TC2's David Rohde on Telecom
By David Rohde Posted November 18, 2015
Warren Buffett always says that value investors have to be patient and not try to make a killing all at once. Well, he’s not going to make an immediate killing with the latest investment by his Berkshire Hathaway – $1.93 billion worth of AT&T stock. AT&T’s stock is so boring it could make watching paint dry seem like a James Bond movie.
And yet upon such investments Buffett’s mighty empire has been built. The $112 million worth of annual cash dividends that this AT&T stake will pay alone could buy up the entire advertising airtime of the Super Bowl for Buffett to run a continuous loop of his Geico commercials and freeze out everyone else.
It’s easy to make too much out of why Buffett would pick AT&T rather than any other telecom stock. Many telecom stocks are out of the question for Berkshire Hathaway’s portfolio simply because their companies aren’t big enough. Berkshire has to buy enormous stakes in any of its investments in order to move the needle on its own results. And $2 billion worth of purchases in some carriers would so dramatically affect the stock’s trading patterns that the activity would be smoked out and Berkshire’s price forced up so much that it would ruin the plan.
I remember when Buffett joked about this dynamic in a video of a university finance class visiting him in Omaha. He told the college students that they could easily replicate his phenomenal results by carefully researching a much wider range of investments and then pulling the trigger. “You guys have an advantage over me because you’re broke and I’m rich,” he chuckled. It’s a good thing these were economics students, not art history majors. The joke might have fallen flat with a different crowd.
Still, Buffett has tremendous credibility and freedom of action across the entire economy in putting capital to work. An investment like this is fascinating to us at TC2 because it’s known that our deep client work puts our ears closer to the ground than almost anyone else, and we’ve periodically gotten questions from institutional investors as to what’s “really going on” in the industry. Almost all the time these questions are styled as to imply that they do want to make a killing and uncover a buried secret about an exciting new provider that no one else recognizes.
Buffett clearly thinks differently, and it’s known that on any investment he researches things himself to this day. No, I doubt he knows anything about MPLS, SDN, Ethernet access, metro wavelength rings, Service Guides, or the Withdrawal of Service Matrix. But I bet he would grasp concepts like multiyear term commitments, continuously overlapping individual circuit terms, “signature” account teams, and reciprocity of business among suppliers and customers.
He certainly would understand the value of brand names and the way that procurement awards have to be sold internally up an organization chart as well as across the vendor-customer divide. And in a world of scary technological migrations, he definitely would be familiar with our old friends Fear, Uncertainty and Doubt and the way they can be deployed by experienced vendors to guide customers along their preferred paths to whatever brave new world is just around the corner.
Obviously these days AT&T’s status as a leading wireless carrier with huge operating margins on that side of the business is a large part of the calculation. But I wouldn’t put it past Buffett to recognize and exploit the difference in the current vibe surrounding AT&T vs. Verizon. The very quality that has everyone wondering whether Verizon even wants to continue in the supposedly lower-profit wireline business is probably something that makes the contrarian Buffett lean the other way towards AT&T. I bet he recognizes the truth that enterprise wireline and wireless in combination are highly contributory to AT&T’s account dominance with so many customers.
Regardless of the exact thought process here, you don’t want to be the one to pay the “FUD Premium” for AT&T’s services just because of who they are and why a Warren Buffett is attracted to them. AT&T is clearly one of your valid choices to compete your major transformation procurement for the next comprehensive network architecture in your business. If they win fair and square, then as a new shareholder Buffett benefits. If another carrier wins, I think Warren Buffett will somehow do all right anyway.
Don’t you agree?
By David Rohde Posted November 17, 2015
If Level 3 is the enterprise provider with big momentum whose local sales teams sometimes get ahead of their prospective customers or don’t fully understand the deal environment, then CenturyLink is the legacy industry provider that sometimes seems to be falling behind the customer.
You’d think CenturyLink would have long ago established itself as the firm No. 3 in the U.S. national corporate market, supplanting Sprint. After all, CenturyLink is the third of the trio of big local carriers with a Bell legacy, having absorbed what long ago was called US West. It even owns Sprint’s old local telephone operations. It’s a substantial provider to the federal government, and four years ago it absorbed Savvis, one of the original enterprise hosting specialists.
So why isn’t it a bigger part of the conversation? Plenty of enterprises have some sort of business with CenturyLink beyond the obvious local connections in the 14 western states. But why isn’t it more often viewed as a competitive prod to AT&T and Verizon? When I look up the global Ethernet leaderboard, why do I see Level 3 tightly bunched with the Big 2 but not CenturyLink?
