposition – crafting the right wording matters. There’s a big difference between a 1-year term with 50% liability for an individual circuit or service, and a 2-year term with 100% liability no matter when you leave for the same thing. If your enterprise is doing reasonably well and you are continually installing or upgrading circuits, the former is probably not going to get in your way, but the latter may render your full contract expiration date meaningless because of the treadmill of circuit terms you’ve put yourself on.

Now is the time to re-focus on discovering the state of play among sophisticated enterprises in business terms and conditions for discrete services and bandwidth levels. The thought of benchmarking these terms should go hand-in-glove with the benchmarking of dollars and cents. Without it, the carriers will be living fat and happy with their new business and won’t have to work very hard to keep it. If ever this issue should be at the top of your procurement checklist, it’s right here and now.

Cable companies’ relevance to enterprise doesn’t depend on whether they merge or not

By Posted April 20, 2015

That’s going to be one heck of an agenda at the Justice Department on Wednesday when Comcast and Time Warner Cable arrive to discuss their merger. Or I should say, beg for their merger. The Justice Department staff now clearly has many points on which to propose to their senior political appointees that the merger be blocked.

Almost certainly the idea that a yet-bigger cable company could better compete for large enterprises’ business by having a bigger footprint isn’t going to be high on the list of topics, if it appears at all. But that’s always been our key interest in this round of proposed mega-mergers outside the wireless industry. And the tension here is analogous to the more public points of contention in this very prominent matter.

As often seems to happen when two giants in a legacy sort of industry (which cable is already becoming) propose to merge, their pro-merger arguments have an odd cast to them. Comcast and Time Warner are essentially arguing, “We’re actually not that good. We’re not even very relevant.”

They’re basically saying that cable TV is not a “thing” unto itself any more. It competes with a dozen other ways for people – especially millennials – to get their fix of entertainment, news, gaming, music, interpersonal communications, you name it. Therefore, in essence, their argument is, “Who cares if we merge? Don’t worry about it – it’s no big deal.”

Of course the flaw with that much false humility is that both of these companies, like AT&T, Verizon and CenturyLink, are broadband access providers with a certain type of incumbency about them. And that’s where an interesting historical precedent with the telecom industry comes in.

When it comes to the infrastructure side of the business, Comcast and Time Warner seem to implicitly promote the same sort of “if-only” argument that AT&T’s ILEC core, once known as Southwestern Bell or SBC, used to throw out there to obtain approval for its many roll-ups. Despite their whole-hearted embrace of Ethernet access, cable companies are legendarily allergic to proposing out-of-market solutions. So in theory mashing together Comcast and TWC’s maps would make for more comprehensive proposals to enterprises.

But the fly in the ointment is that TWC already has said – extremely quietly but still – that it will do a national Ethernet offering including out-of-market, “Type 2” access pricing. How come they’re able to do that? Because there’s no real “rule” about size when it comes to determining whether a provider wants to make national proposals. The ultimate factor is the desire to do so.

And arguably the far more effective physical leverage in going national is not a bigger incumbent map – which can never be anything like 100% anyway – but a diverse, facilities-based competitive map, such as Level 3 has been developing, which predictably hits close to where many or most of an enterprise’s locations are.

Once again my psychology degree is of the armchair, not academic, variety. But when it comes to any supplier’s desire to expand its competitive energy, 25 years’ experience in this industry tells me that it always runs in inverse proportion to the amount of time the CEO in question is involved in financial engineering in New York and political lobbying in Washington.

In other words, the best thing that can happen to this merger is for it to be finally resolved one way or the other. Covering 20%, 30%, 40% or 50% of the country isn’t going to get Comcast, or whatever it’s going to be called, into the mix with Level 3, CenturyLink, XO and some others in enterprise proposals. Spending large amounts of executive time and energy on the enterprise market will. Let’s see where this goes. Hopefully whatever that is, it happens quickly.

Instability, inconvenience accompany foreign ownership of carriers

By Posted April 16, 2015

If deep pockets and open wallets were the main result of foreign entities owning American telecommunications carriers, then this feature of such a capital-intensive industry might be entirely constructive and transparent.

