TC2's David Rohde on Telecom
By David Rohde Posted April 20, 2015
That’s going to be one heck of an agenda at the Justice Department on Wednesday when Comcast and Time Warner Cable arrive to discuss their merger. Or I should say, beg for their merger. The Justice Department staff now clearly has many points on which to propose to their senior political appointees that the merger be blocked.
Almost certainly the idea that a yet-bigger cable company could better compete for large enterprises’ business by having a bigger footprint isn’t going to be high on the list of topics, if it appears at all. But that’s always been our key interest in this round of proposed mega-mergers outside the wireless industry. And the tension here is analogous to the more public points of contention in this very prominent matter.
As often seems to happen when two giants in a legacy sort of industry (which cable is already becoming) propose to merge, their pro-merger arguments have an odd cast to them. Comcast and Time Warner are essentially arguing, “We’re actually not that good. We’re not even very relevant.”
They’re basically saying that cable TV is not a “thing” unto itself any more. It competes with a dozen other ways for people – especially millennials – to get their fix of entertainment, news, gaming, music, interpersonal communications, you name it. Therefore, in essence, their argument is, “Who cares if we merge? Don’t worry about it – it’s no big deal.”
Of course the flaw with that much false humility is that both of these companies, like AT&T, Verizon and CenturyLink, are broadband access providers with a certain type of incumbency about them. And that’s where an interesting historical precedent with the telecom industry comes in.
When it comes to the infrastructure side of the business, Comcast and Time Warner seem to implicitly promote the same sort of “if-only” argument that AT&T’s ILEC core, once known as Southwestern Bell or SBC, used to throw out there to obtain approval for its many roll-ups. Despite their whole-hearted embrace of Ethernet access, cable companies are legendarily allergic to proposing out-of-market solutions. So in theory mashing together Comcast and TWC’s maps would make for more comprehensive proposals to enterprises.
But the fly in the ointment is that TWC already has said – extremely quietly but still – that it will do a national Ethernet offering including out-of-market, “Type 2” access pricing. How come they’re able to do that? Because there’s no real “rule” about size when it comes to determining whether a provider wants to make national proposals. The ultimate factor is the desire to do so.
And arguably the far more effective physical leverage in going national is not a bigger incumbent map – which can never be anything like 100% anyway – but a diverse, facilities-based competitive map, such as Level 3 has been developing, which predictably hits close to where many or most of an enterprise’s locations are.
Once again my psychology degree is of the armchair, not academic, variety. But when it comes to any supplier’s desire to expand its competitive energy, 25 years’ experience in this industry tells me that it always runs in inverse proportion to the amount of time the CEO in question is involved in financial engineering in New York and political lobbying in Washington.
In other words, the best thing that can happen to this merger is for it to be finally resolved one way or the other. Covering 20%, 30%, 40% or 50% of the country isn’t going to get Comcast, or whatever it’s going to be called, into the mix with Level 3, CenturyLink, XO and some others in enterprise proposals. Spending large amounts of executive time and energy on the enterprise market will. Let’s see where this goes. Hopefully whatever that is, it happens quickly.
By David Rohde Posted April 16, 2015
If deep pockets and open wallets were the main result of foreign entities owning American telecommunications carriers, then this feature of such a capital-intensive industry might be entirely constructive and transparent.
But it doesn’t seem to work that way. The fact that two of the four U.S. national wireless carriers are foreign-owned tends to create discomfort for their American subsidiaries in unexpected ways. Perhaps the inherently political nature of telecom exacerbates the problem.
You can see this in the debate I mentioned yesterday over whether carriers other than AT&T and Verizon should have “incentives” or “set-asides” for the re-use of UHF television spectrum due to be auctioned off in early 2016.
Both Sprint and T-Mobile say that as smaller carriers they’ll be priced out of the auction if the Big 2 are allowed to bury them in repeated bids for all of the airwaves up for grabs. But AT&T and Verizon have a pretty easy retort that they haven’t been shy to trot out.
