TC2's David Rohde on Telecom

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Zayo pours it on with 40% of revenues devoted to network investment

By Posted February 13, 2015

So it turns out that investing in the network really does helps win business and satisfy customers. What a concept.

While my colleagues and I have been talking about additional network investment in terms of encouraging signs (Level 3), questioning signs (AT&T), and troubling signs (Vodafone), one smaller carrier with a stake in both sides of the Atlantic has been proportionately pouring it on like no other.

In the fourth quarter of 2014, the Zayo Group spent a whopping 40% of its revenue on capital expenditures. That’s as a percentage of revenue, not gross margin or net profits. The carrier took in $323.9 million in revenues and pushed out $129.5 million in capex. Do the math.

What did it buy them? For a reporting company, willingness to be ultra-specific always – always – is a good sign (in this industry, anyway). The network spending added 853 route-miles and 561 on-net buildings to the network.

That helped lead to year-over-year gains of 18% in both revenues and total buildings connected. Funny how those two stats march in lockstep. After all, it’s getting to be an Ethernet access world out there, and that’s much more demanding of last-mile fiber than the old T1/E1 regime.

Not sure where to really place Zayo, though? That’s understandable for a couple of reasons.

The company has really been building out in the UK and the European continent, so these figures are split between Europe and its native North American market. Also, Zayo is a collection of companies that have come together via merger and acquisition, so I may have to use former names like AboveNet to prompt recognition for many people in large U.S. metros.

But Zayo also has the same insight that the former TW Telecom had before its acquisition by Level 3 – that you dramatically increase your enterprise market relevance when you have answers for locations in mid-markets, not just the large metros.

For example, on January 1 Zayo closed on a purchase of IdeaTek Systems, Inc. The acquisition added 1,600 route-miles in Kansas with a dense footprint in Wichita, immediately connecting to more than 100 additional business buildings (and hundreds of cell towers – obviously emerging landline carriers get mileage out of backhaul opportunities).

We all know that many, many factors come into play before a carrier is a viable choice. Prices, business terms, and an intangible surrounding a new carrier’s ability to sense your company’s unique pain points and accommodate or fix them, all play a big part. Clearly, though, Zayo is screaming “enterprise” with its accelerated, granular network spending. Keep your ears pealed for more from them.

Vodafone needs to play catch-up, but the landscape may already have changed

By Posted February 12, 2015

The following is a guest post by Mark Sheard, Managing Director of TC2 UK.

You’d think Vodafone would be sitting pretty in its home market of the UK. They’re still seen as the standard provider for business users. They have an advantage in multi-country deals because of their presence elsewhere and because of domestic consolidation among other players. And they’re certainly capable of innovation, such as on some of their roaming pricing.

But has Vodafone been sitting on their laurels? Just last week I noted the potential impact of the planned BT/EE tie-up and the possible acquisition of O2 by Three. Our view is that the new entities will provide a very real threat to Vodafone, and present both opportunity and challenges for enterprise buyers of mobile services in the UK.

And now comes RootMetrics’ quality report for mobile services in the UK. Here, we see that EE actually tops the quality tests in all 6 categories, tying in one of them – network reliability – with Three. That means that besides EE’s top overall score, they’re tops in call performance, mobile Internet performance, speed performance, and text performance. Just as thought-provoking, and this is before a potential tie-up with O2, is that Three finished second in 5 categories.

In aggregate, O2 was a clear third, with Vodafone very much lagging the entire pack. What does this mean?

Well, as with all such tests, the relative positions don’t mean Vodafone is poor, but at the moment it is certainly less good in terms of mobile network performance than its competitors. It emphasizes what we said about Vodafone needing to push on with its 4G network upgrade program. It also shows that EE and Three have momentum.

EE’s UK ad campaign, delivered by movie star Kevin Bacon, about avoiding “BufferFace” (i.e. staring at your screen, waiting for a download) appears to have real substance behind the jovial message! And this week’s announcement by EE to invest a further £1.5Bn ($2.25Bn) in “phase 2” of its 4G roll-out by 2017 is just going to continue to raise the bar for the other providers.

If this situation endures, not only would the new BT/EE and Three/O2 tie-ups bring the prospect of new innovation in their solutions, and have greater corporate presence and credibility than either EE or Three has at the moment, but they would also give the new entities a justifiable message about having a materially better network than Vodafone.

