TC2's David Rohde on Telecom
By Ben Fox Posted July 23, 2015
The following is a guest post by TC2 managing director Ben Fox.
Before the days of the any-to-any network connectivity that MPLS services provide, large global networks were based on point-to-point technologies such as private lines, frame relay or ATM and were typically very regionalized with multiple network tiers. Sites in a particular country may have been connected to an in-country hub, which would in turn connect over a regional network to a regional hub, which in turn connected to the company’s global backbone.
Such networks would typically use multiple carriers, in particular leveraging carriers that were strong in particular regions. However, the networks could be difficult to manage and gave rise to performance bottlenecks, hence the rise of MPLS, which was largely driven on the back of the benefits (both cost and performance) of any-to-any connectivity rather than the ability to use multiple classes of service.
In the early days of MPLS, many customers were uncomfortable integrating multiple MPLS networks, which led to a trend of companies consolidating much of their global data network with a single MPLS provider (which was usually either AT&T, BT, Orange Business Services, or Verizon) and the demise of regional networking strategies. But now that MPLS is so well understood, such concerns have fallen away and we are seeing a rise in the use of multiple providers for a customer’s global network and a trend away from global to regional network strategies.
Regional carriers (such as Colt, NTT, Singtel, Telefonica and Telmex) have invested heavily in their infrastructure in order to compete with their global peers. In Asia-Pacific in particular, the regional carriers tend to have more capacity on more undersea cables than their global competitors, and can hence provide lower-latency connections across the region. Regional carriers will often also have a greater point of presence density and country coverage, deeper relationships with the local PTTs that deliver those all-important local access circuits, and have greater local knowledge and local market experience (for instance in dealing with complex regulatory regimes such as China). Even simple things such as having better local language capabilities can make a big difference in the event of an outage.
The regional carriers have also become more competitive in terms of pricing (where they used to routinely get beaten by the global carriers) and on terms and conditions and commercial flexibility. But it is important to push the regional carriers hard in these areas in order to move off standard, customer-unfriendly terms that provide constraints such as multi-year individual circuit lock-in periods.
Companies that are embracing regional network strategies and moving to new regional carriers are almost always doing so via a competitive procurement. An RFP provides the opportunity to closely vet the capabilities of potential new carriers. It also provides maximum negotiation leverage to extract the best possible pricing, commercial flexibility, service levels and contractual terms, and allows the collection of all necessary information required to build a detailed benefits case justifying a regional strategy or global strategy as applicable.
A global RFP best practice is to organize the RFP document to accommodate proposals from both regional carriers and global carriers, and not to unduly disadvantage or advantage one type over another. Given how daunting it can be to change carriers for a mission-critical data network, RFPs are usually very comprehensive in terms of technical, service level and service management requirements, as well as including best-in-class commercial terms. The overall objective of the RFP is to enable you to comprehensively scrutinize the strengths and weaknesses of different carriers’ capabilities and propositions, and to be able to make informed decisions between regional and global network strategies and selecting the best fit carrier(s).
Different strategies suit different companies, and weighing the pros and cons of a regional versus global network strategy will produce different answers for different companies. The overhead of managing and integrating multiple carriers will drive some companies to a global strategy, whereas the in-region strengths of regional carriers will make the additional overhead worthwhile for other companies. The trick is determining which approach provides the best fit for your unique circumstances and requirements, but a regional strategy is more viable than ever.
By David Rohde Posted July 3, 2015
The U.S. telecom industry went completely bananas this week.
By the end of the week, two carrier CEOs were cursing each other out in 4-letter words, one carrier’s Washington shop was calling out another’s “unmitigated gall,” one carrier released an ad promoting one of its competitors’ network benefits but none of its own, and industry funnyman John Legere theorized that Sprint’s Marcelo Claure must have gotten drunk because he was flying to Japan to get yelled at by his SoftBank bosses.
Four entertaining Internet links tell the tale of the week that was. Take the time during the holiday weekend to enjoy them. We may never have so much fun in this industry again!