Translated from Washington bureaucratese into plain English, it goes: “Whaddaya mean you’re ‘small’ carriers that need set-asides? You’re owned by two of the biggest companies in the world! SoftBank and Deutsche Telekom can bid whatever they want for any of the spectrum you need.”
It’s an intuitively logical argument that’s hard to question. What it fails to account for is the difference between capability and desire on the part of foreign owners. The worst pain for a subsidiary seems to come when an owner is both rich and remote. That can cause them to pull their punches on their U.S. investment without generating any sympathy, putting the U.S. carrier in a tough spot.
Recall that for years it was a truism that Deutsche Telekom badly wanted out of the U.S. market. After all, they twice “signed” a deal to bail out of T-Mobile in the U.S. – once officially with AT&T in 2011, and once unofficially in the first half of 2014 while SoftBank shopped the deal in Washington, only to be squashed by FCC and Justice Department officials.
Yet these periods of disillusionment with the U.S. market can turn back into enthusiasm. Now you can clearly feel DT’s intrigue with the U.S. market growing again, especially now that they’ve set John Legere loose to shake up the U.S. wireless market.
My read of DT’s current position is that they’ll be happy to sell out – for absolute top dollar, the way Vodafone did with its 45% stake in Verizon Wireless (which netted Vodafone an incredible $130 billion). In the meantime DT can enjoy an unusual period in the U.S. wireless market where pure subscriber acquisition, not profits, is the governing metric of success. That makes T-Mobile US a more and more valuable property every time Legere tweets congratulations to an American consumer who supposedly waves goodbye to Verizon, AT&T or Sprint.
But poor Sprint is watching its own foreign owner, SoftBank, appear to go in the other direction on the enthusiasm meter. SoftBank came into the U.S. in a blaze, certain that it could replicate its success in other countries in turning weak carriers into “strong No. 3s” gunning for the No. 2 spot. When that proved difficult – essentially because the U.S. isn’t a densely populated country like Japan or South Korea and Sprint’s network holes were far more intractable – SoftBank reached out to grab T-Mobile. Now that that hasn’t worked, look what’s happening.
SoftBank’s own fourth-quarter 2014 results came as a shock – down two-thirds, largely due to big losses at Sprint. SoftBank CEO Masayoshi Son has been widely reported as telling analysts since then that he’s not going to bet the entire company on Sprint. The company decided not to bid at all in the recent AWS-3 wireless auction and in fact has floated the idea of selling some U.S. spectrum, not buying more. It’s dumping some office space in the San Francisco area that it expected to need after acquiring T-Mobile.
And the negative reviews have flowed and flowed for Sprint’s ad campaigns and off-the-mark strategems like setting up shop in defunct Radio Shacks and putting cutesy cars on the road to deliver phones (eventually, to some customers, in some cities) – all of which seem tangential to the urgent need to stop finishing last in network ratings from RootMetrics and Consumer Reports.
Which is easier: Buy ads promising “half off,” or raise the capex budget by $10 billion to match Verizon on 4G coverage, speed and reliability? Mr. Son has many shareholders to report to in Japan, too.
Many cross-border acquisitions have been unwound over time – not only in the telecom business but also in many of the vertical industries in which large enterprise customers are found. I’m only an armchair psychologist, but SoftBank and Mr. Son don’t seem to be having any fun any more with their U.S. acquisition. Looking like you have a rich foreign owner but not benefiting from it a whole lot may be the worst of both worlds for Sprint. Over the next couple of years, while the U.S. market completes its transition to all-IP in the ground and all-mobile-broadband everywhere, something may have to give on that front as well.
By David Rohde Posted April 15, 2015
The official U.S. government policy to maintain four national wireless carriers rather than the three that many other countries enjoy has been confirmed by the government’s two firm rejections of attempts to buy out T-Mobile US Inc.
