TC2's David Rohde on Telecom
By Mark Sheard Posted February 5, 2016
The following is a guest post by TC2 UK Managing Director Mark Sheard.
At the end of last week, BT completed its long-anticipated acquisition of British wireless carrier EE from Orange and Deutsche Telekom. EE’s network may be leading in the UK consumer space, but EE has struggled to leverage this in enterprise sales, despite its Orange heritage. But clearly BT wants to change that, something we judge from an announcement that Luis Alvarez, CEO of BT Global Services, rushed out to enterprise customers earlier this week.
Luis’ announcement didn’t say too much other than to mention that EE was “the UK’s biggest superfast, super-reliable 4G mobile network [provider],” and to say that for BT “all your existing services will stay exactly the same.” But a year ago we pointed out that the merger could allow BT to present a real threat to other UK mobile providers. BT now has a vehicle with much greater horsepower on which to carry forward its mobile services strategy. Luis’ comment on the quality of EE’s mobile network is perfectly fair, and BT’s channels to market should ultimately give EE a boost in terms of being able to display their capabilities.
Of course BT has to operationalize all of this, and there could well be a hiatus while they work out how best to use their undoubted collective assets, and, importantly, leverage their (BT’s) existing relationships with businesses. Moreover, there will be some growing pains as they work out how best to serve enterprise customers’ mobile needs. They have started with some organizational changes but more will be required.
From what we have seen of late, EE will need to sharpen up its enterprise propositions to better challenge Vodafone and Telefonica O2. Our expectation is that, under BT’s ownership, they certainly will. That said, it may be an iterative process presenting both opportunity and risk for the corporate mobile services buyer.
So, as the person responsible making sure your enterprise’s mobile services costs don’t run away with themselves, and that your users get the mobile service solutions they need, what now? Here are my top things to consider:
- BT/EE should now definitely be on your mobile services bidder list.
- For the “best” deals, the need to RFP every 2 years remains in place, and the possibility of a material change in EE’s enterprise proposition reinforces this practice.
- BT/EE will not have everything worked out, but for the savvy buyer with the necessary mobile services negotiation experience and the ability to do the detailed cost analysis to compare apples with oranges there could be real opportunity.
- In particular, the BT/EE tie up creates competitive tension for Vodafone and Telefonica O2 that, if one of these providers is your incumbent, should be leveraged.
- Until, and if, Three acquires O2, their reseller approach means that Three is not a “player” in enterprise deals, despite some positive high-street headlines on their products – roaming, for example. Don’t waste time trying to make this happen.
- With mobile data consumption continuing to grow, regularly revisiting your mobile services needs is a must. Products are continually changing, so assessment and identification of the ones that are right for you requires active review.
BT/EE may immediately offer something new and attractive or, in the short term, it could come up short. Either outcome is possible. However, it will evolve and at the very least enterprises should take a look at what they might offer. At the same time, the merger should be a prompt to take stock and to see if you can use the shake-up in the market to your advantage.
By David Rohde Posted February 4, 2016
One of the great unsung heroes of the telecom industry is Sunit Patel, chief financial officer of Level 3. Patel has completely revamped the carrier’s financial structure, going from heart-attack levels of near-term debt maturities four years ago to one of the industry’s cleanest balance sheets today.
I almost burst out laughing this morning when I read Level 3’s relatively strong fourth-quarter and full-year earnings release, which ended with a remark that Level 3 was paying off holders of debt due in 2020 with new, lower-interest notes due in 2024. I guess having completely replaced all debt due for the rest of this decade, Sunit is busy working on pushing off everything in the next decade!
But I’m sorry, for the first time I have to disagree with something Sunit said in the earnings conference call today. While Level 3 came in with $658 million in actual positive free cash flow for the year, which outran even the raised guidance it previously gave to Wall Street for a likely $600-$650 million for all of 2015, it’s obvious that these dramatically sunnier results come as much from Level 3’s improved financial structure as from real momentum in the marketplace.
Level 3’s North American enterprise revenue growth of 7.6% for 2015 over 2014 is, well, good – I suppose. But given that Level 3 is so much more a pure play on U.S. enterprise wireline than anyone else who matters, shouldn’t this figure be in double digits? When asked by an analyst about what looks like a particularly anemic growth in U.S. enterprise revenue of 1.5% from the third quarter to the fourth quarter, Patel said that was only because the second quarter to third quarter growth was unusually “strong” at 2.7%.
I might suggest a different reason why Level 3 is experiencing only single-digit and apparently decelerating growth – because it simply doesn’t win as many deals as it should. To its credit, Level 3 is pulling away from the rest of what we used to call the “second tier” of carriers in terms of its presence in competing for real enterprise business. But reading between the lines of some other remarks today by CEO Jeff Storey, it’s evident that the integration of the critical merger between Level 3 and TW Telecom is still not really complete.
It’s a tricky measuring stick on this particular merger, because Storey has always insisted that “integration” for once be absolutely complete and real this time, with one and only one resulting company-wide platform for every function, whether it’s the sales organization, network management, customer portals, internal ERP processes or anything else. But at midyear last year Level 3 was talking extensively about customer-enabled dynamic network capabilities that we are not always seeing reflected yet in discrete, on-the-street proposals.
It’s also possible that Level 3 is, like many suppliers, reflecting these far more in virtualized and cloud-connect environments – Storey did explicitly talk today about dynamic network management in those kinds of services. But we have always viewed the new Level 3 as a supplier that won’t make the historic mistake of new entrants of skipping over the current generation of transport services when it wants to grab more than a toehold in large customers’ need for strength in both current and future services.
