Net Neutrality Friday

This week the big news was the Comcast/Netflix peering deal. In some ways it was a non-event. But given the popularity of Netflix (and I am both a Comcast subscriber and a Netflix subscriber) it raised a number of mainstream eyebrows.

First, I want to say I have never had an issue with streaming Netflix over my Comcast connection. On top of that, my son and I have only come close to our “bandwidth cap” with Comcast 1 month in our time here. He streams A LOT of video to his phone over WiFi and uses Netflix. We also use our PS/3+Youtube integration. With all of that and our other activities we are still below the threshold.

The peering deal made a lot of sense for both companies. My guess is that Netflix will bypass Cogent’s CDN over time with most of the US Tier 1 ISPs and directly peer with them. There is so much traffic now from Netflix that I think this will lower their long term costs. It helps the ISPs as they get some revenue out of the deal though probably not as much as they want.

The number of services that may encounter these scaling and growth issues is very limited. You need to be a site that delivers LOTS of video OTT. Right now there are only 2 – Youtube and Netflix. Given that Youtube is free and Google buys lots of stuff from lots of ISPs it is not clear that Youtube causes the same consternation from the ISPs as Netflix.

But on the Google front, they have announced a major expansion of Google Fiber. Interestingly, none of the cities to date are in Verizon properties. This means that Google is not going after FiOS. Google is going into Centurylink and AT&T properties where there is essentially no FTTH. I don’t expect this to stir up much as the cable companies can already do DOCSIS 3.0 (100 Mbps) anywhere they want. I still don’t thin Google is going to want to be an Access Player long term and will probably end up selling the properties. But it is FUN to talk about!

I think I can get back to general topics on Fridays going forward! If some telecom regulatory issue comes up, Friday’s will my days to talk about it!

Have a great weekend!

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis
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Sonoma County News and Notes

First of all, I want to remind everyone to register for my Webinar that I am sponsoring with Business Design Corporation. They have an offering and can help people apply some of the techniques from the E-Myth to your business. The webinar will be recorded, so I can send it to you even if you can not attend. THIS is a link to register for that event!

On to the major topic of the day. Calix reported results that were a bit down but still not awful. I did not listen to their call but read the transcript. I need to say one thing here that may not be clear to you if you have never done one of these. Quarterly Conference Calls are Sales Events. They are designed by the companies to announce factual data and mix it with the “Company View” of what is going on. The view is designed to give you a good reason to invest in the company. There is nothing wrong with that, but for those unskilled in listening they may not know it. Also, if you are going to listen to conference calls (something I highly encourage) there are some language issues that you may not know. There is a lingo that you can pick up by listening to multiple calls. That will help you separate the analyst lingo from the company or industry lingo. The cadence and tone of callers will sound friendly and inside – lots of what sounds like winks and nods. I can tell you that this is the furthest thing from the truth. Company Executives have to work to keep things upbeat and friendly. It is often hard and requires incredible personal control.

The results themselves are very familiar to me. Anybody who wants to can take a look at AFC in say 2002 and get approximately the same results. That is Calix’s problem. The Tier 2/3 Access Market supports a firm of about $350M – $450M a year. It supports some other firms business as well. This has been true for about 20 years. Really the only issue is can you make it a good business? Calix at the moment is making it a business around break even. Not horrible, but people will push for growth. There are few to choose from and we analyzed them in the 2001 AFC Business Planning process. AFC was more profitable and had more cash so it had more flexibility in choices. Calix has been pursuing International Business and I can tell you that is a hard slog. Outside the US the desire to invest in wireline networks is smaller than it is here. On top of that, the Chinese show up as powerful competition. There are large tempting markets, but getting needle moving results is hard.

And by the way, “needle moving” is one of those things that you need to think about in your own business. For Calix, it is not thinking about going from $400M/year to $410M/year. It is about getting to $550M – $600M per year. On that scale, you can see that finding the places that you might be able to get another $200M a year in revenue is an issue. Which leads to the second problem that Calix has and that is R&D spending. Right now Calix invests about 20% of revenue in R&D. That is a signal to the market that the company believes there is significant revenue growth coming. Yet there is little to show that such revenue growth is really happening. A typical sustaining percentage would be 5%. Right now, R&D spending is about double the growth rate. That means Return on R&D is bad and Calix needs to do something about that. Either change the spend to lower it or change it to invest in new revenues. Either way it needs to change.

This has been a big week on the Net Neutrality front with Netflix. I will post about that on Friday.