Even if, or more likely when, Vodafone catches up, the perception among many of it being the “network for business” may have been badly tarnished. Enterprise procurement specialists or mobile leads should be able to more easily convince stakeholders of the viability of alternative mobile services providers than in the past. This bodes well for good mobile network performance, but also for better competitive sourcing.

UK mobile consolidation: What does it mean for you?

By Posted February 6, 2015

The following is a guest post by Mark Sheard, Managing Director of TC2 UK.

As of 5th February 2015, BT has apparently agreed to a £12.5bn deal with Orange and Deutsche Telekom to sell their UK joint venture “EE” mobile services business to BT, and “Three” – which is owned by Hutchison Whampoa and is the fourth mobile carrier in the UK – is seemingly still planning a bid for “O2”, which in turn is owned by Telefonica.

Did you follow that? David gave the basic business outlines of all this in December. Now let’s look at what this seismic shift in the UK mobile market means for you, the business customer for UK mobile services.

First, these are dramatic moves. BT re-entering the mobile space with a vengeance is righting the strategic wrong of the then cash-strapped BT selling O2 to Telefonica for £18bn in 2005. Who on earth would have got out of mobile in 2005 if they had had a real choice? Now, BT is back on its game and, armed with EE’s network and customer base, is going to present a real threat to the other UK providers.

Principally, it will have access to many more corporate buyers via its fixed line business.  Where Vodafone and O2 are long-standing incumbent providers, they could soon be looking over their shoulders where once EE didn’t really worry them.

BT has the potential to bring dual-play – fixed and mobile – together in a way that could gain much more traction than the limited success Vodafone and O2 have had so far. The question is how well BT will pull off the integration and actually leverage the new capability and provide innovative pricing, given that sometimes BT doesn’t come across as agile as it might.

That said, BT Sport TV is a huge success, and BT is smashing the UK broadband market to such an extent that it is attracting the attention of Ofcom (the UK telecom watchdog), admittedly prompted by rivals’ complaints that BT is abusing its dominant position. While there may be temporary growing pains, if you are re-procuring mobile services from late 2015, EE/BT should definitely be on your bidder list, even if EE hasn’t made it in the shorter term.

Driven by the potential acquisition of O2 by Three, going from 4 mobile operators to 3 shouldn’t really adversely affect the business customers. Most of Three’s business is in the consumer market. While there are still going to be regulatory hurdles, the potential is that the aggressive deals often provided by Three might change O2’s offerings for the better.

There could be real upside if Three brings some of its innovation on pricing to more businesses, for example its “Feel at Home” roaming solution. In June 2014, Three’s CEO Dave Dyson said: “Roaming charges are a rip-off and Three is tackling the issue head-on. We haven’t just reduced charges; we’ve now scrapped them in 16 destinations, making it fairer, easier and more enjoyable to use your phone abroad.” Spain and New Zealand are being added to the list in April.

Business customers might like some of Three’s messages, particularly if they now see the new company as a truly viable corporate provider. As O2 plugs the perceived Three coverage gaps, and O2 enhances the access to business customers Three has lacked, we have the prospect of a bigger, stronger competitor in the UK mobile market.

Vodafone won’t take this lying down. If they do they might not get back up. Back in October, I blogged on Vodafone leading the way with innovative roaming pricing.  Certainly, Vodafone is going to have to raise its game to match the other two “new” providers. However, of the existing players, Vodafone is arguably the provider best suited to take on the challenge. Of course, amongst other things, it will need to drive on its already redoubled 4G roll-out efforts, push hard on its fixed line aspirations, and leverage its true multi-country reach, which could possibly be weakened for the other two, “new” UK providers.

What does this mean for you? The amount of change in terms of pricing and plan structures is likely to increase, as everyone flexes their capabilities to see how best to create competitive advantage, and respond to the perceived threats. As with any coming together of two companies, there could be operational and contractual ambiguities affecting the customer. Added vigilance is going to be required to make sure you successfully navigate through some potentially turbulent times.