Why did I hear bad stories about implementation of CenturyLink’s SIP trunking service at a session at Enterprise Connect this year? And what on earth is this line in CenturyLink’s latest earnings report that it’s considering selling its data centers?
Part of your answer is right there – the earnings themselves. For a year now, CenturyLink has presented some of the dreariest earnings in the industry. Quarter after quarter the company reports problems in its various units. Senior executives are constantly expressing surprise at the performance credits they’ve had to issue in hosting and other services. It sounds like the company has lost key wholesale business, particularly in backhaul connections to wireless towers. (I wouldn’t be surprised if the Zayo Group, with its big reinvestment in capital expenditures, is eating their lunch there.)
CenturyLink at first promised that its overall revenues would be up in 2015 vs. 2014, even after accounting for the ongoing disappearance of primary residential “telephone” lines. But halfway through the year they had to take back the promise.
Granted, it’s no great sin in the enterprise market for an ILEC – well, let’s call these guys what they are, an RBOC – to be challenged in its local residential markets. But I think there’s a mindset here that has failed to account for a significant shift. When you look at a Level 3, you start by noting they’re not an ILEC anywhere. But what they are, by design, is a national metro player. Their model anticipates attacking metro markets with success-based fiber buildouts according to customers’ geographies, not the accidental history of the U.S. “telephone industry.”
Even Windstream – one of CenturyLink’s two peer companies in rolling up ILEC territories around the country – says it’s adopting something like Level 3’s model. And at least for medium-sized enterprises, we’ve recently seen excellent bids from Windstream. (The third of this type of telco roll-up, Frontier, has its hands full with two takeovers of unwanted ILEC territories from Verizon, one complete and another on the way.)
There also seems to be a deeper issue at play. Over the course of the year, CEO Glen Post and CFO Stewart Ewing have lamented the “bumpy ride” of a shakeup its sales force that, in so many words, was designed to weed out the deadwood. Sometimes they made it sound like some of the sales force never really got much past frame relay. But – I’m not making this up – in last week’s earnings call, Mr. Post himself at one point referred to “next generation MPLS” at the very time when some in the industry are trying to retire MPLS. At other times he sounds like he’s just reading words off a speech.
For his part, Mr. Ewing has had a habit in several earnings calls of blaming Ethernet for some of CenturyLink’s problems. He’s complained that it takes several step-ups in Ethernet bandwidth to replace the profitability of a copper access line. I’d suggest a better approach for Mr. Ewing would be to concern himself with fulfilling enterprises’ critical new bandwidth needs rather than moaning about them. Lord knows all of CenturyLink’s competitors are doing that.
The Wall Street analysts have gotten frustrated with CenturyLink’s leadership as well. The analysts are not always a swift bunch, but one of the best of them, Mike Rollins at Citigroup, pointedly demanded a clarification on CenturyLink’s statement that it would consider “strategic alternatives” for its “data centers.” Mr. Post clarified that “the sale of these assets do not include our cloud and hosting operations, [but] strictly the data center operations – the colo business itself.” Phew! But why couldn’t this have been clearer in one of the most important kinds of documents any company issues – the quarterly earnings report?
From a 30,000-foot level, some industry observers think CenturyLink is hobbled because it’s not a wireless carrier like Verizon and AT&T. Okay, maybe. Or maybe that gives them a focus advantage if they know how to capitalize on it. Is the company’s leadership up to it? The enterprise market is waiting for the answer right now.
By David Rohde Posted November 16, 2015
If you didn’t know our industry, you might think the obsession with carrier account teams was irrational. Why should enterprises be excessively concerned with whether their local sales executives have the influence within their organizations to get market-based deals done and resolve operational issues? What does it say about a carrier if it takes special intervention to achieve the reasonable goals of a prospective or ongoing customer?
Yet that’s today’s reality with virtually all service providers. In part it’s a legacy of the old U.S. tariff (now Service Guide) regime, where prices have to be customized rather than standardized to have any chance of being reasonable, much less market-leading. In part it also represents the business-critical nature of information technology and communications, where the way that bits and bytes flow is always intertwined with the special requirements not only of specific companies but also of their component strategic business units.
Executive account teams are only now being embraced by Level 3, a carrier that’s knocking on the door everywhere in enterprise wireline. The carrier’s extremely laudable financial turnaround and forward-looking investment model has the enterprise market’s attention. Level 3’s sales energy by far outstrips any other prospective No. 3 bidder for major U.S. enterprise projects. And its corporate broadband wireline focus arguably exceeds the wireless-obsessed Verizon and presents a major challenge to AT&T’s hegemony over many of its business customers.