Who’s that guy now? On Tuesday Sprint released an on-line ad in which retired soccer superstar David Beckham goes looking for a truly unlimited wireless plan by visiting stores of the four national carriers. Apparently when Mr. Beckham goes traipsing through an American city he is recognized by everyone and the local TV stations deliver BREAKING NEWS that he has been seen about town and construction workers leave their worksites to follow him. I love international football – in other words, soccer – but, um, really Sprint? Check the incredible moment at 1:15 of the video where the sales rep in the AT&T store, who is an obvious attempt to parody Lily the salesgirl in the actual AT&T commercials, delivers an AT&T benefit – “Did I mention we have the nation’s strongest LTE signal?” – and goes completely unchallenged. What the hell? Even worse, the following day Sprint itself was caught throttling video to impossibly slow speeds and had to back down. Great “unlimited” timing, folks.
Cracking up here. When the Sprint ad got negative reviews and T-Mobile’s Legere made fun of it on Twitter in his usual colorful language, Sprint CEO Claure snapped. “@JohnLegere I am so tired of your Uncarrier bullshit when you are worse than the other two carriers together,” Claure tweeted out. Oh brother. As Legere himself would say later in the week, “Don’t come into Twitter unless you know how to swing the bat.” Claure continued the tweet (as you can see) with a half-sentence that awkwardly continued into several more disjointed Twitteresque harangues against T-Mobile. At week’s end Claure was in Tokyo where he was busy apologizing for the throttling ruckus, revealing Sprint’s second-quarter results to SoftBank CEO Masayoshi Son, and no doubt pleading for a faster capital injection to fix Sprint’s network. I hope the stress isn’t driving him mad.
Smooth talk in D.C. Of course some people know how to deliver a punch without looking frazzled, and for that we can trust the experienced big-carrier lobbyists here in Washington. On Thursday, Verizon smoothly laid out “The Uncarrier’s Unmitigated Gall” on its public policy blog. Verizon glibly reported that the previous day Legere had not been too busy on social media to get a new petition over to the FCC, whose chairman, Tom Wheeler, had previously rejected Legere’s potty-mouth demands for bigger spectrum auction blocks that exclude Verizon and AT&T. The new T-Mobile petition asks for faster exercising of T-Mobile’s existing set-aside rights to more rapidly disqualify AT&T and Verizon from bidding. “So what does this mean?” pondered Verizon. “It all adds up to a concerted effort to fleece taxpayers, and to subsidize a massive German conglomerate partially owned by the German government.” Gosh, I hope the Greek financial crisis is keeping American telecom news off the front page of Der Spiegel.
Life’s a beach. By late yesterday Legere had found his way to the Hamptons, where he took a device out to the beachfront and recorded an amazing 15-minute stream of consciousness for Periscope, the latest social platform that keeps his hippie-dippie CEO image up to snuff. Legere’s hilarious piling on of Claure’s bad week – you have to see this to believe it on some browser other than IE – would be more complete if John would acknowledge his own politically manipulative toddler tantrums over T-Mobile’s dire need to fill in coverage holes with low-band spectrum. Still, the market reality as we hit midyear is that T-Mobile is standing tall as the value player that counts, something that U.S. public policy is desperate to maintain while the other national carrier beyond the Big 2 is making blunder after blunder. Beyond all the outrageous play-acting that is now consuming the U.S. wireless market is the question we continue to watch: What will T-Mobile do to make itself more enterprise-relevant? I’m tweeting a link to this blog post directly to John (who has personally “favorited” some of my tweets that flatter his view while passing up the others) to see if he cares to start providing an answer. BTW John, I said “enterprise,” not small business, or “Uncarrier 9.0.”
John Legere, and all of you, have the July 4 holiday weekend to relax and then start coming to a conclusion on all this. Happy Fourth, everyone!
By Mark Sheard Posted July 1, 2015
The following is a guest post by TC2 UK managing director Mark Sheard.
On Tuesday, the EU Council backed the European Commission’s recommendation to scrap roaming charges in the EU by June 2017. This is big news and will continue the shake-up in the products offered by suppliers in the EU around mobile services.
Best practice mobile deals are typically 2 years in duration, so any deals concluding from now on can benefit from this ruling. But you have to include the right provisions in your agreements to ensure that your enterprise does not leave itself exposed to the old way of doing business in roaming.