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis

Tellabs Access: The 3rd Leg

The 3rd leg of the Tellabs Access Business was the original AFC business with the Independent Telephone Companies (the IOCs). For the sake of simplicity, I will add in the small International Business that existed. When Tellabs took over, they stopped all new development outside of FiOS with one small exception.

That exception was the Gigabit Ethernet card that we already talked about. On top of that, Tellabs halted the development of the Next Generation Platform that was going on in Petaluma. All of that was to focus on delivering for Verizon. That focus is good but there was a misunderstanding of this leg of the stool. I was told directly by Tellabs Executives at the time of the acquisition that they didn’t like the IOC business.

Now, from a 3rd leg of the stool standpoint what was this business. There was around $350M per year in business with these companies. This business tended to be the highest margin business that AFC then Tellabs had in Access. I think the least understood aspect of the relationship was the early deployment and testing of new features. AFC had such a good relationship with some of those customers that they loaned us systems during our development phase to help us test new capabilities. These customers got early access to features and worked with AFC technical personnel.

I want to emphasize this last bit. When I joined AFC, I found that our customers were cheering for us to succeed. AFC was the first company that showed up and worked to serve this particular segment. I am sure that they chose AFC over competitors whenever they could. The product was not perfect but they tolerated the challenges. This group is no longer so underserved, and the changes that Tellabs brought in helped make them more callous to vendors.

Now this was the choice of Tellabs and I understand why they made that decision. However, this extended pretty far up the “food chain” of carriers. On the day of an acquisition, there is generally a number of courtesy calls made by the new Senior Management to major customers. At the time of the acquisition, the largest customers were BellSouth and Embarq. Verizon was going to become the largest customer but at the time they were still pretty small. Embarq was an account that was about $120M per year. They did not get a call from the CEO but instead from a Senior Sales Executive. Needless to say Embarq was real unhappy with that.

Now, I was at many a function inside of Tellabs where I was told that AFC destroyed its own IOC business. I used to get very upset when I heard people say that. I agree that AFC had not done the best job that it could with the IOCs in 02 through 04. On the other hand, nobody inside AFC wanted to dump that business.

This kind of culture clash is what kills acquisition and this clash killed the 3rd leg of the stool that was the Tellabs Access Business. Next week we will finish off on FiOS and then begin to wrap this story arc up. Tomorrow, I post about Calix’s Q4 earnings.

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis
Systemize Your Business Webinar!

 

Tellabs Access: So What was Happening with BellSouth?

I am back from the FocalPoint annual conference. I will be back to a normal posting schedule and am glad to get back to business. It was great to see other Coaches and learn from them and their businesses.

Meanwhile, I need to talk about the second leg of Tellabs Access. That was the former Marconi business with BellSouth. When AFC bought that group, the plan in place was an upgrade to the FTTC product particularly in data and video. Shortly afterwards, this became a plan to move to IP Video over DSL.

This was a significant change and should have given us a head’s up that something was going on. However, AFC was being bought by Tellabs and we were tied up with this. What happened was that SBC bought BellSouth and reformed what is now called AT&T. AFC had dealt with SBC purchases of both Pacific Bell and Ameritech. Both of these were bad for AFC, as SBC made only (what was at the time) SWBT approved product as approved. AFC had to restart the approvals process within SBC and until that happened any possible sales stopped.

The good news was that AFC became a Project Pronto vendor with SBC. How that happens nobody inside AFC knew. But we were the competition for remote DSL with Alcatel. We ended up with a small portion of the business amounting to $20M a year or so. We worked regularly to increase that and eventually ended up with a small ongoing business. Alcatel successfully fought us off in bulk but we kept the pressure on per our business plan.

The fMarconi group was a vendor in 2 product categories within BellSouth. They were deployed in Fiber To The Curb (FTTC) and Digital Loop Carrier (DLC) applications. The FTTC business was more important as this was a sole sourced contract. This deployment style was used in the high growth, high house density areas like Atlanta and Florida. There were lots of lines (over 1M) deployed and the BellSouth folks were proud of their joint deployment of FTTC.

The SBC folks in San Antonio had a different view. They had done some small FTTC deployments with a company called BBT. BBT did not survive and the technology was not picked up by anyone. SBC was very much against a sole sourced unique architecture like the BellSouth folks had deployed.

The important bit of all of this is that as the new boss came into control, you needed to evaluate what would happen with your partners. In this case, Tellabs decided that this was a low priority for SBC and they would let the BellSouth people keep doing what they were doing. This meant that the fMarconi Team in Dallas did little to nothing to market the FTTC product in San Antonio. Predictably this meant that FTTC was not selected as a mechanism going forward. SBC decided to pursue U-Verse with Alcatel/Microsoft/Cisco and new build would be based around that product mix.

