TC2's David Rohde on Telecom
By David Rohde Posted April 29, 2016
Yesterday Verizon issued its BAFO, or Best and Final Offer, to the CWA and IBEW to resolve their current strike. The proposal includes 7.5% in wage increases and some marginal-looking changes to Verizon’s outsourcing and employee-transfer policies.
As a consultant, naturally I now want to see Verizon’s BARFO. That would be its Best and Really Final Offer. The unions seem to feel the same way, which is no surprise. It’s kind of comical to see Verizon reach for an insincere piece of midgame negotiating terminology at a time when both sides have long-term goals that neither wants to paper over in an interim contract.
Verizon feels it absolutely must come out of this episode with flexibility to change its overall business model. Even they probably don’t know exactly what their business will look like in the year 2020, since so much depends on what other technology players and private equity investors are willing to pay to take things off Verizon’s hands. The one thing Verizon executives do know for sure is that they want up to half of America addicted to Verizon’s mobile devices and, increasingly, Verizon’s own content deals because, you know, “Better Matters.” That means keeping up their current wireless investments and winning the race to 5G.
To get there, Verizon absolutely must affordably raise the money for whatever new spectrum they grab from UHF TV broadcasters this year. That means either raising their credit rating from BBB+ to A-minus and/or finding more asset sales like their apparent snookering of Frontier to take over the old GTE ILEC territories. Frontier not only paid $10 billion for these businesses but is getting saddled with terrible headlines in the Los Angeles Times and elsewhere as thanks for its generosity. You gotta wonder what they were thinking in helping out Verizon so charitably.
With few other players as clueless as Frontier out there, Verizon now has to wait out much higher offers than anything currently on the table for the following businesses in something like the following order: 1) the Terremark cloud and data center operation; 2) the FiOS consumer business in the core Bell Atlantic area, and ultimately, just possibly 3) the enterprise business that originated as good old MCI. What’s obvious is that in the meantime, Verizon cannot let these businesses be cost drains or perceived hindrances to its credit profile while it continues operating them rather than sell them for a song.
There’s no other explanation for why, on the consumer landline side, Verizon is so set on moving FiOS technicians around so freely. If FiOS is so great, you’d think they’d just build it and maintain it everywhere they’re still an ILEC from Virginia to New England. Then there would be plenty of work for all their employees to do exactly where they’re stationed. But the company’s geographic selectivity – not just on where FiOS is at all but also where the most premium bandwidth options up to 100M are offered – represents their hedging of this bet. And there’s always continued cord-cutting to consider now that mobile broadband is more ubiquitous.
For their part, the landline unions (which is what they basically are) feel they absolutely must protect the interests of what are, to be honest, their primarily older memberships. Getting yanked around the East Coast to do jobs that it’s obvious that Verizon, despite its strike bravado, really doesn’t have other people trained to do is not proving appealing to this workforce. It’s not entirely clear what the CWA thinks its membership is going to look like 15 years from now, and those photos that John Legere posts on Twitter of insanely happy (or perhaps brainwashed) non-unionized T-Mobile store workers around the country aren’t helping the union cause. But now is now, and the unions want their people protected while Verizon decides what it wants to be when it grows up.
What gives in the meantime? Customers are asking their Verizon account teams for, you name it – an inventory of current services, a next response to a bid for new services, a network management request that can’t otherwise be handled automatically – and the answer is coming back very frequently that those people aren’t around right now so you’re going to have to wait.
And there’s the critical intersecting issue that Verizon has been trying to re-initialize and re-standardize terms and conditions but in their own favor, with the term “Verizon Rapid Delivery” taking on new and interesting irony. The important clawback to best-practices terms and conditions from the enterprise customer perspective also requires this critical back-and-forth with Verizon account relationships.
Slow-rolling any of this isn’t in either Verizon or the customers’ interest while we continue to see new players, whether a carrier like Level 3 or a different provider like Accenture, aggressively attack the transforming WAN marketplace. If Verizon thinks throwing around the term “Best and Final” will make the world stop spinning, it won’t. Real impacts are taking place. It will be fascinating to see where they go next, and how quickly.