Moreover, all the other factors affecting mobile deals are still going to be there: complicated data; fast changing technology; massive growth in data consumption; and all sorts of application and user policy issues. The emergence of the new entities may present real opportunity for savvy buyers to improve their current solutions, for example, by taking advantage of new price plans to reduce those painful data roaming charges!  However, corporates will also need to make sure that analysis is as robust as ever to understand the total cost impact of different price plans and more widely avoid potentially painful contractual “gotchas.” For example, the new entities might well have different approaches to term, line and a range of spend commitments from those you have dealt with previously through your careful negotiations, and that could seriously limit your down-stream flexibility, or leave you exposed to unforeseen charges. In the UK, the next couple of mobile services procurement cycles are going to be extremely interesting!

Level 3 commits to spend 15% of revenues on network investment

By Posted February 5, 2015

Hey, did Level 3 CEO Jeff Storey sneak into one of our user conferences?

At forums like CCMI’s semiannual Negotiate Enterprise Communications Deals conference, I’ve been talking about the potential for Level 3 to really make an impact in enterprise now that it owns TW Telecom and its heavy metro presence. My one big caveat has been that Level 3’s spending on capital expenditures, at a little over 12% of revenues, is one of the lowest in the industry.

Since TWT constructed its business model on “success-based capex,” or rapidly building out to its newer customers, I questioned whether Level 3 could maintain the combined pace of 2,500 new building entrances a year (500 from legacy Level 3 and 2,000 a year from legacy TWT) without upping its game. I specifically said at the last conference in San Diego (shortly before the merger closed) that Level 3 needed to get to what I consider the industry benchmark of 15% capex-to-revenues.

Yesterday, in his quarterly earnings call, Storey said just that: Level 3 projects exactly 15% capex to revenues for calendar year 2015.

And Storey and CFO Sunit Patel said they now project not 2,500, but 3,000 new building entrances a year.

Maybe I should send Level 3 a bill? Wait – of course as our clients know – we don’t take money from carriers. We work exclusively for you, the enterprise user. That’s all right, I’ll accept the pure satisfaction.

Now for the moving parts, because nothing is ever that simple. First, naturally, what Level 3 is really doing here is accepting the blended rate of its capex (or network investment) ratio and TWT’s healthy pre-merger statistics. It beats the 2,500 combined total because, in theory, each new building entrance is less expensive due to the network effect of density in each metro market. We’ll see.

Second, Level 3 has to balance other factors, such as its large debt load – no longer anything like a threat, since almost all of it now matures at the end of this decade or beyond – but carrying significant interest payments. The point here is that Level 3 is not going to let the internal competition for operating cash flow dollars impede its investment, even if realistically it can’t get much beyond 15% network investment because of financial obligations.

Then again, it doesn’t have to reserve any of this money for stockholder dividends, because unlike AT&T and Verizon it doesn’t pay any. Oh and those two are no slouches for debt anymore, either. Verizon took out nearly $50 billion more of it to pay off Vodafone, and AT&T now has to go to market to fund $18 billion in spectrum it just bought in the latest auction (earning a credit rating downgrade for its trouble).

Most critically, there’s network integration. Here I give points to Storey for candor (something in short supply at Level 3 in past mergers). He repeatedly said in the earnings call that “there’s a lot of change going on” at Level 3. He meant account teams, provisioning platforms, and internal systems like ERP. He also said the full integration wouldn’t be completely done at the end of 2015.

But there is a bottom line: Level 3 is now a profitable company. In the fourth quarter of 2014, it earned $66 million, or 21 cents a share, despite flatness in wholesale and some international markets. The key driver was strategic services in U.S. enterprise, which were up 11% year-over-year. In fact, 71% of Level 3’s revenues are now enterprise – quite a switch from its original image.

With big IP transformation projects under way, how far can enterprises really go beyond AT&T and Verizon in a strategic rather than tactical way? That’s what underlies all of these factors in watching Level 3 as a prospective first-line player in the future. It’s a helluva story.

AT&T knocks out its “camel hump” in spending, but where’s my last-mile fiber?

By Posted January 16, 2015

AT&T’s total capital expenditures in 2015 are slated to go down from its recent annual rate of about $21 billion to $18 billion. Recently I’ve made a big deal of capex (in plain English, network investments) especially for “second-tier” carriers like Level 3 that are knocking on the first tier’s door. So is this spending reduction at AT&T a concern?

AT&T’s answer at the recent Citi Global Internet, Media & Telecommunications Conference in Las Vegas is telling.