Formally, such regulation is aimed at the consumer market and not negotiated business-to-business deals. Many providers do follow the regulations for their enterprise customers. But not always, especially not for existing contracts when they haven’t previously provided such a commitment.
There are other nuances in the Commission’s proposals like safeguards to prevent purchasing a SIM in one country (where the rates and charges might be cheaper) and routinely using it in another. Sadly, that’s one cost-saving idea off the table!
It is easy to see how this change will shake up the products offered, with a continuing trend to bundled packages. The back-drop of increasing data consumption won’t be going away in the near term. However, watch for new constraints being imposed – for example, add-on pricing for more bandwidth-hungry services like streaming video.
As of now, most often the bundles from different suppliers will not be directly comparable, so an expert eye will still be required to model consumption against each supplier’s portfolio of products to ensure a reasonable apples-to-apples comparison, and to see which best fits your need with the lowest total cost of ownership. It is likely that the savvy enterprise buyer will also look ahead and commission some sensitivity analysis against the plans on offer.
For non-EU roaming and international calling, you will continue to need to consider your profile against the country zones, regions, groupings or however the suppliers align their roaming pricing outside the EU. It will be imperative that you can pull out and analyze non-EU roaming traffic. “Gotchas” like Switzerland suddenly being priced as “Rest of World” with much higher charges need to be avoided. Particularly, for example, if you have a significant business presence in the country and senior users with high voice and data consumption who often visit.
Ultimately, expect the changes to generate supplier review of the products offered, and subtle and perhaps not-so-subtle changes to pricing that will not be to the advantage of the unwary. You will still need to model and analyze the products and your specific consumption profiles carefully, avoid the most costly and inappropriate pricing commitments, and seek out improvement opportunities wherever you can! So while this is a big change, in terms of the diligence enterprises need to apply to secure best-in-class deals, it’s the “same old, same old” if you want success.
By David Rohde Posted June 26, 2015
Maybe John Legere should have checked with SoftBank CEO Masayoshi Son – who last year was going to install Legere as head of a combined Sprint/T-Mobile if Mr. Son had sold that merger to regulators – before pressing the lobbying in Washington so hard.
Mr. Son went too far last year when he plastered airports and train stations around Washington with SoftBank image ads promoting itself as a disruptive, entrepreneurial company when it actually wanted to make itself larger and more entrenched in the U.S. by swallowing T-Mobile in addition to Sprint.
Similarly, John Legere went way too far when he issued profanity-laced videos claiming AT&T and Verizon were working the levers in Washington to lock everyone else out of the next spectrum auction.
Legere was not wrong that low-band, high-propagation spectrum is exceptionally valuable and there’s a risk that the 2016 auction of previously UHF TV frequencies might concentrate the market even more in the hands of a prospective duopoly. But he was dead wrong that the Big 2 were making an exclusively nefarious push to pressure government officials (who had already agreed to a reserve of 30 MHz in many markets for T-Mobile, Sprint and smaller entities to bid on) when he was the one turning over tables demanding an even greater set-aside.
Yesterday afternoon FCC chairman Tom Wheeler revealed that he is circulating a draft decision to the other four commissioners sticking to the 30 MHz reserve while fixing and modifying other problematic auction-eligibility rules in preparation for a commission vote next month. Maybe Wheeler was ticked off at T-Mobile’s latest video which, among other things, pictured all five FCC commissioners as cartoon figures – the caricatures at 1:30 of the video are of the actual three men and two women on the commission.
Or maybe the whole political establishment was tired of Legere’s antics, as Brian Fung of the Washington Post describes in an article. T-Mobile’s basic policy position wasn’t the thing that was getting him in trouble, as he was actually garnering general support for a substantial auction reserve from the Justice Department and a group of Senate Democrats (although neither specifically endorsed a kick-up to 40 MHz or higher). I think the hypocrisy factor, where Legere was calling his opponents names and pretending to be a political babe in the woods, was more of a consideration.
The irony is that in the long run, all this is going to push the other options for the U.S. wireless industry further up the chain of consideration, including ones that may have been in Legere’s endgame all along. It is completely conceivable that Deutsche Telekom and SoftBank could restart talks about an eventual new try at merging T-Mobile and Sprint, as I mentioned yesterday. But the timing is dicey. They can’t do that immediately or they would lose all of their “reserves” or “set-asides” in the 2016 auction – the FCC would then probably make them compete on an equal footing with Verizon and AT&T.