It doesn’t really matter than the denial of AT&T’s bid in 2011 was official and the denial of Sprint/SoftBank’s bid in 2014 was communicated behind the scenes, since Sprint never formally submitted its T-Mobile takeover bid. The consumer wireless market still has essentially benefited from this firm stance by the FCC and the Justice Department, even looking beyond some of the marketing tricks that all the carriers use.
But enterprise customers keenly feel the incomplete nature of this four-carrier competition. If national broadband wireless capability were truly a commodity, then you’d put out an RFP and let the four players fight like dogs to offer the lowest “price” (meaning effective price under a sophisticated Total Cost of Ownership analysis attuned to the wireless market) until you got a winner.
But of course it’s not that simple. Verizon, AT&T, T-Mobile and Sprint just aren’t the same animal when it comes to large business relationships. Verizon clearly gets mileage out of the fact that its 4G network was first and broadest in coverage, giving it today’s wireless equivalent of “Fear, Uncertainty and Doubt” about using somebody else. And AT&T is, well, AT&T and always will be.
By contrast, T-Mobile finally has made some “business-to-business” hay out of its Uncarrier initiatives but still suffers coverage gaps that make telecom managers fretful about sending end-users on the road with T-Mobile devices and plans. And T-Mobile’s knowledge of enterprise (not just “business”) best practices in contractual terms and conditions is still a gleam in their eye more than anything else.
Meanwhile, Sprint now tends to do poorly in any competitive situation except defending existing business, as part of its incredible slide down the path to irrelevance throughout its once-vaunted wireline and wireless product set – frankly one of the saddest stories I’ve seen in my 25 years in the telecom business.
Note the order in which I placed these players for discussion – Verizon, AT&T, T-Mobile and Sprint. That signals our intense interest in seeing whether T-Mobile (which for all intents and purposes has displaced Sprint as the No. 3 consumer player in terms of subscribers won and U.S. brand image) can up its game to be a credible competitor to the Big 2 in large enterprise procurements.
Only now are people recognizing the incredible importance of an upcoming spectrum auction in determining the answer to this question. In early 2016, provided all the pieces are in place, the U.S. government will auction off relatively low-frequency spectrum in data connectivity terms that once acted as ultra-high frequency in television broadcasting terms.
T-Mobile frankly needs some of this stuff. That need becomes more and more urgent as people (read: your end-users) not only expect a “signal” for “cell phone calls” but think they need broadband connectivity to work wherever they go in the U.S. other than a Rocky Mountain hilltop.
But in a terrific article yesterday in the Washington Post, the Post’s telecom and tech writer Brian Fung explains the dicey nature of this auction. The whole thing is worth reading, but here’s the challenge for T-Mobile in five points:
- The government still has to yank that spectrum away from the broadcasters, who want top dollar for it. They’re pretty desperate in the first place, because “broadcast TV” isn’t doing too hot as millennials run to other forms of entertainment.
- The broadcasters believe, not without reason, that the spectrum is worth the maximum amount if the government imposes the fewest possible rules on who can bid on the spectrum among the wireless carriers.
- But if the government does that, it may price “smaller” carriers like T-Mobile out of the auction, which may need the very kind of set-asides or “a leg up” for spectrum bidding that the broadcasters think cuts into the ultimate value of the spectrum.
- The broadcasters have a trump card because if they don’t give up the spectrum, there ain’t gonna be an auction at all.
- The longer this gets delayed, the more spectrum will soar in price – a recent auction of mid-band spectrum went for $45 billion rather than the $18 billion expected – and that only favors the Big 2 even more.
In the telecom regulatory world, this upcoming auction is often referred to as the “incentive auction” because of the working out of the bidding rules. Throughout the remainder of this year, we’ll be keeping a close eye on the developing roadmap for the auction. Keeping the enterprise wireless market from falling into its own form of duopoly is of critical importance. It’ll be the biggest spectrum war ever – watch this space.
