Next week, I will spend the bulk of the time on the 2001 Business Plan process and output at AFC. This was a major event in the history of the company where we examined our market conditions and actual numbers in the company. The last post reset where the market had taken the UMC up to that event, but today I want to reset the Business Climate. This needs to talk about technology, customers and competitors. All of this is in preparation for so that you can understand (I hope) why we did what we did.
I have already posted a bit about the Optical Bubble, but I want to remind you of what it was and how it impacted the AFC world. This started with 2 different angles. First, there was the explosion of the Internet with the introduction of the World Wide Web in 94. People were talking about Internet traffic doubling forever based on the early days of what was going on. The second factor was the creation of CLECs through the Telecom Act of 1996. This created a new class of carrier that (theoretically) could offer new and innovative services on top of the existing phone network by “renting” that facilities and using them to do new things.
Many of you might remember the early days of the dial-up Internet. I was working at Racal-Datacom at the time and we were getting lots of new modem wins at companies that nobody had ever heard of before then. These companies were rapidly expanding their facilities and they were buying racked modems at a very fast pace. This led directly to the development of products like the Ascend TNT and TNT max products that were built for that market. By 1999, the first DSL rollouts were happening, but cable was far ahead with cable modems. I got my first broadband line in 1999, a 1.5Mb/s service from SBC with a Alcatel 1000 modem and a real splitter in the NID. The explosion of traffic was real and it was causing a lot of pressure on the telco facilities. This led to the deployment of more optical equipment to meet the new bandwidth needs. In the access network, telephone companies were struggling to deploy lots of second lines and then DSL. One of the things the telcos did is deploy Pairgain based around ISDN technology and that alone screwed up the capability of bringing DSL to that home. But the deployment of broadband services on both cable and telco lines added even more pressure to build out bandwidth.
Then there were the CLECs. I need to add here there were also the carriers like Quest that really weren’t CLECs but were building national transport networks to help carry that Internet traffic at the same time. But in both cases, there were new customers to buy equipment. These carriers had a simpler sales cycle than the traditional carriers, so equipment could be sold much more quickly. So, on top of the pressure from the Internet now there was another push to install lots of equipment. This included long haul equipment for the transport equipment to hook up the “NFL cities” and the metro equipment to provide Internet bandwidth within a city.
One other point of pressure exists because of the Internet due to a change in the Pareto rule with traffic. In the telephone networks, it is a widely quoted statistic that 80% of all calls are local to wherever you are in the network. This is why the “Mother’s Day” problem existed. Phone networks were not built for the large percentage of long distance calls made on that day. The Internet is quoted as being the other way around. By that I mean that 80% of traffic is remote from any place in the network. So, the thin long haul networks of the telephone era become the thick networks of the Internet Era.
This demand created a huge number of new optical players. I recall a Quest RFP that received 87 responses from different players. Yes, 87 people who thought they had a good product for this bid. When we did the JPC for FTTP it was more like 20 and that was a big number. Then Cisco bought Cerent for $6.7B. AFC was right next door to Cerent and I remember talking to the guys in the News Van who were in our parking lots. Things went NUTS. I recall quotes of companies being bought for a multiple of the number of engineers on staff. Everybody got funded. Hundreds of millions were poured into companies.
Now much of what was going on was based on a fake funding model called Vendor Financing. Equipment companies were providing money to carriers to buy and install equipment. The idea being that the carriers would be able to skip the complicated process of raising billions to build networks. From an equipment vendor standpoint, they locked in the carrier’s business. They also were able to spend cash on hand to accelerate business. Here was the problem. These new carriers did not create greatly differentiated business and the network buildout was over funded. This led to the collapse of the model. If I use Winstar as an example, they took $6B from Lucent. With AFC, they turned up 3,500 buildings and they only had customers in 40% of them. They had other customers that were not on their network directly, but you can see they used the money as a land grab.
The thing is that maybe all these new products that were being developed might have created new services. But these products were not ready and so the new carriers used the existing products that were deployed by the traditional carriers and sold the same services. So, these carriers collapsed. Some still exist, but even those that do went through a period of debt reduction and consolidation. So, demand for the new products dried up before they hit the market.
Now the traditional equipment vendors had funded the carriers and overpaid for the new vendors. Poof – money gone. Now they were in trouble economically. So, as we looked around after the bankruptcy of Winstar we saw a customer base and competitor base that was in over its head of financially. We had maxed out our market share in the IOCs. The RBOC business was stalled. The International business was small and flat. Next week, details on our 2001 Business Plan…have a great weekend!
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