The fact that Level 3’s push can’t be just generic but must be individually account-based has been recognized by Level 3’s senior management. As part of the integration with its acquired company TW Telecom, Level 3 CEO Jeff Storey has instituted a Global Account Management structure for major customers and prospects. Storey, an enterprise-market veteran who goes back to the 1990s frame relay or “fast-packet” revolution with the original WilTel, knows that there must be an effective, direct and – forgive the business buzzword – passionate advocate for the customer who can both grasp all of their needs and wield clout up Level 3’s own organization chart to get substantial enterprise deals done.
But on the ground, Level 3’s efforts have been inconsistent. I’ve spoken with major enterprise customers whose eyes light up with what they’ve been able to achieve with Level 3 – not just on SIP trunking (where Level 3 absolutely went to town) but also on major bids as well as incidental requests for circuits and functionality. Yet we’ve also seen Level 3 simply whiff at fat pitches.
Some of Level 3’s reps and teams seem to be under the impression that they’re supposed to wait for each customer to move to the next generation of simple Internet links into cloud or virtualized network services before taking procurements seriously. That’s a losing strategy for anyone who wants to serve the usually overlapping needs of enterprises for current and next-generation services. And sometimes Level 3 just seems to think business is supposed to come to it.
While I know that customers pound the table in frustration over what AT&T and Verizon do or don’t do in their ongoing relationships, the simple fact is that the new player has to underbid them to win business. Mistaking customers’ dislike of the two industry giants for a lack of reliance on them is a rookie mistake for a prospective carrier. Level 3 should be past that.
If there are Level 3 account executives and teams who think they don’t have to sharpen their pencils and they can propose any old prices for the business, Storey ought to set them straight. The same is true of laziness or just ignorance of the contractual terms required to meet best practices for enterprises, or an exasperating failure to tie up loose ends by requiring customers to come back to them after the fact for every new pricing element.
When you consider that beyond the basics almost any substantial Level 3 “win” is going to include at least some investment in metro market and last-mile buildouts – which means promises, concessions and cooperation as well as a detailed financial understanding – then you can also understand the resource commitment that both Level 3 and its prospective customers have to make to get to a deal.
This is a moment that’s too good to waste. It’s ironic that the name “Level 3” – which originally was kind of a cheap pun on the third layer of the network stack – is now indicative of its candidacy to be a strong No. 3 in the market, and nothing like the also-rans who have come and gone while customers slouch back to the Big 2. Knowledge and energy on the “street,” even more than the very fine work over the last couple of years in the executive suite, will be crucial to where Level 3 goes from here.
By David Rohde Posted November 11, 2015
Well that much is settled. Verizon isn’t going to sell out your wide area network for a song. CFO Francis J. Shammo (you’ll see him referred to in the media as Fran) told a New York investment conference yesterday that the Reuters report that Verizon is considering selling enterprise wireline for $10 billion is “conjecture,” “ridiculous,” and other juicy descriptors.
“This is part of our portfolio and we will continue to support our enterprise customers,” said Shammo. Reuters newswire drily reported out his comments, helpfully linking back to its original story.
Verbal craftsmanship always counts in these situations. Of course Verizon is going to “continue to support” its customers. Telecom regulation and Verizon’s contracts with you require it.
And you and I know that Verizon is not going to pull the rug out from under enterprise for ten billion bucks. As long as that’s the ballpark encompassing the figures for such a transaction, denials are straightforwardly available to Verizon.
With due respect to TC2’s own highly valued Wall Street clients, sometimes the financial markets’ views of relative value fail. At a time when Verizon’s brand screams “expensive high-performance wireless” rather than “mission-critical corporate networks,” Verizon would be within its rights (and maybe even its fiduciary obligation) to sniff around for options. But in doing so it’s battling three perceptions:
- Everyone is going to the cloud, and “cloud” means Microsoft and Amazon, not Verizon, and that will somehow sink them tomorrow
- Wireless is sticky and wireline isn’t, confusing consumer wireless substitution for the enterprise phenomenon of corporate contract commitments, individual circuit terms, and fear of migration
- The value of wireline backhaul to a wireless carrier is a fungible commodity like other wholesale telecom with no profit margin, and it can just be negotiated back through an easy lease-back – oh really? tell that to CenturyLink which has lost profitable tower backhaul business, and Zayo, which is making good money on it
Of course Verizon itself is partly responsible for these perceptions, just by virtue of how it presents itself publicly and acts haughtily in private toward many of its own enterprise accounts.