Remember from the appearance by Verizon CEO Lowell McAdam that carriers are out to impress institutional investors at this conference. So spending less on capex – which competes with shareholder dividends, share buybacks, and debt service after the “gross margin” of wireline and wireless services – is a “good thing.”

I’m happy to concede that this is as much the “fault” of the big investors and analysts as the carriers. The carriers get pressured this way on Wall Street (whether in Manhattan or transplated to Vegas) just as much as they feel other kinds of pressure in the political arena. Still, as a consultant to large enterprises I feel like I’m sitting in the cheap seats after hearing John Donovan, AT&T’s senior executive vice president for network and operations (AT&T’s CTO in so many words), give his view on this.

AT&T has had a comprehensive network upgrade program under way called Project VIP. Under this project, it credits itself with doing much better on its ILEC consumer broadband service called U-verse. In its wireless network it trumpets an industry-leading density of cell sites. (That’s something Verizon claims it doesn’t need as much of because of a larger percentage of 700-850 MHz spectrum, but that’s another debate.) AT&T’s in-building, in-stadium and other hyper-local buildouts, while often shared with other carriers, are generally on an ownership model with other carriers renting.

And look for AT&T to charge ahead on VoLTE because of the resulting wireless network reliability. Donovan noted that handoffs from LTE to 3G protocols like HSPA+ (I think we’re supposed to forget that AT&T once tried to brand the latter as “4G” – okay, I officially forget that now) in a sense don’t “matter” to data applications. But on voice they result in a dropped call. Density of LTE cell sites, yes, it’s a big deal.

The bottom line on Project VIP? “With very few exceptions – like the number of businesses passed with fiber – there’s some things where they’re still some work left to complete,” said Donovan. “But for the most part that program is checked off. And therefore we were able to take that camel hump, if you will, of capital spend out.”

If I had sound effects on this blog, I’d insert a record-player needle losing its track and scratching across the record. What’s that you say, John Donovan? In an era of carriers pushing people to move off of T1 and NxT1 to Ethernet access – indeed, AT&T’s own Withdrawal of Service Matrix now speaks directly to this – how is fiber to business locations a minimal “exception” that doesn’t stop you from “checking off” the recent capital spending surge?

Tickle an AT&T customer who’s been rapidly moving to 5M, 10M access and above, and ask them if they’re ordered Ethernet access and run into the buzzsaw of “special construction.” If Project VIP is – or apparently was – so great, how come a key product is being sold that you often can’t fulfill?

This is one of the reasons I’m tracking so carefully the second-tier’s models. It’s why it’s important for Level 3 to keep up the acquired TW Telecom’s hyperactive rate of buildouts to building entrances.

And of course it’s not necessarily the case that one carrier vs. the other is better or worse when it comes to the inevitable special construction issues somewhere. Much depends on best-practices terms and conditions, construction financing pools, and clear communications among the triangle of carrier, customer and building owner.

But based on what AT&T’s CTO said, there is still, ahem, “some work to do” and that overall reduction in company capex bears close watching in 2015. The breed of rising wireline carriers should note that AT&T, attitudinally, “checked off” its big investment initiative without having this issue well in hand. Users should sharpen their pencils in RFPs. Demand sets and RFP texts should be crystal clear on this issue.

Otherwise we might be looking at a “camel hump” of unexpected USER spend to get to the transformed, high-bandwidth-everywhere network. Or maybe a camel hump of AT&T customers finding somebody else to use. Keep watching this space.

Verizon can make plenty of money with lower prices … just ask their CEO

By Posted January 15, 2015

There’s an old truism in the telecom industry that carriers say the opposite thing in Washington that they say on Wall Street. In one version of the joke, “In New York they brag that they’re making gobs of money, while in Washington they say they’re going bankrupt and it’s somebody else’s fault.”

So what do you think they say in Las Vegas?

Really, Las Vegas during the week of the Consumer Electronics Show is sort of Wall Street transplanted because it features a simultaneous investment conference, the “Citi Global Internet, Media & Telecommunications Conference.” Listen, I’ll take the carrier’s statements at face value wherever they decide to take truth serum in order to impress the audience in the room.

And with so much attention being paid to the Washington side of telecom carriers – particularly in the net neutrality ruckus – we wouldn’t want carriers’ statements in “Wall Street West” to escape notice.