By David Rohde Posted April 14, 2016
The current strike by 36,000 members of the Communications Workers of America and the IBEW is hardly going to sink Verizon. It’s less than one-quarter of Verizon’s total workforce even if certainly a concentrated number of people in their East Coast ILEC operations. One of the funniest things about Verizon’s response is that they say they can handle it precisely because these strikes happen so regularly. They make it sound like a routine fire drill. Move along briskly but no running!
Back in the real world it’s not all fun and games. There’s a diminishing amount of margin and tolerance for this kind of disruption in the wireline business. Each time that more senior, non-union people in the company are called upon to fill in tasks performed by missing employees, it becomes a slightly more critical and dicey situation. Senior account executives have sent messages to enterprise customers cautioning them that they may be out of pocket performing other duties with a “this time we really mean it” air.
Personally I relish the image of Verizon sales execs having to climb telephone poles or answer call center inquiries from testy retail customers. But think of what that kind of activity is replacing. We’re already in a period where Verizon customer commitments are getting scrambled by attempted forced marches to new contract paper. The savvier Verizon enterprise customers have worked hard to reinstate and reinforce proper terms and conditions, but much depends on follow-through within the Verizon organization. A deeper fall-off in that level of eyes on the critical details – everything from proper implementation of credits and measurement of service levels to back-billing issues and dispute resolution – is entirely possible.
All this is happening at a time when nobody fully trusts what Verizon’s long-term intentions are in the wireline field. We’ve been clear that Verizon remains a highly desirable competitor for the medium term even if the reasons are essentially circumstantial. CEO Lowell McAdam and CFO Francis Shammo have basically said that Verizon retains the WAN business because 1) nobody else would buy it from them for a decent price and besides 2) if they sold it, how would they get you to buy more Verizon wireless plans and devices at a time when the dastardly AT&T is cleverly integrating their wireline and wireless enterprise businesses? Such backhanded enthusiasm justifiably has people on edge.
The strike itself is really centered a bit more around the FiOS consumer wireline broadband business, with the company maintaining that it needs flexibility to move around trained FiOS technicians to new territories and the unions claiming that this is just a ruse to induce more experienced employees to leave. One of the additional risks for Verizon appearing to treat the eventuality of a strike with routine equanimity is that it gets sucked into current societal and political controversies. Just yesterday McAdam hauled off on Bernie Sanders for the way that Sanders expressed his solidarity for the strike. While I try to keep these commentaries non-partisan in the broader, non-telecom-specific sense, McAdam had a point about Sanders’ now-familiar generic rhetoric about American corporations and investments, given that Verizon really is one of the country’s biggest domestic re-investors in capital expenditures. Although they certainly turn around and try to charge for it – “Better Matters,” remember?
The point is that the entire industry is, consciously or otherwise, starting to ape John Legere’s engagement in current affairs and popular culture and often stepping into minefields, as Sprint’s Marcelo Claure did once again this week on a completely different matter of a pulled ad. Risk piles upon risk when images like striking workers hit both the traditional mass media and the Twittersphere.
However the strike turns out, Verizon remains in the mix in every RFP and a critical provider of the current and emerging network and IT communications services we deal with every day. The question is whether the cavalier, “we can ride it out, no big deal” manner that Verizon affects about things like a big workforce not showing up for work reveals important clues about the future. It’s not “no big deal” that this is happening just because something like it has happened before. All of us certainly have both eyes trained on it, whether we’re in Verizon’s ILEC territory or not.
By Joe Schmidt Posted March 1, 2016
The following is a guest post by TC2 Project Director Joe Schmidt.
It wasn’t long ago that BYOD was viewed by some as the new “best practice” for enabling mobility in the enterprise. BYOD was going to provide more choice, greater productivity, and happier users.