Level 3 is maintaining its practice of putting 15% of revenue to work in capital expenditures, which automatically means a raise in 2016 because it now projects a cool $1 billion in free cash flow for the year. Even more amazingly, some of the analysts today were asking about the prospect of Level 3 getting yet more credit rating upgrades to reach “investment grade” level, something that is shared in the U.S. by only AT&T and Verizon (although my guess, strongly hinted at in other comments by Storey, is that he’d rather spend a few bucks on an acquisition in Western Europe that emulates TW Telecom’s metro footprint model).
But I would say that Level 3, having so dramatically fixed its bottom line and its credit profile, needs to shift its attention to the top line. That means consistent rollout of promised features, consistently proposed to the large enterprise customers it says it craves, with the out-of-the-gate hot pricing for Ethernet bandwidth its increasingly dense network model clearly enables them to present. Frankly, in its four quarterly earnings releases for 2016, I really no longer need to see that last line about refinancing away the nearest debt maturity they have. That’s yesterday’s problem and I’m over it.
Sunit and everyone at Level 3, take it from those of us at street level in the enterprise market – you’ve won the last battle and it’s time to move on to the next. The bandwidth and networking needs of enterprise are huge and critical, and should provide you plenty of substantial growth if you go for it.
By Jack Deal Posted December 17, 2015
The following is a guest post by TC2 managing director Jack Deal.
A number of times David has mentioned how the growing challenge of “take or pay” type terms for individual circuits threatens to turn customers’ wireline contracts into a never-ending treadmill.
For enterprise customers who are not prepared to address this issue from the very beginning with their providers, the issue seems to be getting worse, not better. Here are some of the reasons for the trend:
- Enterprises now routinely need multimegabit access circuits that both providers and customers agree are best served by Ethernet. The perception that Ethernet requires end-to-end fiber raises the specter of new last-mile construction.
- Newer carriers are finally entering the enterprise market for real, but historically new entrants make their mark first in lower prices, not better terms and conditions. In fact, they’re often worse than the incumbent carriers on Ts & Cs when they first jump in.
- The incumbents themselves have an excuse to go backwards on their Ts & Cs because both AT&T and Verizon are changing up their fundamental contract vehicles. “New paper” or simply a new way of doing things is always an opening for them to attach their own preferences to contract clauses rather than carry over negotiated concessions.
- The transformational procurements that many enterprises are undertaking are bound to have protracted rollouts. Any extended timeline to deploy a new network to hundreds or thousands of sites – or even just an economic dynamism within a business that causes continual new endpoints to come online – means that new, multiyear circuit terms are always being initiated into the contractual relationship.
The result can be a tug-of-war between the provider and the customer when it comes time to talk about whether a term of 2 years or more styled as a “circuit term plan” or “minimum payment period” needs to be assigned to every new access line, with the threat or reality of making you pay full freight for the line no matter what occurs during the term in play (a.k.a. “take or pay” liability).
This struggle happens when the customer has not established right from the beginning the assumptions at work. So here’s a reality check that needs to be communicated to the providers at the top of any procurement project. Notice that it goes much better when there are multiple providers hearing the same message.
The first thing to note is that there’s a huge difference between a true high-bandwidth requirement – such as 50 Mbps and up – and what people used to consider a fat pipe but no longer is. The local access landscape (literally and figuratively) in the U.S. has been undergoing a change, with simple generalizations about metro fiber and building entrances becoming very superficial in favor of real “facts on the ground” in every geographic market.
Carriers are forever justifying their capital expenditures on fiber – to both financial analysts and to customers – on the basis that each buildout in a market makes the next adjacent one easier and cheaper. They’re right about that, so it cannot be the case that every new circuit requires a death-penalty sort of circuit term just because it’s “Ethernet” at some fundamental speed like 5M or 10M, especially when you think about the basic regulatory rights and obligations that carriers have to one another.
The next thing to note is the difference between physical and virtual elements. Putting an individual term on, say, a physical access circuit, a port in the central office, and a Class of Service element is in effect triple-charging you. (Or maybe pronouncing three jail terms for the same “crime.”) It has no real bearing on the carriers’ sunk investment costs, if there even are any.
Now note what happens when you compete the business. Level 3 gives away a lot of the game here when they refer to their accelerating fiber investments in 85 metro markets as “success-based” capital expenditures. The carriers aren’t putting down roots in a vacuum – they’re competing to do exactly what they want to do, win your RFP. And they’re smudging the line between the idea of “sunk investment” and the much simpler notion of “the cost of doing business.”
Just think about your own company’s industry and its pricing practices. Presumably there’s some general investment to build a better mousetrap than the other companies in your industry. Circuits are the “mousetrap” of the telecom industry. If the carrier didn’t want to build them, they ought to be in some other line of work.
Of course, there’s always context in every particular situation. The basic rule should be that individual circuit terms only apply to 50 Mbps and up domestic U.S. circuits and PTT access elsewhere, with a duration of no more than 12 months. But the more carriers that see this customer requirement simultaneously, the more likely they are to follow it. It’s a great illustration of the “multiplier effect” that competitive procurements provide, in motivating everyone to do better on every aspect of an RFP and, if necessary, providing a comparative basis for multi-round guidance and feedback.
The great thing is that winning this tug-of-war will keep you off the treadmill! The stakes are too high right now to be weighing down your critical next contract with penalties and headaches. Make sure your bidders know that you know the current terrain on circuit terms right when they’re invited to compete. It’ll reduce problems and introduce benefits well into the future.
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.