But it doesn’t seem to work that way. The fact that two of the four U.S. national wireless carriers are foreign-owned tends to create discomfort for their American subsidiaries in unexpected ways. Perhaps the inherently political nature of telecom exacerbates the problem.

You can see this in the debate I mentioned yesterday over whether carriers other than AT&T and Verizon should have “incentives” or “set-asides” for the re-use of UHF television spectrum due to be auctioned off in early 2016.

Both Sprint and T-Mobile say that as smaller carriers they’ll be priced out of the auction if the Big 2 are allowed to bury them in repeated bids for all of the airwaves up for grabs. But AT&T and Verizon have a pretty easy retort that they haven’t been shy to trot out.

Translated from Washington bureaucratese into plain English, it goes: “Whaddaya mean you’re ‘small’ carriers that need set-asides? You’re owned by two of the biggest companies in the world! SoftBank and Deutsche Telekom can bid whatever they want for any of the spectrum you need.”

It’s an intuitively logical argument that’s hard to question. What it fails to account for is the difference between capability and desire on the part of foreign owners. The worst pain for a subsidiary seems to come when an owner is both rich and remote. That can cause them to pull their punches on their U.S. investment without generating any sympathy, putting the U.S. carrier in a tough spot.

Recall that for years it was a truism that Deutsche Telekom badly wanted out of the U.S. market. After all, they twice “signed” a deal to bail out of T-Mobile in the U.S. – once officially with AT&T in 2011, and once unofficially in the first half of 2014 while SoftBank shopped the deal in Washington, only to be squashed by FCC and Justice Department officials.

Yet these periods of disillusionment with the U.S. market can turn back into enthusiasm. Now you can clearly feel DT’s intrigue with the U.S. market growing again, especially now that they’ve set John Legere loose to shake up the U.S. wireless market.

My read of DT’s current position is that they’ll be happy to sell out – for absolute top dollar, the way Vodafone did with its 45% stake in Verizon Wireless (which netted Vodafone an incredible $130 billion). In the meantime DT can enjoy an unusual period in the U.S. wireless market where pure subscriber acquisition, not profits, is the governing metric of success. That makes T-Mobile US a more and more valuable property every time Legere tweets congratulations to an American consumer who supposedly waves goodbye to Verizon, AT&T or Sprint.

But poor Sprint is watching its own foreign owner, SoftBank, appear to go in the other direction on the enthusiasm meter. SoftBank came into the U.S. in a blaze, certain that it could replicate its success in other countries in turning weak carriers into “strong No. 3s” gunning for the No. 2 spot. When that proved difficult – essentially because the U.S. isn’t a densely populated country like Japan or South Korea and Sprint’s network holes were far more intractable – SoftBank reached out to grab T-Mobile. Now that that hasn’t worked, look what’s happening.

SoftBank’s own fourth-quarter 2014 results came as a shock – down two-thirds, largely due to big losses at Sprint. SoftBank CEO Masayoshi Son has been widely reported as telling analysts since then that he’s not going to bet the entire company on Sprint. The company decided not to bid at all in the recent AWS-3 wireless auction and in fact has floated the idea of selling some U.S. spectrum, not buying more. It’s dumping some office space in the San Francisco area that it expected to need after acquiring T-Mobile.

And the negative reviews have flowed and flowed for Sprint’s ad campaigns and off-the-mark strategems like setting up shop in defunct Radio Shacks and putting cutesy cars on the road to deliver phones (eventually, to some customers, in some cities) – all of which seem tangential to the urgent need to stop finishing last in network ratings from RootMetrics and Consumer Reports.

Which is easier: Buy ads promising “half off,” or raise the capex budget by $10 billion to match Verizon on 4G coverage, speed and reliability? Mr. Son has many shareholders to report to in Japan, too.

Many cross-border acquisitions have been unwound over time – not only in the telecom business but also in many of the vertical industries in which large enterprise customers are found. I’m only an armchair psychologist, but SoftBank and Mr. Son don’t seem to be having any fun any more with their U.S. acquisition. Looking like you have a rich foreign owner but not benefiting from it a whole lot may be the worst of both worlds for Sprint. Over the next couple of years, while the U.S. market completes its transition to all-IP in the ground and all-mobile-broadband everywhere, something may have to give on that front as well.