Unfortunately, BYOD hasn’t delivered the results most enterprises had hoped. So there is a renewed interest in maximizing the value of corporate-sponsored mobility programs. Mobile service providers have stepped up to support this renewed interest by introducing new rate plans, but they require a new way of thinking about mobile services.
If it’s been a while since you last looked at your mobile provider’s service offerings, one of the first things you’ll discover is that data is now the driver in corporate rate plans. The cost of Verizon’s Flexible Business Plans, for example, varies based on the data allowance a subscriber selects, and domestic voice and messaging are unlimited. Verizon also offers custom plans and, yes, you can still buy plans that are pay-as-you-go or have some amount of inclusive minutes, but the focus has switched to data because data consumption is growing … a lot.
Another change that’s benefited companies with a large number of data users is the ability to share (or pool) data across users and different devices. Pooling of voice minutes has been available for some time and corporate users in the past have been allowed to share data, but only across similar devices. Smartphone plans could share data with other smartphone plans, tablet plans could share data with other tablet plans, but smartphone plans couldn’t share data with tablet plans.
Today, mobile providers allow all data to be shared, regardless of the type of device using the data plan. So smartphones, tablets, MiFi devices, and data cards can all share the same data pool.
If you’re not into managing pools, Sprint and T-Mobile offer plans with unlimited data and come with the requisite unlimited voice and messaging. AT&T also offers an unlimited data plan, but it’s targeted at consumers (at least for now) and you need to have DIRECTV or U-verse TV service. A word of warning: Some of the mobile providers will slow down the connection speed of the unlimited data plan if the subscriber consumes too much data in a month.
Remember Vodafone, the UK mobile provider that sold its 45% stake in Verizon Wireless back in 2014 for $130 billion? Well, they’re back. Without a lot of fanfare Vodafone has again entered the US mobile market, but this time as an enterprise-focused Mobile Virtual Network Operator (MVNO) reselling T-Mobile.
Vodafone’s new enterprise plan for US multinationals was pioneered in the UK. Known as Vodafone Red, the plan is designed using a company’s unique usage profile and gives the enterprise a bundle of minutes, data and messages that are shared by all corporate users. The price of the plan is guaranteed not to change for the first six months of the contract, and any overage, if incurred, is not charged. Vodafone leverages its global reach and offers international roaming rates equivalent to domestic rates in 48 countries, if a user buys the daily add-on feature.
I’ve touched on a few of the changes taking place with mobile rate plans, but I have much more to share. I’ll be speaking on a panel at Enterprise Connect in Orlando next week where we’ll be discussing the new mobile rate plans and their potential gotchas, the new approaches for equipment funding, and how to decide which mobile provider and plans are best for your company. I hope to see you in Orlando.
By David Rohde Posted February 25, 2016
If you missed the news from earlier this week that Verizon is buying XO Communications, I could spin you a story as to why the lack of hype is a good thing. Nobody’s come out with the typically Orwellian bit about how “combining” companies “creates” a stronger carrier, skipping over the eternally painful business of supplier merger integration. In fact, I challenge you to go to XO’s website right now and see how far you have to dig even to know that your business is being sold out, or that anything at all is about to change.
But, of course, things are going to change and there’s going to be upheaval anyway. That’s being triggered by the weirdest M&A announcement I’ve ever seen in the industry, as XO and Verizon carefully crafted a brief statement on Tuesday that the bigger company was buying the smaller one’s “fiber-optic network business” for $1.8 billion.
For all the world that sounded to a lot of people, myself included, like a sale of XO’s wholesale carrier-to-carrier business … or maybe the underlying routes of the enterprise business but not the customer accounts … or maybe some special construction or custom-build division deal. But in fact this was XO owner Carl Icahn’s ham-handed way of saying he was selling XO complete as a business while simply keeping his wireless assets – some valuable spectrum in the LMDS (Local Multipoint Distribution Service) range of 26-29 GHz and up.