The fact remains that Verizon’s stock rose merely on the rumor of only a $10 billion sale of such a critical business and fell back on the denial. Imagine what would happen if they got an unsolicited offer of $20 or $25 billion from people who would know what to do with one of the two large enterprise WAN shops. Now put yourself on Verizon’s board of directors and ask yourself what you would do then.
In the real world, Verizon has a stated goal of recovering its A-minus credit rating, which got dropped to BBB+ when they added almost $50 billion in debt to finish paying off Vodafone. They need this not for solvency but because the ratings make in difference in funding capital expenditures. And in that aspect of the business, Verizon has all but promised to stay one step ahead of everyone else in U.S. national wireless, and must prepare for the March 2016 “incentive auction” of low-band spectrum. (Yes, that’s the one that John Legere made such a stink about when he wanted Verizon and AT&T to be shoved out of more slices of the auction in favor of “small” carriers like T-Mobile that failed to stock up on low-band for less-dense markets in the past.)
We should be grateful that $10 billion doesn’t even get a real negotiation under way. Otherwise Level 3 might actually be able to afford it, and that would dramatically upset the developing dynamic of a new Big 3 in wireline (AT&T, Verizon and Level 3). But after Verizon completes its latest planned sale of ILEC territories to Frontier, there’s still going to have to be another “asset sale” of something at Verizon to dig out from under $112 billion in debt.
Yesterday I gave advice on how to handle questions about the pressures on Verizon, inasmuch as the Reuters news report may have been driven less by any reality to a specific deal discussion and more by the facts on the ground of Verizon’s wireless tilt. Keep those readily in hand. Anything that can happen in industry transition will likely be in parallel with the now live reality of network transformation in the enterprise world. There’s a lot to manage in both network technology and message management to your various stakeholders, and we’re on it. As they say in the news business, whatever happens will be a helluva story.
By David Rohde Posted November 9, 2015
I’d rather you hear this from me than your CIO or SVP. So at the risk of amplifying an incomplete and potentially misleading report, yes, a major news outlet reported late last week that Verizon is considering selling its enterprise wireline business.
In other words, Verizon would literally get rid of the business called at various times MCI, WorldCom, Verizon Business, or “your critical wide area network.” Oh and Verizon Cloud Services as well – the business originally known as Terremark. Check out the Reuters newswire story for yourself.
Panicked yet? Don’t be. But you need answers for the inevitable discussion. Here are half a dozen points that really are important at this juncture. Make sure to bring them to the table at least for internal discussion rather than be stuck for a response.
1. This is not entirely new. There’s no real significance to the fact that this came out in early November 2015 except that you now have to speak to it. Verizon has to give thought to “selling wireline” because it’s done far too well in wireless. Wall Street perceives that a great majority of the company’s value resides in its proven ability to charge a premium for wireless customers and, let’s face it, keep the vast majority of them anyway. For months pockets of Verizon’s own employee base have batted around the rumor that the company will “sell MCI” (and it’s possible you’ve already heard it that way). It has been, and will continue to be, part of the noise in the industry.
2. There are variations on this report. The parallel rumor that previously appeared in print is that Verizon will “sell FiOS” – in other words, its consumer wireline business. The potential buyers here are the same global buyers who are hunting for cable company assets in the U.S., Europe and elsewhere. Broadband connections into people’s homes are considered valuable because of the assumption that entertainment will move to streaming services. And Verizon’s FiOS is the gold standard. Which sale would come first, if either happens, would depend on the deal on the table. Which brings us to …
3. The reported price is ridiculous. Reuters says that Verizon is talking to purchasers in the arena of $10 billion for the enterprise business. For comparison, check these numbers: Sprint’s debt plus equity totals $49 billion, which is theoretically the amount of money someone would have to pay to buy them. Level 3’s stock market value is $18 billion, and they’re still no Verizon. Most incredible of all, a decade ago Verizon bought “MCI” (the re-renamed WorldCom) out of bankruptcy for $9 billion! The $10 billion number appears to be a mechanical calculation of 5 times (financial buzzword alert) “EBITDA” for Verizon wireline, which ignores the synergistic effect of Verizon sharing Big 2 status with AT&T by virtue of being in both wireline and wireless, and overvalues the competition for generic cloud services. No deal is going to happen unless the financial discussion changes substantially, as Telecom Ramblings helps demonstrate today.