So here’s what Verizon CEO Lowell McAdam said in Las Vegas when he was in a Q&A session with a Citi analyst hounded by reports that the consumer “price war” was digging into Verizon’s wireless margins:

“From the network side, this reminds me of the days of voice and then the days of SMS and, now the days of data, where if you look at the top-line price, it looks like things are going down but the costs are going down equally so you can maintain some profitability. Just as the example, when we went from 3G to 4G, our efficiency of the network went up by 8 times. So you can take a pretty significant price cut and your costs are dropping at the same level.”

McAdam, of course, does not want Verizon’s stock to sag or for Verizon to be unable to continue refinancing the debt it loaded up on when it bought out Vodafone’s interest. Much of his bragging about Verizon’s continued profitability – we’ll know for sure when they report quarterly and full-year earnings on January 22 – was in the context of waving away higher churn rates in the face of T-Mobile and Sprint promotions.

And I think he has some justification on those points. The iPhone 6 launched caused action and movement among some portion of all the carriers’ customer bases. The carriers’ deals, particularly Sprint’s alleged half-off offer, naturally provoke a reaction. “Clearly customers are moving back and forth and seeing whether the claims are true,” McAdam dryly noted. He also implied that any customers lost are those that Verizon doesn’t want anymore, and those coming aboard are Verizon’s supposed target market of network-quality-sensitive heavy users, especially for multimedia.

So if he stretched a point to say to his audience – mostly institutional investors – that any price reductions don’t equal any margin or profit reduction at all, he’s probably not stretching by much. McAdam also jumped on the opportunity to raise what he calls the VLSS (Verizon Lean Six Sigma) program to credit some others in his senior executive team. “I think we took over $5 billion of costs out of the business just through process improvement in 2014 and we will do the same thing in 2015,” he said. “So that’s [also] where we will see the sustained margin that we’ve delivered historically.”

Well, nice job, guys! Enterprise customers may want to keep some of these metrics handy. Verizon clearly tries to take a premium pricing positioning vs. other carriers and shouts “network quality” in every other sentence, but the question is how much, if any, of that needs to come into play in big deals. I see plenty of pricing gaps and wiggle room. And I didn’t even have to go out to Las Vegas to find them.

Don’t let AT&T pull the rug out from under you because you didn’t know it was coming

By Posted December 31, 2014

Tomorrow is the first day of the second half of this decade. (Alarming, I know.) And I know that you know what the main story is in telecom for the years leading up to 2020: the end of the Public Switched Telephone Network.

So, are you thinking that there’s going to be a big announcement at some point during the next five years ringing the bell? Perhaps a big headline where the Federal Communications Commission announces that it’s okay for the big carriers to turn off the PSTN?

No folks, it doesn’t work that way. Okay yes, I suppose there probably will be some such event. But if you’re waiting for it, that’s going to be way too late. Carriers always prod and poke and push the envelope in an ongoing tension between technology, legality, and profitability. It’s going to be a dynamic process.

That’s why right now you need to be conscious of one of those strange little special aspects of being a telecom manager. It’s courtesy of the telecom industry’s unique structure of a (technically) publicly available but (practically) inscrutable disclosure mechanism, the notorious Service Guide.

In AT&T’s Service Guide, the carrier has started a “Withdrawal of Service Matrix” that is going to be used over time to roll out its complete IP network transition in terms convenient to itself, all while being able to say “I told you so” if you missed it and fall behind on transition plans.

To get the story, please go to Webtorials and check out our initial expert read of the Withdrawal of Service Matrix from LB3’s Deb Boehling and TC2’s Janis Stephens. Notice the complications that have already arisen. Soon Deb and Janis will have more to say about it. And the bottom line is that this is something you’re going to have to be bird-dogging for quite a while.

You don’t have to be any kind of daring early adopter in all this (besides which, all those people have already substantially moved). The challenge here is to stay two steps ahead of the game rather than one step behind. Timelines are going to be key. Welcome to the new world, for real. I look forward to continuing the conversation in 2015.

P.S. Yes, yes, I know. This “decade” technically runs from 2011 to the end of 2020, not 2010 to 2019, so we’re not really halfway through in strict mathematical terms. But by that logic you didn’t celebrate the millennium on December 31, 1999, you waited a year. And I know you gave in to popular perception back then, so spare me the technical complaints. Thanks!