In a cue to what the real motivation was here, Icahn gave Verizon a 2-year lease on the LMDS spectrum with an option to buy at the end of the lease. No doubt taking the whole rest of the company off his hands, including XO’s customers, was something Icahn required of Verizon to get the deal done.
Icahn is really more a financial engineer than an industrial mogul, and he has all but called XO a giant pain in his rear end. Almost everyone had been amazed that XO hadn’t been sold long before now. But with Level 3 zooming ahead on metro buildouts nationally and the emergent Zayo Group winning huge backhaul contracts with the big wireless carriers and working dark fiber deals for fat bandwidth with very large enterprises and municipal governments, XO appeared to be falling behind. In short, it was probably now or never for Icahn to recognize some residual value out of an investment that dates back to the telecom crash at the start of this century.
On Verizon’s part, the acquisition probably says little one way or the other about its long-term prospects for unambiguously committing to wireline enterprise after last November’s panic over whether it would get out. I don’t mean to sneeze at an image of what 1.8 billion bucks would look like stacked up in cash, but the reality is that Verizon, with an annual capital expenditures budget of $17-$18 billion, probably considers this purchase price as simply substituting for other kinds of wireline capex.
In an era of Ethernet access, Level 3 has demonstrated that there actually is value today is building out according to the importance of metro areas nationally rather than resting on the laurels of an ILEC position, which tilts the U.S. map in one direction but leaves you fallow elsewhere. With XO, Verizon picks up about 4,000 last-mile building entrances nationally, although that’s about one-tenth of what Level 3 has. Verizon also presumably gets to substitute some newly owned backhaul fiber for what it would otherwise have to pay a wholesale provider to stay ahead of lurking congestion on the wireless multimedia broadband traffic that it relentlessly impels consumers to consume and pay for.
And that LMDS spectrum gets Verizon potentially major benefits for both its emerging 5G strategy as well as additional backhaul. It’s perfect for backhaul from cell towers as it delivers high bandwidth using small dishes the size of a plate. The direct pickup of XO’s “fiber” plus the lease of XO’s spectrum not only probably substitutes for other kinds of network investment but provides a help to both the wireless and wireline sides of Verizon’s direct sales to both consumers and enterprises. Whether Verizon ultimately tilts completely to the wireless business still depends far more on whether another huge player in the market eventually recognizes what the enterprise WAN business is really worth – hardly just the 5 times operating cash flow that a news service claimed was being bandied about last fall.
As for XO’s enterprise business itself, it’s too bad that the company’s occasional successes in selling MPLS, SIP Trunking and dedicated Internet as a competitive provider weren’t more consistently realized. They did often beat the pants off the larger carriers on price, and that benefited customers who knew to reach out in a tactical way. At the same time, XO was famous in industry circles for what must be the longest-running gripe session about employee layoffs in the form of a hilarious comment thread at Telecom Ramblings. And the real game now in enterprise is whether a strong and powerful No. 3 or No. 4 can emerge into the first tier of carriers at a time of fully strategic transformational procurements, not just tactical one-offs.
XO was never going to get there with the churlish backing of Icahn, who managed to bemoan the “bumpy road” of his XO investment over the course of 15 years in a final, rather irritable personal statement about his time in telecom and the sale to Verizon. Nice having you along for the ride, too, Carl, and good luck elsewhere.
By David Rohde Posted February 19, 2016
T-Mobile CEO John Legere had a bad day on Wednesday. RootMetrics, the carrier network evaluation firm, kind of ruined it for him. Actually it might be more correct to say that John let RootMetrics ruin his day. His overreaction was revealing.
Yes, in its now anticipated half-yearly report, RootMetrics placed T-Mobile last overall among the four U.S. national carriers. It must have been particularly galling for T-Mobile to see Sprint, a company that is perceived to be gasping for air, finish in third place. (Verizon was first and AT&T second, although I’m sure you already guessed that order.)