In the meantime, there are customer RFPs to respond to, and as always we are judging this by how many credible and capable carriers there are to serve a particular enterprise need, whether they achieve this position organically or through mergers. The global financial situation that I recently described foretells a great deal of financial engineering in the second half of 2015 and into 2016. What I think this week’s events tell us is that the most dynamic people in the industry like John Legere, who do have the capability to provide aggressive competition to important markets like enterprise broadband mobility, would do best if they would cut the crap and get organized to truly attack the competitive marketplace above the pure retail and small-business level. I’m sure those are terms John can understand.
Late Friday addendum: Legere sent a (polite!) letter to Wheeler today asking him to reconsider his apparent decision to keep the auction reserve at 30 MHz. In the key line, Legere noted that U.S. policy has consistently been to maintain four national carriers, and added that a 30 MHz low-band auction reserve is “just not enough to support more than one rival to the two dominant players: AT&T and Verizon.” That seems to set out an either-or: Give us more spectrum to bid on free of AT&T and Verizon auction participation, or change U.S. competitive wireless policy to three national carriers. The game continues.
By David Rohde Posted June 25, 2015
John Legere wants you to know that some serious stuff is about to go down in Washington, D.C. And he wants you to get really peeved about it.
Of course he didn’t put it quite that way. For his exact wording and an entertaining few minutes’ video break in your day, check out John’s own words. I’m going to keep it more mellow on this family blog here on my company’s website (although I’ve been willing to get closer to the mark in real-time if you’ll follow me on Twitter).
What I will observe is that regardless of the merits of his argument, which has to do with which wireless carrier gets what spectrum, his framing of the political morality of the two sides is – I think the technical term for it is – bull crap.
It’s no different than the typical ad for a congressional or local candidate you don’t know much about. Republican or Democrat, liberal or conservative, pretty much all the time when a candidate credits himself or herself with taking a “courageous” position while his or her opponent is a (cue sneering voice of professional announcer, often female) po-li-TI-cian, if you scratch behind the surface you’ll find the reverse is true – it’s the sponsoring candidate who’s pandering or manipulating while the opponent had to make a hard policy choice.
That’s basically what John is doing here – reverse-framing the politics. It’s T-Mobile, not Verizon or AT&T, that’s asking for the explicit favor from the federal government.
T-Mobile has shaken up the wireless mass market in beneficial ways, but it’s typically been lousy in coverage in rural areas and had propagation problems in buildings and in other more urban environments. To help address this, the government so far is setting aside 30 MHz of spectrum (in certain markets defined a certain way) in a critical auction next year of low-band spectrum acquired from TV broadcasters for the non-Verizons and non-AT&Ts of the world. But T-Mobile is pounding the table for a bigger set-aside – at least 40 MHz if not 60.
Legere turns this around to say that it’s the Big 2 who are lobbying hard to “play keep-away with your mobile future” and he’s just an innocent citizen who’s being victimized. So that must have been some other John Legere who’s been prowling the halls of Congress and the FCC asking for stuff. Whoops – pink shirt, leather jacket! That’s our John Legere doing some influence peddling.
Listen, I’d be happy to concede that “Dumb and Dumber” (John’s names for Verizon and AT&T) are the nefarious string-pullers if Legere were correct in his assertion that T-Mobile has “always” recognized its need for low-band spectrum and worked hard to patch its coverage holes. But as late as January 2014 Legere’s instinct was to laugh off the issue before somewhat acknowledging it – check this video starting at 38:15 of the countdown clock from the 2014 Consumer Electronics Show in Las Vegas.
Now he’s singing a different tune. As a consultant to large enterprises, I’m glad Legere has gotten religion on this matter. Coverage gaps are a major issue for enterprises who need to know that they’re sending end-users (including C-level executives) on their road and expecting to find not just coverage but broadband capability.