4. But Verizon has massive debt, so “asset sales” are manna to Wall Street. Surprised? As an industry, we’re so used to thinking that “second tier carriers” (like Level 3) are (or used to be) financially challenged that we can forget what a trap the first-tier Verizon set for itself when it let Vodafone be a partner in Verizon Wireless. The result was a massive money raise to get the Brits out of Verizon’s hair. Verizon’s current debt is $112 billion – over one hundred billion dollars. So Wall Street is aching for them to sell something. (And certainly Frontier is tapped out after buying large ILEC territories from Verizon … twice!) In a way, this news was inevitable, even if you blanch, as you should, at being called an “asset” rather than a valued customer of Verizon.
5. The Wall Street Journal hasn’t bought in yet. When merger rumors occur, it’s because investment bankers leak. Who they leak to matters. Everything’s on the table these days, but when The Wall Street Journal reports something in the U.S. (or the Financial Times does so in Europe), it means the deal is at the serious stage. So far the Journal hasn’t bitten on this news. Of course that could change.
6. We’ve got enough problems with Verizon as it is. The real significance of this report may be less in what it indicates about the future than what it reflects about the present. Everyone who deals with Verizon knows that its wireless business rules the roost. Account teams are now heavily slanted toward the attitudinal background of the wireless business, which is more “we’re the best, take it or leave it” than the traditional MCI mindset, which was more “what can we do to put you in a car today?” Meanwhile, the carrier is bedeviling customers by shoving them into the Orwellian-named Verizon Rapid Delivery platform, often appearing to break carefully crafted transition language to make this happen.
Luckily, behind the scenes it’s obvious that Verizon wouldn’t dare make a move before resolving the utterly critical wireless-backhaul issues that a wireline sale transaction would engender. (Already at least one Wall Street analyst says this is exactly why such a deal probably won’t happen.) Even more than money, what Verizon values is its superior perceived wireless-network performance, and here’s betting that the time it would take to hash out leaseback and other arrangements would play out in public to give everyone plenty of prep time. But even that is several steps down the road.
Don’t worry, all of us have our radar out for you. Put this one in the “anything is possible” column. And remember, no matter how squirrelly any one carrier may be getting in isolation, it all dramatically plays out better if you line up your contracts and transition plans and procure everything competitively. The moment anything here changes, we’ll be on it.
By David Rohde Posted November 5, 2015
If carriers were ranked by their executives’ performance on quarterly earnings conference calls, Level 3 would be at the top of the heap.
Uniquely among carrier CEOs, Level 3’s Jeff Storey goes back a long way in the true enterprise wireline market. I actually have a mid-1990s business card from him when he was at the original WilTel, which essentially launched the frame relay market. As head of Level 3 today, he has a way of diplomatically but firmly redirecting Wall Street analysts’ questions to address their misconceptions about the market for corporate wide area networks.
He certainly needs that skill now, as several of the analysts on last week’s Level 3 third-quarter earnings call asked some of the stupidest questions I’ve heard in a long time. I swear that some of Level 3’s analysts on Wall Street have no idea how the company’s turnaround model even works.
Now that Level 3 is reporting actual bottom-line earnings and steady growth in its core North American enterprise market – with those revenues up 2.7% from the previous quarter and 8.3% from the third quarter of 2014 – the analysts are almost audibly drumming their fingers on the table waiting for Level 3 to revert to the bad old ideas that make analysts’ hearts leap but destroy prospects in the actual business market. Here are three of those areas that arose:
Stock buybacks. Two analysts pressed Storey and CFO Sunit Patel on whether they would start to use some of Level 3’s new annual rate of $600 million in free cash flow on stock buybacks to boost the stock price a bit more than it’s already risen. This is a horrible idea. Level 3’s entire success model is driven by Ethernet network re-investment and growing the number of its customers’ on-net fiber locations. Level 3 added 700 more customer building entrances in the third quarter. That’s great. It’s also only 700 buildings. Storey redirected the question to the need to find more buildings via winning more enterprise deals. Patel, the financial wizard, added a comment about spending precious investment dollars on buybacks only if Level 3’s stock price drops back to an irrationally low figure. These analysts need to be reassigned to covering a detergent maker with capital to spare or a software company with no physical buildout requirements and tens of billions in the bank to ask questions like this.
Comcast. Two more analysts, citing renewed statements by Comcast that it’s attacking the quote-unquote “Fortune 1000” market, in effect asked Storey if he’s afraid of competing with them in national enterprise. In so many words he answered: 1) “Okay, let’s see Comcast come up with the systems we have before I start worrying about them,” and 2) “Maybe you’ve heard of our other competitors AT&T and Verizon?” He even added that “we actually want to help Comcast” because they are a customer of Level 3 for intercity fiber, content distribution networks, and other services. One reason most of the “CLECs” failed was that they mistook potential customers’ apparent hatred of AT&T and (by whatever name) Verizon for a lack of deep reliance on them. Level 3 isn’t going to make the same mistake.