That evening Legere rushed out a statement blasting one particular part of RootMetrics’ methodology and literally saying RootMetrics should be “banned.” But all that did was to dramatically boost the publicity about the overall results. If he had taken a moment to even begin reading the report, he would have noted RootMetrics’ very careful and responsible qualitative remarks about T-Mobile’s results. Here’s the second paragraph of RootMetrics’ remarks:
T-Mobile offered fast speeds and strong data reliability in metropolitan markets. If you primarily use your smartphone in a major metropolitan area, T-Mobile remains a strong choice. Even though urban areas carry more weight in our results, it appears that T-Mobile currently lacks broad enough coverage to excel in our National or State RootScore studies.
Bingo. T-Mobile is doing just fine – indeed more than fine – in major metros. It helps explain the good earnings that T-Mobile reported on Tuesday. But it has the same problem it’s always had: it’s a lousy choice for smaller cities and rural areas.
Remember Legere’s profanity-laced tirade last year when he accused Verizon and AT&T of asking for special favors at the FCC for low-band spectrum when the truth was that it was T-Mobile who was asking for the special favor – a bigger block of spectrum in the next auction that the Big 2 would be prevented from bidding on? It was all about this issue – the foresight to corral relatively low-band spectrum for high-propagation signals in the North American continent’s sprawling diversity of geography and population.
Like a good politician, Legere at the time used a single throwaway line to try to slough off T-Mobile’s history of ignoring this need in order to present his favor-peddling as a white hat act. But regulators didn’t go for it and he dropped the routine. That is, until RootMetrics hit this same sore spot this week.
Why this matters now: Because that big low-band spectrum auction is almost upon us. Unless some last-minute complication derails it, on March 29, the government finally begins the giant “incentive auction” of formerly UHF television airwaves to U.S. wireless carriers. It’s a monstrously complicated procedure that may take several months to fully play out, first involving the government running an “incentive” or reverse auction for the TV station owners to give up their spectrum, and then the government auctioning back out the spectrum to carriers.
It’s also going to be a monstrously expensive proposition for the carriers. That’s probably the principal reason that now both Verizon and AT&T have been saying they’re laboring to restore their “A-minus” credit ratings (they’re both at BBB+) in preparation for the debt-raising they’re going to have to do to pay for their new spectrum.
This is also key in two related Big Questions about T-Mobile, now that it has supplanted Sprint as the No. 3 consumer wireless carrier: 1) Can it continue to finance its needs on its own, or will it opportunistically sell out to a bigger domestic player (such as a cable company) at a time when T-Mobile’s perceived brand value gives it leverage at the M&A negotiating table? 2) Can it finally become a highly relevant No. 3 in the enterprise wireless market? Consumers who buy T-Mobile can be mollified that they live in a metro area, not a rural village. But that equation is not so simple for enterprise deals where executives are assumed to be mobile and end-user populations are treating mobile broadband as mission-critical and not subject to excuses like “it’s just cellular.”
Indeed, T-Mobile’s capital needs in the face of the incentive auction and the way that possible industry consolidation is starting to line up are part of what I myself am discussing next Tuesday, February 23 in a special seminar in our Staying Connected webinar series. You’ve heard the scary stories about what Verizon might or might not do to dismember its business. And I’m sure you’re wondering what to expect from Level 3 (who desperately wants to be part of your next wireline procurement) and whether it’s worth putting the cable companies on the RFP bid list.
All of these issues fit into an interesting puzzle about both the wireline and wireless sides of the industry, including whether T-Mobile will mean more to enterprise customers in its current guise or a new one. Deep down I have to believe that even John Legere realizes it’s a no-win proposition to blast truth-tellers like RootMetrics. By yesterday he had dropped the whole subject, instead posting an entirely happy and energy-filled Periscope video of him visiting T-Mobile’s sales offices in Springfield, Missouri and – perfectly appropriately – lauding their high J.D. Power customer service scores.
Indeed I believe RootMetrics got his goat precisely because its measurements reveal the financial, market positioning and industry consolidation pressures that Legere and his bosses at Deutsche Telekom are currently facing. Hey, it’s at least as pressure-filled for all the other players as well, even if they control their day-to-day reactions better. The next steps will be fascinating to watch. Join me at the webinar next Tuesday for a nice deep dive on the subject.