By David Rohde Posted April 3, 2015
It’s an axiom of enterprise telecom RFPs that you probably want to award some business to competitive providers to keep the big incumbents on their toes. And in the old days, throwing some intercity private lines or some outbound long distance minutes to Carrier X was a nice, tactical way to achieve this purpose without much operational risk.
But we do not live in tactical times. A massive strategic shift is well under way in the enterprise market. Business customers are procuring products and services that have to be stable in the new, all-IP network environment as the TDM-based Public Switched Telephone Network is about to be ripped out of the ground.
That drives two completely intertwined questions: What services do you put out to bid? And who do you put them out to, in addition to AT&T and Verizon? It’s an anxiety-inducing pair of questions. Think about what’s on your plate now: Is a “CLEC” really a rigorous enough vendor for you to throw business at when the stakes are so high?
At our upcoming conference for business users, Negotiate Enterprise Communications Deals, running from April 27-29 in Orlando, Florida, connections among sessions and speakers will bring these linked decision points into focus.
I’m thinking particularly of an in-depth session to be presented by LB3’s Deb Boehling and TC2’s Pat Gilpatrick called “Data Network Transformation” that is heavy on Ethernet access, MPLS Bandwidth on Demand, and on-net access to the cloud. That will be complementary to a session that I am presenting called “Reconstituting the First Tier.” If you are buying Ethernet access to a critical service like SIP Trunking, or if you are moving key applications to (probably) a private or hybrid cloud structure, you’re probably not looking at vendor selection for these services the way you would have for Plain Old Telephone Service!
For a number of years I have been evaluating “competitive” or “second-tier” carriers based on their skillsets and financial strenth and stability – not their stock price or even their credit ratings necessarily but their near-term debt “maturities.” Now, for would-be first-tier carriers who aren’t AT&T or Verizon, this kind of question affects bid lists for services that must be awarded properly or the success of your next-generation network is in jeopardy.
It’s striking the different abilities that carriers have demonstrated over the last two years to push off the typically high debt that all of them tend to have to later years or even another decade. Some have succeeded in doing this and some haven’t.
And no fair if a carrier does this by simply stopping raising money to invest in their network! There’s a strong correlation between the percentage of overall revenues that are devoted to what Wall Street calls “capital expenditures” and what you and I call “network investment” and a carrier’s ability to both provide contemporary services and reach a non-trivial number of your locations end-to-end over their network.
In all of this, one thing hasn’t changed from the telecom industry’s long-established pattern in large-scale technology migrations: It’s an opportunity for all carriers to restart the contract environment with new, more onerous terms and conditions.
Think about individual circuit terms in addition to the overall term of your contract and the overall dollar commitment. Are you prepared for the guilt trip that carriers will lay on you regarding the much higher bandwidth of Ethernet access circuits and the “sunk investment” that requires a circuit term? Are you prepared to counter with best practices for what are actually these days rather moderate Ethernet bandwidth needs?
Even if you do know the state of the art here, do you know the ingenious (okay, nefarious) little ways a relatively benign circuit term can turn into a real ball-and-chain, just because of the way it’s written and the way the prospective liability is calculated?
Remember, the Big 2 are not even necessarily the bad guys (or at least the “worst guys”) when it comes to this stuff. Newer carriers that want to play in the big leagues can come in with smoking-hot pricing but be some of the most challenging in this arena. In fact, the general attitude about terms and conditions is one of the evaluation areas that all of us – Deb, Pat, myself and all of the speakers at the Negotiating Deals conference – instinctively look to when we see a carrier that wants to make the step up to offering strategic services, not tactical circuits and ancillary services.
For the full agenda of the conference, check out the welcome letter from Conference Chairman Hank Levine and then go through the agenda. I hope to see you in Orlando on April 27-29!
By David Rohde 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.
By Mark Sheard 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.
By Mark Sheard 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!
By David Rohde 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.