And that brings me to the larger context here, regardless of the political tactics, which were worth sorting out for clarity’s sake on the furious spectrum lobbying now going on. The reality is that there IS something of a duopoly that is forming in the wireless market, despite the U.S. government’s ongoing efforts to maintain four national wireless carriers. And the coming financial environment that I described yesterday only threatens to exacerbate this problem in the telecom industry unless something new is done.
One of the four carriers, having failed to accomplish what it needed to financially during the global easy-money era, is seeing its window of opportunity shut. As I’ve stated before, the extraordinarily shrinking relevance of Sprint is the saddest story I’ve seen in 25 years in the telecom industry. After suffering losses, majority owner SoftBank has clearly told analysts that it won’t bet the company on rescuing Sprint. But Sprint needs a rescue-level of capital injection to speed up its network plans. How Sprint gets past this Catch-22 is getting harder and harder to see. Not for nothing did Sprint’s Chief Technology Officer quit this week.
At the same time, the mergers and acquisitions market in a whole rash of industries is heating up. The second half of 2015 is going to be a panic call for global conglomerates to announce and fund their takeover activities before interest rates move out of the basement. All while spectrum prices in the market show no sign of slowing down. Both Verizon (after raising money to pay off Vodafone) and AT&T (after raising money to buy the spectrum it nabbed in the last auction) have already had their credit ratings downgraded a notch.
If even Dumb and Dumber are being nicked this way for ponying up for broadband wireless, who else can play in the giant U.S. market? T-Mobile and its German majority owner Deutsche Telekom may be the only ones left going forward.
We here in the enterprise market have to remember the precedent of the “Big 3 Long Distance Carriers” of the 1980s and 1990s – AT&T, MCI and Sprint. Three capable and aggressive bidders is a great dynamic for competitive procurements. But T-Mobile really does have to keep learning enterprise to make something like that a reality in today’s wireless game. Given the reality of spectrum costs, there may actually be some merit to T-Mobile’s spectrum requests, but an end to rural and other coverage excuses is just the start of it. Otherwise a risky change to the 4-carrier paradigm for wireless won’t bode well for enterprises, no matter how unbalanced the four existing carriers are in coverage and enterprise experience.
The betting here is that T-Mobile and Legere are really waging a multi-front strategic war. Besides gobbling as much as it can in the 2016 low-band auction (and with a bigger set-aside, it would net less at auction for the government, which is part of the issue), there are two alternate ways T-Mobile can broaden its spectrum holdings.
One is to agree to be acquired by Dish Network, although Dish CEO Charlie Ergen is a tough guy to negotiate with and I worry that falling into the hands of a consumer-oriented provider will just drive T-Mobile further away from enterprise rather than closer. The other is to change the focus of its government lobbying to a totally different issue – the possibility that now might be the time to relent on the four-carrier policy and actually allow Sprint and T-Mobile to merge, only this time with T-Mobile on top. Sprint might be bringing a sick business into the combination, but they sure have a great deal of spectrum to contribute to the match.
Just today the Washington Post is reporting that T-Mobile’s current lobbying focus on the spectrum auction is getting on people’s nerves in Washington and not likely to achieve its objective. A new approach or new emphasis may be needed at T-Mobile. Something that brings enterprises more completely parallel choices in procurements is what they should be angling for. If T-Mobile pivots from here, I’ll be the first to let you know. Whether you use T-Mobile or not, they’re kind of the tail wagging the dog of the entire U.S. wireless industry right now. John Legere is certainly making bleeping sure of that.
By David Rohde Posted June 24, 2015
It’s not clear exactly when it’s going to happen, but the Federal Reserve is prepared to start lifting interest rates from the cellar. The five or more years that U.S. monetary policy-makers kept short-term interest rates at effectively zero offered a tremendous opportunity for telecom carriers to work out their (also tremendous) debt problems. Some took advantage, some didn’t, and – to all appearances – some couldn’t.
The big winner? Level 3. The big loser? Sprint. The big wild cards as rates start to rise? Spectrum and mergers.
Somebody ought to make a full-body cast of Level 3 chief financial officer Sunit Patel and encase him in bronze. Four years ago the company was a financial basket case. In 2011 Level 3 was looking at about $3.5 billion of debt coming due in 2014 alone, at a time when the company barely reached $6 billion in revenues (not earnings, of which of course it didn’t have any).
