Net Neutrality Friday

Last week I talked about the various forms of competition and how that drove significant FTTH deployment. Today, I want to look at Government Intervention. How can the government encourage network spending so that consumers and businesses have higher quality Internet Access?

Well, I have talked repeatedly about the business case aspect here. In most underserved and underserved areas, there is simply not enough Return On Investment (ROI). This is not a lack of capital issue. It is much more about opportunity costs. If I am building/upgrading marginal networks, then I am not working on those projects that have a better ROI. Grants and low cost loans simply don’t change that equation enough to make the build become viable expenditures. Tax incentives might work better, but I think that they as well will not go over well enough to matter.

So if the government can’t incent the carriers to do work, what can they do? They could create Broadband as a Universal Service. This would make the installation of Broadband mandatory. It would not cause one service provider areas to suddenly develop a second. It could however make sure that the provider was up to whatever standard deployment was required at the time. This service was how Plain Old Telephone Service (POTS) was broadly built for the most part. In some areas, the only entity that would build was the local government. These became the core of the smaller Independent Operating Company (IOC) market. It is these small companies that get the vast bulk of the Universal Services Fund disbursements. Something similar could be done with Broadband.

On the price side, the FCC mandates price caps for POTS service and could do something similar for Broadband (x dollars per Megabit per second per month). One caution about this is that the carriers are likely to slow innovation when it comes to these services if caps go in place. Why spend money on next generation services if they will struggle with ROI on that expenditure. This is one of the many reasons that Wireless is replacing Wireline in the voice world. Wireline voice prices are capped. No matter what a carrier does they can not charge any more money. That puts the right Capital Expenditures (CAPEX) for that market at zero. They can’t get there, but they do try to drive as close to 0 as possible.

So, something to think about. Should we make Broadband a Universal Service?

Have a great weekend!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

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Sonoma County: News and Notes

This week we will be reviewing the results from Calix for the 2nd Quarter of 2015. They announced these results yesterday after the market closed.

The company recorded $99M in Earnings in Q2 with very high Gross Margins of over 51% and Operating Expenses of $47.5M. Each category was better than the guidance provided in the Q1 earnings call but the Gross Margin was particularly strong. We will focus on this number a bit later. But in general, the quarter was about flat accounting for inflation. The company made a GAAP loss but a non-GAAP profit. I have explained the difference in the past. In this case, I would read the non-GAAP numbers as they represent the actual operating conditions at Calix.

First, why is this change in Gross Margin so important? The reason is that the company has claimed that its R&D spend has allowed it to make products that were either of lower cost or of higher value compared to its competitors. Investors can look at this as money in the bank. Generally speaking Gross Margins tend to remain flat in a business, unless the market conditions change. This expansion speaks well for the company and its prospects of growing profitably in the future.

Next a down note, last year Calix was touting potential expansion into International markets. This quarter saw a markedly smaller amount of International Revenue at $7.5M. There has been a downward trend over time, so bad news on this front is not huge news. It is also a small piece of the overall business. However, this means one of the growth initiatives has failed and continued to show that it has failed. I find it interesting that the company tried to spin this on the call. They called the results “Lumpy”. This implies that business comes in good sized chunks. However, you can’t look at a long term downward trend and call it a mixed bag (which is the point of calling it lumpy). I will come back to this at the end of this note.

So, really the question is where will growth come from. The most likely source would be the purchase of parts of Verizon’s network by Frontier. Verizon is not a Calix customer but Frontier is. However, this may be a problem going forward. Much of the business in the bigger properties that Frontier bought are part of FiOS. This is particularly true in Florida, Texas and California. Unlike the last go round, this batch of lines has lots of installed FiOS. This means that Alcatal-Lucent (ALU) is now a significant vendor to Frontier in Access. Frontier won’t be able to just replace the ALU gear. ALU is a tough competitor in Access and I think that might monkey up Frontier for Calix. ALU has a wide portfolio of products throughout the network and a larger deal might get cut by ALU to win more business. This will be something to watch next year.

Also, there was a report this week in Light Reading that Huawei is starting to gain some traction in the smaller carriers in the US. This would be a long term negative for Calix. Huawei would be one of the main International competitors. We have seen how well Calix did Internationally. If Huawei can get even traction as a stalking horse (somebody who bids low but does not win to drive down prices), this could be bad news for the Gross Margin at Calix in the long term. We have no evidence of this, but keep an eye on Calix’s Gross Margin next year.

Finally, let’s come back to the lumpiness or failure on the call and the company’s characterization of it. What people want out of management is honesty. I get that a Quarterly Conference Call is a Sales call for Calix stock. But Management damages its credibility when it continues to predict growth on what is a failed initiative. Implying that the International business is about to turn around removes that confidence. Given the nice Gross Margin this quarter, maybe it is time to say that Calix’s International Business is what it is.

Have a great week!

Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

Using “Marketing Tools” in the Hiring Process

I spent part of the morning working on a Client on a person he wants to hire. He has been looking for this person for a month or so. He is using business partners to provide him with referrals. It has simply not worked. After talking with him, I concluded that he was not really describing the person he wants accurately.

I started with a basic job description. He gave me the primary technical criteria that he was going to choose the candidate from. I nodded and began to ask him questions. I knew that if he was struggling with the hire that he had hidden requirements. On top of that, I needed to get him to get all these requirements written so that he can give them to the people he is having refer candidates to him.

The job description was broken into 3 sections: Job Duties, Mandatory Requirements, Preferred Requirements. Since he started with the Mandatory Requirements section that is first where I probed. It turned out that he wanted someone to fill a Lead Position. Not a Manager, but a hand’s on leader of a particular job. Over time we were able to determine that my Client needed this person be able to lead the job independently for a specific period of time. We collected all the requirements and enumerated them. We then went on to Preferred Requirements. Again, we spent time to enumerate these requirements. I asked the Client if he really only needed 8 years of experience (his Mandatory Requirement). He said that he really needed more like the 15 that were in his Preferred Requirements. Finally, we got to the Job Duties and went through them. This is where we came up with the Independent Operations capability. His actual requirement was “Mature”. I knew that was a vague description and open to interpretation. The clarity that able to operate independently brings to that description will help those who need to understand who to refer.

Which is the entire point here. In a lot of ways, what we did was go through an Ideal Client discussion. I used the same methodology to drive my Client to that answer that I did when we went through the Ideal Client discussion. Getting referrals is great. Generally, you will only receive good quality folks in referrals. This was true for my Client as well. But he wasn’t getting the ones he needed. He had requirements that he did not tell people about. Just like any other form of referrals, you have to be crystal clear on who you want referred to you. If you are not, then you will not get the prospects that you want. This will be true whether you are hiring employees or looking for customers.

The common element is clarity. Being able to clearly describe to another what you are looking for. The biggest issue is pulling out specifics to be able to tell others. “Mature” or “Senior” means one thing to you but something else to others. So be objective and specific. That will help others when they refer candidates to you.

Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

Net Neutrality Friday

Last week, I posted about the problem with the current round of incentives and how they have not worked to increase investment in the network for the existing large providers. The question I want to go over this week is what we can do about that.

I see two choices going forward to encourage network investment. The first is to change the market conditions via government intervention to make the poor quality investments meet the Return On Investment (ROI) requirements of the large providers. The second is government intervention to mandate last broadband service is universal. Unless something happens on a front for me to go after, this will be my topic for at least one more week.

What I have said in the past, that large scale network upgrades require 1 of 2 conditions: Government Intervention or Competition. I want to explore the Competition side of the equation and how that has been important in two cases.

The first case is that of NTT. NTT is one of the largest Fiber To The Home (FTTH) companies in the world. Given the incumbent nature of NTT, one would not expect them to be at the forefront of new technologies in Access. But the reason was simple, NTT was getting killed in the DSL market. Japan required Local Loop Unbundling (something we call UNE-L in the US). This spawned several competitors in Japan who were going as far to hand out DSL Modems at Train Stations with self-install kits. NTT was not able to compete in the market quickly enough and was actually the #3 player in the Japanese Broadband Access market because of that.

I give credit to NTT for realizing that fighting the DSL game was not going to be a winner for them. So, they changed the game and began to build an Ethernet Passive Optical Network (EPON). This network was not required to be unbundled. This meant that NTT had just installed a better network than its competitors. That is because the competitors had not built networks, they were using NTT’s network. The US learned that lesson from CLECs. Which is, in general, to be successful you need to own the network. There are still CLECs working the small business communications market, but they are small and have a tiny market share.

The second case is Verizon. One huge difference between Verizon and AT&T is geographic and thus demographic. Verizon had the bulk of their population in the Northeast Corridor. AT&T has the bulk of its population in the Sun Belt. Given what has happened in US migration trends, Verizon does not have population growth as a stimulant for business the way AT&T does. These are general statements as Verizon (at the time) had properties in Texas and California. AT&T had the old rust belt properties of Ameritech. But the general rule still holds. The Cable MSOs were introducing their Cable Voice Services. That offered the consumer a package that had a triple play as they were already the market leaders in broadband and video.

Both AT&T (both SBC and Bell South at the time) and Verizon participated in a 2003 Request For Proposal (RFP) for Broadband Passive Optical Networks (BPON). In the end Verizon deployed this technology in a significant part of their network as what we now as FiOS. What this did was stop line loss on the voice side where there and significantly improve the broadband market share for the company. The standout competitor was Cablevision and to a lesser extent the other MSOs. Since these competitors had their own networks, they were able to respond to FiOS. But the deployment fundamentally altered the competitive landscape. Verizon could offer a triple play on a network with more data bandwidth than the cable companies.