Data centers and other cool stuff. One analyst, noting that there’s been a lot of “M&A” in the “data center space,” pressed Level 3 on how happy its customers are with its data center services. I get it – this stuff matters. But other stuff matters more, such as Level 3’s bids for the actual wide area networks on either a transport or carrier-managed basis. Storey found a way to let the analyst down easy. “If you look at each of our regions, our data center strategy is tightly coupled with our regional strategy,” Storey explained. “If you look in Latin America, data center is an integral part of the way customers buy our other services, our transport services, the various long-haul capabilities and other metro services. In North America [he said as if this is an equivalently important market], it’s not as integral. Customers want to buy data centers separately. They don’t care if it’s connected to transport or long haul or any of those other services.” Translation: While you analysts can inhale all the industry babble, my fiduciary responsibility requires me to succeed where most people spend most of their money.
Interestingly though, Storey has a similar challenge further down his own org chart. As part of Level 3’s merger integration with TW Telecom, it’s been instituting a Global Account Management structure that holds the promise of recognizing the rigorous needs of real enterprises. But we’ve seen cases where these Level 3 account managers do indeed act like the relevant market only consists of requirements for the latest and greatest. There’s nothing more frustrating to an enterprise customer than putting out a comprehensive RFP and having a company like Level 3 literally refuse to bid on the MPLS demand set because – well, why? Because there are no trade show keynote speeches about MPLS? Is Level 3 really going to make this same mistake as past new market entrants?
Jeff Storey has to know that some of his account teams are exactly like these clueless analysts who only want to deal with “cool” topics. Happily, that’s hardly uniform across the Level 3 account structure. Many other enterprises are reporting good – or even great – results from their engagement with Level 3 on new RFPs. So will you get a good result or bad result from your Level 3 bid inclusion?
Well, notice something interesting about Level 3’s earnings. Yes it’s growing steadily in North America, but it’s only growing 2.7% quarter-over-quarter and 8.3% year-over-year. In the same conference call, the normally brilliant CFO Patel got sucked into what I view as a rare mistake, when he was asked about network services pricing trends and he said that “we see little change in the overall pricing environment.” In my entire history of listening to enterprise carrier earnings reports, I have never heard a CEO or CFO tell the analysts, “You know what, guys, price per bit is really falling because hey, it’s technology and enterprises want to save money.” Well if what carrier CFOs say about prices has always been true, then today nobody would be able to step up to Ethernet access and gigabit bandwidths because the price would be astronomical.
Holding the line on prices wouldn’t make Level 3 revenues soar anyway. Winning lots more big enterprise deals that will do that. The great news about Level 3 is that almost everyone is engaging them in competitive situations. We can now say that Level 3 is the new No. 3 in U.S. enterprise networking. But will it be a “strong” No. 3? Here’s a memo to Jeff and Sunit at the top of the company: Keep sticking it to the analysts. They’ll have to give you credit if and when you start reporting double-digit growth as the remarkable new pure-play enterprise wireline carrier.
And make sure your key account executives don’t believe in any dumb advice implied by stupid questions either. Aggressive bid responses on fully comprehensive RFPs for current and next-gen services will tell the tale. Do that often enough and ultimately it won’t matter what the analysts think.
By David Rohde Posted October 6, 2015
The recent entry of Comcast into what it confidently believes will be core national enterprise competition with AT&T and Verizon occasions three additional thoughts about where the market is going. All of them relate to whether Comcast – a facilities-based heavyweight unlike any mere “CLEC” or venture-funded “competitive long distance carrier” – is going to have a major impact or is just chasing rainbows.
This is not a story that can wait two years while the Big 2 lock up major enterprises for the next generation of technology and try to convince customers that pure telecom transport deals, no matter how fat the bandwidth, are too boring for you (because they’re less profitable for them). I’ve not yet been invited to the Comcast boardroom, but it would be heartening to know that these three issues are up on a blackboard or whiteboard somewhere near the C-suite.
The brand. Comcast is kidding itself if it thinks it has a fresh start on its brand image with the enterprise market. In a way, the small-business broadband market that Comcast and other cable companies have been enthusiastically attacking is less susceptible to Comcast’s consumer reputation for bad customer service than the big-business market. All a small business has to do is get a great offer for connectivity from Comcast that beats the pants off competing options (not hard to do if there are no other carriers with building entrances), receive a reasonable-sounding service guarantee (even if more like a soothing retail “satisfaction” blanket than a rigorous network measurement), and sign the contract. By contrast, an enterprise always has an internal political task in choosing a brand-new vendor. Anyone up the management chain who laughs at the mention of the word “Comcast” can nix any consideration of the deal.