How did Patel get rid of the death-grip debt maturity? By refinancing it to Kingdom Come. Intermediate-term corporate bonds of course have never been at or near zero, and certainly not those of a company like Level 3, which like every U.S. carrier except AT&T and Verizon is classified as a “junk bond.” But Patel sold institutional investors on the appeal of receiving 7% to 10% on bonds maturing late this decade or into the 2020s if they would agree to the longer maturities.
And they all bought in despite the risk. Why? Because Level 3 upended its business model – changing it from 75% wholesale to 75% enterprise – and kept its financial promises.
There’s a complicated financial metric that involves the ratio of a certain measure of operating income (the funny “EBITDA” figure you often see in telecom) to the “net” of a carrier’s total debt (involving subtractions and additions for cash and other considerations). Just like our benchmarks for carrier network rate elements, there are benchmarks for this ratio, and they have to be met lest a bondholder demand immediate repayment. After each Level 3 acquisition – but most notably those of Global Crossing and TW Telecom – Patel would set forward targets for this ratio to reach the benchmarks that “junk bond” investors are looking for in exchange for their longer-term risk. He always – always – hit them.
That gave Level 3 the credibility to keep doing these refinancings to the point where they actually have almost no debt maturing until 2019, and the vast majority now from 2020-2025.
And then there’s the company that never seems to keep either its financial promises or network buildout timelines.
Sprint’s debt maturity chart now is uglier than Level 3’s was at the beginning of this decade. It has four billion dollars due in 2016 alone. Granted, Sprint is a larger company and so the scale of the numbers is different. But its total net debt has grown to over $30 billion. What about refinancings? Well, there have been some, but they’ve been overrun by the need for new debt for Sprint’s ongoing wireless upgrade needs.
Okay, what about the fact that Sprint is majority-owned by a huge Japanese conglomerate? Huge, yes, but debt-laden as well. SoftBank (depending on whose figures you use and what currency assumptions you make) has either over $90 billion or $100 billion of debt of its own. More to the point, there’s now an active debate among analysts as to whether SoftBank CEO Masayoshi Son is redoubling his personal efforts to improve Sprint’s prospects or starting to look for an exit strategy.
The point is that the window for holding out juicy financial bon-bons for institutional investors with credible telecom bonds in what is otherwise a zero-percent interest-rate world for them is starting to close. And there are two other things going on here.
One is that the daily interest expense is now as big a story as the dangerous debt maturities. Remember, every dollar of interest a carrier has to pay on even a safe bond is one that it can’t spend on its network. At Level 3, the most recent debt refinancings have been done not only on longer maturities but on much more favorable terms. Over the last 18 months, the average interest rate that it pays on its bond and bank debt has actually gone from near 7% to just over 5%. That provides more ongoing cash for the business model that Level 3 bought into with the TW Telecom acquisition – many more last-mile fiber connections to buildings, but based on the customers it wins. (That’s an ongoing story where metro-market managers at Level 3 do continually push for more resources, providing both opportunities and risks for enterprise customers. More to come on this.) Over at Sprint, it’s not been able to enjoy nearly as much of this benefit and its total interest expense is growing to the point where some financial analysts doubt their 2017 cash position and many networking analysts doubt their latest upgrade promises.
The other effect of the closing of the zero interest rate window is on the players in the market for spectrum. Nobody seems to have informed the holders of airwaves, including TV broadcasters, that interest rates might start heading up soon and financing start to tighten up. The prices for spectrum keep shooting higher anyway (although AT&T and Verizon like to blame Dish Network for part of that for manipulating the recent AWS-3 spectrum auction). More demand and fewer players who can afford to ante up is raising the stakes, and that’s where our entertaining friend John Legere, CEO of T-Mobile US, comes in.
He is lobbying hard for favorable rules for a crucial auction of low-band spectrum in 2016 – or, according to one line of thought, is alternatively angling for a new attempt at a carrier merger which will require more financing in a non-zero interest rate world. The timing is critical as the Federal Reserve is considering establishing a new interest rate and financing era in September. More on that side of the story tomorrow, complete with Legere’s spicy language. Stay tuned!