Moody’s downgrade reflects Sprint’s sinking morass of issues

By Posted December 18, 2014

Three years ago I said that “For Sprint, now everything has to go right.” I’m not sure much of anything has gone right for Sprint since then.

Yesterday Moody’s lowered Sprint’s credit rating to “B1 with a negative outlook.” Here’s a handy guide to translation from credit-speak. B1 is four notches into junk bond territory. “Negative outlook” means Moody’s is signaling that the next move is likely to be the fifth notch down rather than a move back up.

The practical financial meaning is that Sprint is basically where bad CLECs were 10 years ago.

Moody’s credit downgrade comes on the heels of a proposed $105 million fine from the FCC for “cramming” unauthorized charges onto wireless bills. Sprint is hardly alone in cramming. But the fine would be a record among U.S. wireless carriers.

Sprint also has to face the ominous spike in spectrum costs signaled by the more than $40 billion in current auction bids for what was expected to be a relatively sedate AWS-3 auction. It’s not that Sprint doesn’t already have a great deal of spectrum on its hands – it certainly does via Clearwire. Organizing that spectrum into geographically consistent broadband service with additional investments has been their issue. And nobody wants to be financially hindered from getting some of the coveted low-band, high-propagation spectrum that the government is prying out of the hands of UHF television stations to auction off in early 2016.

The rising cost of capital implied by a crumbling credit rating does not bode well in this environment. At the marketplace level, it’s hard to see where Sprint is able to go on offense. Sprint has basically forfeited its place in the wireline business, and in enterprise wireless it’s principally relevant in terms of defending incumbent positions in individual accounts more than being able to blow people away with aggressive bids for new business.

In the consumer wireless market Sprint is certainly trying to look menacingly aggressive with its half-off offer. But I think it’s kind of a phony aggression that doesn’t come off cleanly. Certainly the offer is going to get people onto the showroom floor, to borrow a car-dealer image. But the whole promotion is based on waving its arms to say “me too” on whatever Verizon and AT&T is offering, because you have to bring in or send in your bills from those guys to try to get the deal.

Is this kind of me-too-ism a classic marketing mistake, as some marketing gurus would declare? Earlier this week T-Mobile introduced “Data Stash,” a plan to let customers carry over unused data allowances for up to a year, replete with shots at specific Verizon and AT&T practices from T-Mobile’s perpetual funnyman John Legere. I think that approach hits a nerve while “half off” is just whiny. Besides, everyone knows it isn’t really half off.

Remember something in all this that people may have already forgotten since midyear 2014. When SoftBank and Sprint were thinking they had a shot of buying T-Mobile from Deutsche Telekom and getting the U.S. government to approve the deal, they were clearly thinking of changing their name to T-Mobile and installing Legere as CEO. You don’t recover easily from this downgrade of your own brand value and self-esteem, even if it was never officially announced.

Of course SoftBank itself brings financial resources to the table. But some of their moves, like repurposing SoftBank engineers for Sprint work and clearing out Sprint employees under actual new CEO Marcelo Claure, look a lot messier in real-life human terms than they do on org charts.

One thing that’s always been implicit, and concerning, in the SoftBank/Sprint saga is that the main focus has never been on enterprise, as was clear two years ago even when the $22 billion takeover was just being discussed, and as was illustrated in the sad tale of the Nextel migration. I doubt that Claure’s understanding of how hard it is to appeal to enterprise customers when the whole focus is on cutting and chopping has advanced very far at all.

And there’s some concern about SoftBank’s staying power as its easy analogies to winning as a No. 3 carrier in markets like Japan and South Korea have proven exceptionally difficult to execute in the U.S. market. Sprint does now have 260 million LTE POPs and yesterday it boasted about its new network organization under SoftBank leadership. As a cross-cultural company SoftBank/Sprint is another test case in these global mergers, which overwhelmingly have proven difficult, as many large enterprise managers themselves have experienced.

That brings us to the other, aggressive players in all of these markets. T-Mobile’s potential in enterprise (which is still far more potential than actual) and the welcoming and varied approaches to enterprise wireline from Level 3, CenturyLink, Zayo and others are clearly starting to fill the gap. At this point does Sprint magically turn it around and effectively get back in the game for new business? Under current ownership and management, the answer in this corner has to be: It’s increasingly hard to see how.