Sure, I get it: AT&T and Verizon are also unloved – but they’re not No. 8 on the list of America’s most hated companies. And yes I understand – it’s better to be hated than ignored, since consumers rail against Comcast largely because it provides a service that matters to them. But Comcast needs to be ready from the get-go to identify peer customers in whatever forum works for them to say that the new supplier is capable and “on it,” from network rollout through daily operations.
The power of the vertical industry is key here. Assuming they become relevant, Comcast will rapidly gain either a positive or a negative reputation throughout each of the broad financial, healthcare, retail and business-services industries. I’m assuming that like most new carriers it’ll have a rougher go in manufacturing, which can have longer relative last-mile loops – although even that is changing. Capture a major Fortune 500 manufacturing company and put all hands on deck in serving their needs every single day, or expect the whole initiative to fail.
The wireless equation. If Comcast is at all successful, events are bound to force it to make a decision: Are we a complete competitor to AT&T and Verizon in both wireline and wireless, or are we a wireline enterprise pure play like Level 3? Either decision is valid, provided it’s definitive. What’s not going to work is half-measures.
What’s driving this is the collapse to near-irrelevance of Sprint as a standalone company. The latest blow was a pair of announcements last week in which first Sprint said it couldn’t afford to participate in the upcoming auction of 600 MHz spectrum (well, they didn’t put it that way, but that’s what they meant in dropping out – they don’t have the money), and then said it was making up to $2.5 billion in operational cost cuts, which will obviously cost many jobs. Sprint’s last-line defenders said that the moves were perfectly rational to shore itself up financially. I agree. But it’s almost impossible to award business to a company that’s going backward like this in a wireless broadband industry that is relentlessly moving upward in performance requirements and network investment demands.
Comcast is kind of the obvious candidate to take Sprint off of SoftBank’s hands in a world where, especially after last week’s announcements, nobody really believes that SoftBank CEO Masayoshi Son fully has his heart in it anymore. That’s especially because Sprint itself has given hints that it’s begging for such a move from a cable company, and because a Comcast-Sprint tie-up would preserve the “four national carriers” policy of the current administration. But an alternate view would reconsider another go at a T-Mobile/Sprint tie-up to create – on paper – “a strong No. 3.” In our mind that only works if T-Mobile CEO John Legere gets serious about the business market – meaning he himself re-focuses on true enterprise rather than babbling on Twitter and Periscope about “Uncarrier 9.0.” But a genuine move like this from T-Mobile would free Comcast to be a next-gen WAN pure play, which is fine too.
The nightmare scenario is 18-24 months of press leaks, analyst forums, and back-door merger-conditions negotiations to figure out whether Comcast does want to be a wireless carrier or not. They’ve already been through that with the failed marathon saga of trying to buy Time Warner Cable. Top carrier executives only have 24 hours in a day like everyone else. Every bit of attention Comcast has to spend on “gaming” the industry before it completely decides what it wants to be when it grows up will rob it of its chance to succeed in core enterprise business.
The platforms. Comcast needs to recognize that enterprises don’t really have relationships with carriers just as a theoretical monolith. They buy on contracting platforms that must be related to specific Service Guides. They manage their networks, invoices and tickets on portals – which are not just a nice concept but go from really good to really bad (such as how many functions can be performed or how many locations or subaccounts are loaded, preferably all of them). Account teams are an enormous variable. No matter how nice it would be for any vendor organization to be fully responsive, the reality is that the effective influence of an account executive internally in his or her own company is a must in today’s world.
This is a “ramp” we’re continuing to watch. As an immediate note, I’ll be in New York City on Tuesday, November 3 discussing the industry supplier outlook as part of a special LB3/TC2 conference on Effective Sourcing & Transformation Strategies. Consider attending if you’re anywhere in the region. A glance at the packed one-day agenda will likely convince you. The story continues and we’re on it – we’ll soon see how much Comcast is as well.
By Jack Deal Posted September 25, 2015
The following is a guest post by TC2 managing director Jack Deal.
Two weeks ago the FCC approved a telecom acquisition that started as a back-page item in February amidst all of the attention-grabbing headlines regarding industry consolidation. It may look like so much reshuffling of the essentially residential “telco” business, but the impact on your enterprise could be significant – especially if it presages more such transactions.