Again, it was not an instant change but this meant that the business for the fMarconi group within SBC would decline dramatically over time. The second leg of the stool that was the $1B Access Group went away.

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
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FiOS: The GPON RFP Arrives

Well here we are at one of the two points that destroyed the Access Business within Tellabs. If we look forward in time, one can see this is the point at which Tellabs tipped inevitably downward into oblivion and is about to be part of Coriant.

As we had predicted, Verizon wanted 2.4 Gbps downstream for their GPON and we had plans to use our own OLT MAC. As I have previously written, we started that project when Broadlight turned us down. We went off and built the silicon with an FPGA and were working on bringing up GPON Cards.

We had started building them on the UMC-1000. The next step back will be on bandwidth. If you recall, the UMC now had 2.5 Gbps capability and we knew we were going to go up against platforms that supported 10 Gbps. We had plans for how to deal with that. My friends at Tellabs Ashburn (aka Vinci) began building ONTs. What is humorous is that for the longest time our Manufacturing folks used the 1000 GPON blade in test fixtures as it was the first one that worked.

The problem with the UMC in this situation is that Verizon disqualified it out of hand as it was only a 622 Mbps platform. Yes that Ethernet limitation stuck in the Executive brains in Verizon even though the lower levels knew that this limitation was removed. We also had a plan to run an external 1 Gbps port to each GPON blade and use an Ethernet Switch as a concentrator for this. Each GPON blad would support 2 GPON ports (and take 2 slots) so an entire chassis would support 12 Gbps total throughput. Not the most elegant way of getting there from here. But given the installed base and work we had done, we thought it was enough.

Another problem with Tellabs was timing. Given all the work to not do anything with GPON – The original design had been cancelled then we promoted enhanced BPON – we were going to be late.

So we were stuck. We could have a product ready that they wouldn’t take or we could figure out something else. We went back to our original prototypes and started work on an 8800 based design. The 8800 was being deployed by Verizon in small volume. On top of that the platform had more than enough capability to meet the demands of the RFP. It had two problems: cost and size.

To deal with this, we proposed taking on significant amount of the burden from the Juniper Routers within the 8800 based chassis (it became known as the 8865). We were changing the product’s form factor and cost reducing the hardware at the same time as well. Verizon eventually accepted this plan but we were going to end up going into the labs 3rd behind Motorola and Alcatel.

Now Alcatel had stolen a page out of the AFC BPON playbook and been very aggressive with its GPON bid. They became the primary for GPON because of this. Motorola played bridesmaid once again. That must have been very tough on the former Quantum Bridge people as they were the darlings of the Verizon Technical Leadership. Our understanding was that there product had more field problems than one would have wanted and much of the luster was gone by the time GPON rolled around.

This was one of the 3 original legs that the Access Business that was AFC was built on. And the unit went from having over a 90% market share inside of Verizon for BPON to being 3rd in GPON. Leadership and market understanding do mean something.

Again, not sure how aggressive my posting will be the rest of the week given my travel to the Focalpoint Annual Conference.

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis
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FiOS: Just before the GPON RFP

I have gotten us to the point where the GPON RFP will arrive. I want to recap a bit, because I think it might be useful to understand where we are.

On the deployment front, things have dramatically cleaned up. Verizon is doing about 10,000 ONT installations a day. Verizon has gotten the Motorola solution approved but the product is restricted to a small market share given all the progress that we had made. We were working with Verizon to lower the cost and time associated with installations. We were making lots of progress on installed quality and the reported failure rates were declining nicely. There were still challenges with first installation quality, especially when new areas were turned up. Things were going pretty well. We were very surprised with the high take rate that was being reported. But it was all good.

On the cost front, our friends at Vinci had done a tremendous job in both cost reduction and selling small price increases. ONT margins were still too low but they would poke into positive territory. There were two non-product issues here. Tellabs had a really simple model of cost allocation. They assigned overhead costs at a flat rate to every product. This penalized ONT margins as it was a (relatively) high volume, low mix product. On top of that cost to market and sell ONTs were essentially 0. If Verizon installed an OLT, they had to purchase ONTs to serve customers. So, ONT margins absorbed lots of costs that were actually related to other products improving their margins. On top of that, Tellabs used ONT pricing to leverage other products into Verizon – particularly the 7100. Just as ONT margins were getting to be okay, Tellabs gave Verizon a price break to get them to deploy the 7100. I always thought that the complaints about ONT margins based on both of these issues were rather hollow.