By David Rohde Posted February 9, 2016
With all of the concern about Verizon possibly selling off a chunk of its business to concentrate on wireless, it’s worth noting the ongoing chatter about Verizon buying companies instead. The latest is the idea that Verizon will take poor Yahoo off its shareholders’ hands.
Here’s Verizon CEO Lowell McAdam chatting up the idea with CNBC’s Jim Cramer last Friday. And yesterday Tim Armstrong, head of Verizon’s AOL subsidiary (yes that’s right, a Verizon subsidiary, how the world has changed), was tasked with exploring a possible bid for Yahoo prior to Verizon’s hiring any investment banks.
Does that mean that the heart attack of an idea that Verizon would sell off its enterprise wireline businesses – mostly recently seen in miniaturized form in a Reuters report in early January that Verizon wants to sell its Terremark data center assets – is off the table? Not at all. What’s going on here is a price-matching exercise in the mergers and acquisitions game.
Verizon is buying “content” and other Internet assets because they can. Companies like AOL and Yahoo aren’t worth anything to anybody else – no offense – but Verizon can make their products platforms for their desired world domination of mobility. Verizon can’t sell its less desired wireline assets because they can’t get enough for them. Not yet anyway. Bandied-about figures for the data centers (about $2 billion) or the entire enterprise business (about $10 billion) don’t achieve Verizon’s goal of meaningfully cutting into its $130 billion stash of debt to raise its credit rating back to triple-A-minus, which in turn would be leveraged for reduced financing costs on more spectrum.
I actually have some sympathy here for Verizon’s position here – on the numbers, not on the concept of skimping wireline to concentrate on wireless. Level 3’s stock is worth $16 billion and had peaked with the stock market near $18 billion. And that isn’t even remotely what the company believes it’s worth. It’s extremely unlikely that Level 3 would sell itself (for example, to a U.S. cable company) for any less than $25-$30 billion. Currently it’s a buyer, not a seller. Level 3 CEO Jeff Storey did all but name the European metro fiber player Colt as an acquisition target in an earnings conference call last week.
So how could Verizon enterprise wireline be worth only $10 billion? It isn’t, and the more relevant question would be is it even worth “as little as” $20 billion with these comparisons? It just goes to show you relative sentiment in the market. Such a sale is not going to happen unless the winds shift, which of course it could, particularly if the wireline pure play Level 3 achieves its projected $1 billion in free cash flow in 2016 and investors realize what wireline still does for business customers.
I should be clear here. McAdam and other Verizon executives have never confirmed even the idea of enterprise wireline as a whole being shopped. Granted, his “denial” only gave wireline accounts the rather backhanded compliment of helping to sell wireless services to businesses. But Verizon CFO Francis Shammo has openly acknowledged that its data centers could be offloaded for a price.
Part of the issue with a transaction price there is a sort of pique with the perception that Amazon Web Services is a total category-killer in cloud. AWS is huge, of course, but the Wall Street Journal has previously noted that Amazon stockholders seem to pay up for mere revenue, not profits, and the importance of hybrid cloud solutions to enterprises seems to be lost in the valuation game. Still, my bet – anything between $3-$5 billion for Terremark and it’s gone to somebody else.
Watch for publications and webinars soon from us in which I extend this M&A price-matching analysis to what is and isn’t going on in 2016 in terms of industry consolidation, rising carriers, and the possibility of cable companies becoming real national enterprise suppliers. In the meantime, remember something we pointed out last November when the whole concern about Verizon began – it’s not that they would exit enterprise wireline, it’s what it says about Verizon’s leanings within enterprise accounts and across product and contracting platforms that people believe they might do this. Maybe it’s best that buyers and sellers right now can’t agree on what building-block stuff within telecom is worth. If they ever do agree, and they might by the end of this year, the upheaval could be something to really behold.
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.