In the deal, Verizon is selling its local wireline operations in California, Florida and Texas to Frontier Communications for $10.54 billion in cash and assumed debt. Here are the details:
- The deal includes 3.7 million voice connections, 2.2 million broadband connections, and 1.2 million FiOS video connections, the majority of which are consumer.
- It also includes switched and special access lines, as well as high-speed Internet service and long-distance voice accounts in these three states.
- It does not include the services, offerings or assets of other Verizon businesses, such as Verizon Wireless and Verizon Enterprise Solutions.
- Subject to FCC and state regulatory approval, the transaction is expected to close in the first half of 2016. The FCC gave its approval last week.
If this all sounds vaguely familiar, it should – Frontier purchased the rural network assets in 13 former GTE states from Verizon back in 2010. Frontier currently provides voice, data and video services to customers in 28 states, and reported having about 3.2 million residential wireline customers at the end of its most recent quarter. The latest deal more than doubles its customer total and is clearly significant for Frontier.
Why should businesses pay attention given the PR focus on the deal’s extensive residential services content? Because businesses purchase local services too, often in significant quantities. The states in question are three of the nation’s four most heavily populated and likely contain significant quantities of ISDN PRIs, DID trunks, business lines and other traditional TDM local service elements deployed for enterprises.
And also because, characteristic of the network communications space, the devil is in the details – in this case the reference to “switched and special access lines” as part of the acquired infrastructure. That includes not only the TDM local service elements noted above, but also things like Ethernet “local loops” that provide connectivity to both MPLS ports and Dedicated Internet ports for all customers, consumer or otherwise. After the deal closes, Frontier will take over the “last mile” infrastructure and responsibility for these circuits from Verizon.
Most large enterprises purchase interexchange (IXC) access under what is known as a “total service arrangement,” meaning that the interexchange supplier is the single point of contact for ordering/billing/maintaining the circuits and works behind the scenes with the underlying access provider. These customers will be expecting a seamless conversion to Frontier, and in many respects they will get one. The processes addressing ordering, provisioning, maintenance and billing are likely to remain unchanged as Frontier already serves as a local provider in other states and Verizon (as well as most major IXCs) already deal with them in that footprint.
But a key concern for some may be unexpected and possibly adverse cost impacts. Because the economics of special access pricing are opaque to the end customer, it is unclear if Frontier will charge your incumbent supplier the same, less, or more for the last mile connection than Verizon does. The impact (if any) to your bottom line will be determined by the specifics of the agreement you have in place with your incumbent total service access supplier.
If your IXC voice and data contract specifies a single, flat-rate price nationwide for any particular access circuit bandwidth (a best practice), you are protected – at least for now. For contracts that reference a particular region/state/zone in which access pricing varies by geography, you should be concerned if the reference is contained in the carrier’s on-line service publication (“Service Guide”) and thus subject to change at its sole discretion. In one case, a leading provider’s standard price for 50Mb Ethernet local access in the U.S. was between 23% and 84% higher in Frontier service areas than in other areas. Finally, if your deal provides only a discount on per-site access circuit pricing (i.e., individual-case-basis or ICB), brace yourself for change.
The remedy to this uncertainty for IXC deals is to make certain (as part of your next contract refresh) that the access circuit pricing your enterprise requires is specified in the agreement at a single nationwide rate for each bandwidth category. These rates should be fixed over the contract term, which will protect you from similar impacts when the next industry sale is announced. If you have this today, resist supplier efforts to remove it from the deal. If you must settle for a pricing structure that varies by geography, make certain the structure is specified in the agreement and fixed/rate-stable for the same reason.
For legacy local exchanges services such as ISDN PRI, DID trunks and business lines, the environment is different – part of your existing contract will be assumed by Frontier, part of it will likely remain with Verizon, and you will be negotiating with both (paying particular attention to commitments) as the expiration date approaches. Beyond this, an enterprise might anticipate fewer qualified support personnel (technicians, account/customer service representatives) as a result of the ”synergies” that always seem to accompany such acquisitions.
If you purchase local exchange services through an aggregator such as Granite or MetTel, watch out for changes in Frontier wholesale pricing that your vendor will doubtless attempt to pass along to you. The lack of market competitiveness for local services will greatly limit your negotiating leverage, so the best way to mitigate any unpleasant impacts is to migrate legacy local voice services to SIP Trunking service with a leading industry provider. Not only will this foreclose cost increases, it will likely result in significant financial savings and improved efficiency across the enterprise.
Speculation continues that Verizon is seeking to sell more of its wireline assets, so what we see with Frontier may surface again with other buyers in other areas. Enterprises that wish to stay ahead of the curve will anticipate potential impacts like those noted above and take appropriate steps to address them early.