By David Rohde Posted May 8, 2015
You’ll be glad to know that Sprint has a new network-upgrade plan called the “Sprint Next-Generation Network.” It will “massively densify” Sprint’s national wireless footprint.
Now tell me what you’re going to do with this information in your current wireless procurement. Very little, as far as I can see.
CEO Marcelo Claure and some of the savvier Wall Street analysts had quite a tug-of-war over this during Sprint’s first quarter earnings call this week. It’s unfortunate because it repeats a long-standing pattern at Sprint of grandiose plans that wither at a few touches. In Sprint’s view, it’s always the Next New Thing that is supposed to be the reason you buy from them. But in the real world, enterprise users need the Current New Thing to make a large commitment or a switch from somebody else.
Claure positioned the Sprint Next-Generation Network by talking up Sprint’s own RFPs to wireless carrier network vendors for great new stuff. Then the analysts basically asked, “Where are you going to get the money to pay for this? You just burned almost $1 billion in cash in the first quarter. And you have $4 billion in debt coming due in 2016 – and $33 billion in debt overall. What gives?”
Here were the collective answers to these challenges from Claure and Sprint CFO Joe Euteneuer:
- We’re not actually spending real money on the Sprint Next-Generation Network until 2016.
- We haven’t decided whether to participate in the 2016 spectrum auction or not, depending on the rules. In fact, we may sell some spectrum instead.
- We don’t really have major debt maturities until December of 2016.
Okay, fine. But then what good is this talk of “massively densifying” Sprint’s network if they might not actually start or finish it in a time frame that justifies anyone’s purchase decision anytime soon?
You might remember other incidents like this at Sprint as it has progressively receded in relative performance, sales energy, and brand image. A few years ago it promoted WiMax as the savior technology providing fixed wireless broadband access to enable the carrier to compete for corporate WANs. If you’re like us at TC2 and LB3, you then asked about reasonably national geographic coverage and SLAs. I still remember the deer-in-the-headlights look of Sprint people when they had no answers for this. Eventually WiMax was thrown out in favor of a late start on LTE.
Some years earlier, Sprint hyped a fantasy product called the Integrated On-Demand Network or “ION” that was basically a working idea of reducing a big ATM carrier box into a premises device integrating voice and data access channels. I was a senior editor for Network World at the time, and boy did Sprint get mad when I kept challenging them as to how someone could actually buy this and put it to work. But they shelved it six months later because it was really just vaporware. Or, as one Sprint employee at a recent trade show told me: “Yes it existed – at Bill Esrey’s house.”
I’ll give Marcelo Claure this – in the mass market, he knows how to get people in the door. It transpires that Sprint’s “Cut Your Bill in Half” promotion has had the effect of luring consumers in for a discussion, only to realize that Sprint itself has a plan that they might be happy signing up for instead of “half off” the terms of an AT&T or Verizon plan.
The problem is whether each of these new customers helps Sprint or hurts them. Sprint finally got positive net new customers this past quarter, but not primarily in the demographic of postpaid power users that Verizon shoots for. Citigroup analyst Michael Rollins said in a report that Sprint’s negative cash burn of $914 million in the first quarter will widen to a total of $6.1 billion for calendar year 2015. Yikes.
We want Sprint to get this all fixed. Right now enterprises are unable to treat U.S. wireless as a fully commoditized market because Verizon and AT&T are able to claim sufficiently superior network metrics to toss around a good deal of FUD. (That’s our old friends in the competitive telecom market: Fear, Uncertainty and Doubt.) T-Mobile is still learning to speak enterprise, and Sprint logically should be the company that lights the competitive fire by making great offers over a comparable service to the Big 2.
But to do so, the company’s mentality has to come in line with the rigor of the enterprise market, with concrete improvements they can readily implement. Chasing rainbows isn’t going to do it – and to that point, may I ask what kind of a name is the “Sprint Next-Generation Network” anyway? Isn’t that term awfully played out?
I hope someone in Kansas City has the nerve to tell Marcelo Claure that, but I fear that no one does. Nobody seemed to tell former CEO Dan Hesse that Sprint’s previous network investment plan, “Network Vision,” was a pretty tiresome cliché as well.