On the technology front, we had gotten Ethernet into the UMC and had met all the ONT and PON requirements of the RFP. Many of the features that we developed never actually got deployed and that delayed things that were useful to Verizon in practice. This kept tension between the organizations and things never were quite on the friendly basis that I have seen in other relationships. It was not a toxic relationship but it wasn’t exactly wonderful.

When I posted about Broadlight, I talked about where the technology was going. Our Executives did not want to do GPON and spend all the development dollars. This made a lot of economic sense as (if you think about it) we had been investing in POTS for over 100 years, DSL for less than 10 years and BPON for under 5 years. Now the network would switch technologies mid-stream of a large rollout. Tellabs would have to spend a lot of R&D to make a new product that was low margin. We pitched an upgrade to BPON as an alternative. There was a version that had a 1.2 Gbps/622 Mbps that we could implement. That didn’t do much for Verizon and they eventually rejected it.

Now finally on a technology note. Remember that Verizon thinks the UMC is limited to 622 Mbps, even though at this point it was doing 2.4 Gbps. The connectivity based on this went from 155 Mbps per OLT to 3×155 Mbps to 3×1.0 Gbps over 2 years. Verizon could upgrade to 3×2 Gbps at their leisure.  We looked at the OLTs when we got the opportunity and found that they had no congestion.  We never found a system that had ever stored more than 3 cells.  That has probably changed at this point but I think its telling how underutilized Access Systems truly are.

So, BPON was making money. It had a huge market share within Verizon. Things were stable. Tellabs stock was up. Access was doing over $1B in revenue total. 80% of that revenue was from Tier 1 carriers. The 2001 Business Plan had not just succeeded, it had worked better than anyone could have hoped. And then it all went wrong.

 

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis
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Net Neutrality Friday

Well another big week as Comcast and Time-Warner Cable seemed destined to hook up. It seems like a really good time to see what residential network consumers want out of Broadband.

I assume all of us would like lower price. I know of some folks who want more speed. There are yet others that want higher quality.

Price: Telcos and Cable have taken somewhat different models here. If I go to AT&T (my local phone company), you can get a modest speed DSL (3 Mbps downstream) for $30 per month. If I go to Comcast (my local cable company), I can get about the same service for about the same price. The prices of the services at about the same speeds (up to 50 Mbps) are within $5 per month of each other. The pricing scales from $30 to $65 per month. I want to remind everyone that a phone line goes for about $25 month (from the telco) so these prices don’t seem outrageous. Where they are really juggling price is in the bundling and there essentially all direct comparisons seem to fall apart. I am a cable customer but would change if given a reason to do so.

Speed: I know of some folks who really want office level connectivity at 100 – 1000 Mbps. In some places this is available, but if I circle back to the notion of concentration at the regional level it is not clear to me that a bigger spigot on the end of the pipe means that you have a bigger pipe all the way through. There are definitely diminishing returns unless the carriers invest in Regional and Metropolitan networks. So, I need people to think about would I really like a “local” and “long distance” portion of my Internet bill if the total did not change? Would you like more choice deeper in the network?

Quality: There are really two metrics of quality. The first is the total of outages. I have had them with both DSL and Cable and found that generally they are relatively minor. I know others have had different experiences and people dislike the customer service of both Telcos and MSOs. My only real negative experience was with a DSL connection at a home I had. I definitely had a special case and the technician did not know how to deal with it. On top of that, they wanted to charge me to fix an installation they had screwed up. That is why I went to cable. To be fair, I knew what he did wrong and didn’t tell him (my DSL connection was old enough that there was an actual splitter in the NID on the side of my house the technician did not know this and thought the DSL line was on the primary pair).

So other than lowered price, options for more choices and higher customer service quality is there anything else. Anybody really unhappy with their broadband? There are some that can’t get any broadband from a wireline provider but the truth is that is pretty rare. My take is that most folks would be happy with just minor improvements over the status quo. This is why that for most people the whole topic is a non-issue at the moment.

Well, next week we start going into the whole issues with the GPON RFP. As I said earlier, I am at the Focalpoint conference most of the week. I want to post on Calix on Wednesday but next Friday may be an off day.

Happy Valentines Day and have a great weekend!

Jim Sackman
FocalPoint Business Coaching
http://www.jimsackman.focalpointcoaching.com/
Change Your Business – Change Your Life!
Business Coaching, Sales Training, Web Marketing, Behavioral Assessments, Financial Analysis