By David Rohde Posted May 4, 2015
Rub your eyes in disbelief, and then come back to this post and re-read the following First Quarter 2015 results of Level 3, once the financial basket case of the telecom industry:
- It made a no-baloney, no-asterisks net profit of $122 million.
- It has no debt due to mature until 2018, and very little until 2020.
- Its average bond interest rate is down to 5.3%, compared to 6.8% a year ago.
- It projects free cash flow after all interest payments of over $600 million for the year.
- Its stock market value crossed $20 billion the day after it announced earnings.
Talk about identifying an opportunity and riding it. Quite simply, Level 3 stepped into the gaping hole left by Sprint when it abandoned bids for large enterprise wireline procurements. (No, Sprint, I don’t need you to stand up yet another empty suit to argue that you’re “really” in the wireline market when you’re “really” not.)
Under CEO Jeff Storey, Level 3 has learned to speak “enterprise” and actually understand what that term means. Most pretenders to the No. 3 position behind AT&T and Verizon misuse the term “enterprise” as a synonym for “business customers” with no real understanding of scalability. Level 3 came in with an unabashed, full-featured SIP Trunking product and then branched out to full engagement in large transport and transformational procurements for Fortune-class companies.
Buttressed by its acquisition of TW Telecom’s very granular U.S. network (and, for what little it’s worth, TWT’s primarily non-large-enterprise customer base), Level 3 has played where the two other carriers that should be the natural new “Number Threes” – CenturyLink and XO Communications – have sometimes faltered.
CenturyLink has acknowledged that it’s going through a transition of its national sales teams, basically cutting out the deadwood that didn’t even know how to sell MPLS, much less other current products. XO just gets stuck on real scalability and its smaller metro footprint than Level 3, even though it can make some smoking bids for individual circuits.
Perhaps executives at these two companies should listen to Level 3’s earnings calls, where even the company’s CFO, Sunit Patel – between rounds of refinancing nearly all of Level 3’s previous short-term debt to the next decade – talks of “capillarity” in the far-flung Level 3 metro network. That alone tells me that the company “gets it” when it comes to the enterprise market. And talk about a 180-degree turnaround from the days when Level 3 thought it was hot stuff because it had the ultra-commodity of wholesale long-haul bandwidth – and nearly had a date in bankruptcy court to show for it.
So does Level 3 have it made? Hardly. Last week, at the Negotiate Enterprise Communications Deals conference in Orlando, it was striking how almost every corporate user is now engaged with Level 3 at least in RFPs if not already in their networks. But it was equally striking how unequal their actual bid experience is with Level 3.
Many enterprises have brought in Level 3 on one thing or another, and then used that tactical relationship to give Level 3 the opportunity to make a winning proposal on a large new network rollout. But other users reported that they were amazed at how high Level 3 bid on at least the first pass, and scratched their heads on whether to continue to use them as a competitive offset to their incumbent.
Are there reasons for this inconsistency? Almost certainly the complicated merger integration of Level 3 and TW Telecom is one of them. Throughout the industry, not everyone at either the account team or product manager level is hip to the way that enterprises “discover the market” via their RFPs, not just for fun, but for keeps. If I’ve got MPLS and Internet ports out to bid, with Ethernet access of 5M and up attached to a whole bunch of them, an RFP to AT&T, Verizon, Level 3 and perhaps one other is going to really show who means business.
Often that’s a question not just of the companies on the bid list but also the individuals involved. Many customers of all carriers talk about the ability to harness an account team that can really work their own internal organizations. That holds true across large incumbents and what we once called “second-tier” carriers but are really now “contending” carriers for major network upgrades and transformations.
At the top of the Level 3 org chart, Storey and Patel last week talked extensively on the subjects that stock market analysts naturally ask about – the next “deal.” Storey told them that Level 3’s next acquisition is more likely to be outside the U.S. because “we will not do anything that causes us to damage our integration of TW Telecom.”
But the “deal” I want them to focus on most of all is the next deal with an enterprise customer. Level 3 needs to build consistency and predictability into its responses and not count on slips by their competitors just because – oh for example – Verizon is letting itself get pushed around by its uber-profitable wireless side. We welcome Level 3 into so many more of our own procurement projects for our clients. What happens next in all of these will be fascinating to watch.