The learning here is in the question of: “Why didn’t AT&T copy FiOS?” Investors hammered Verizon for FiOS at the start of the project. Now AT&T has started to deploy fiber in some quantity – 10 years later. But the reason goes back to population. AT&T wanted to manage its investment because the population growth in its properties gave it breathing room.

My conclusion from these examples is that this large investment only happens when a company has its back to the wall in a competitive environment. But before we think more CLEC behavior is a good idea, take the Japanese experience to heart. Next week I want to talk about the intervention side of the coin.
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

Sonoma County: News and Notes

We are coming up on earnings season for Q2, so look forward to that starting next week. Calix announces on the 28th and others will follow. I have been following the public tech companies headquartered here in Sonoma County and posting analysis of their results. Given that Cyan is going away, I will be adding Autodesk to the list of companies that I post about. If there are any other companies that are in the North Bay and public that you want me to review earnings for, just let me know!

Things seem to be going reasonably well in the business world generally and that has led to a relatively larger number of new companies. Startups like business coaching generally, but the big issue for them is startup capital and then the ability to manage their capital as things go along. There are many different types of companies and therefore many different kinds of capital formation that they can go through.

Many “normal” companies go through the debt route through something like an SBA loan. There are other hard money loans, but the SBA program is by far the largest. This is a form of debt financing that allows for founders to be able to get money for companies that don’t qualify for the underwriting guidelines of banks. Banks may be the actual place that handles the loan, but without the government guarantee, there would be no loan. Friends and Family can also provide this form of early debt. It is extremely wise that formal documents be drawn up because it will help keep everybody friendly.

But there are also specialty lenders for specific business types. An excellent example of this is Banker’s Healthcare Group, for the Healthcare business. They provide Loans and other services to their clients.  The advantage of one of these kind of companies is that they offer services across a broad range of needs. These companies also understand the business issues associated with specific industries. That means that applicants will have a simplified process of approval and can have a long term relationship with a provider of many services.

Now when you are working with a debt vendor, they are going to want to have some view of being repaid with interest. When you present information to them, that is what was they care about. Some level of surety to be repaid.

The other kind of funding is called equity. In this case, you are selling part of your company to somebody for money. Venture Capital works that way. But to be clear, what these vendors care about is valuation. Valuation is how much company is worth. Your investors want to increase the valuation of your company. That is how they will get their money back. In general, they will want to sell their stake at some point in the future for more money. They may also want to get a percentage of your profit in profit sharing as a way to get some money back while they maintain ownership.

Most companies will have a combination of both. Even equity companies often start with debt. It is hard to peg a valuation for a company at its very start. There is often debt that is convertible to equity involved. So, think about being flexible in how getting funded happens. Look for money that can provide additional value. Having people that you can work with that have more services or industry knowledge, they add value beyond the money.

If you have any questions about these issues, let me know. I can help you or people you know raise money.

Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

Implementing Alignment

So, the last few weeks I have spent time focusing on Alignment as a topic in different aspects of your business. Essentially this is one of the core organizing principles in any business. I want to wrap up this topic giving you a view to the work involved in getting a mid-sized company aligned. This goes back to the completion of our 2001 Business Plan at AFC. We were about 1,000 employees and around $350M in revenue at that time.

The Business Plan itself took several months to go through. We were in a fundamental rethink of the business. We were doing fine, but much of the industry was collapsing around us. We took the time to step back and see what was going to happen. This strategic exercise changed the way we thought about many aspects of our business and ultimately led to our FiOS win at Verizon.

The problem was how to push all that change into 1,000 people to make sure that we were all pulling the same way. We announced the results of the planning process to the entire company. Then we brought the layer of management just below the C level in to run different task forces within the company. These task forces had an Executive sponsor but were run by a Director or a Vice President. Each of them had a specific focus and a broad based team. The company and each team created dashboards that we read out at a quarterly review. There were about 10 of these teams and a quarterly review took a whole day.

Needless to say this was an extensive commitment. It was imperfect in implementation like all things. But we got it mostly right and the process made everyone buy into the plan. That alone was worth it. It makes it easy if everyone is pulling in the same direction.

There was a singular Executive who did not agree with this process and went his own way. Just one person like that was a weight in the room. He bent the rules to get what he wanted and it hurt the cohesion of the team and the process. Eventually he was let go and things improved dramatically. His goal was not the success of the plan but instead the growth of his own influence. That kind of person exists in almost every organization of any size. Senior managers have to be looking out for them and root them out of organizations. They simply don’t work in teams and that is what alignment is all about.

I personally tried to model the opposite behavior. I tell people that much of my job at the time was what I called “Executive without Portfolio”. By that I mean, I would often be brought in as a temporary leader to fix and organization. Then, I would hire my replacement. The goal was to bring in an expert to replace me so that the team was stronger when I was done running an organization. That way I tried to show how to build an organization without building an empire. So, when you see empire building it is not a good sign.

Have a great day!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!

Net Neutrality Friday

I wrote a piece on Wednesday about the way that funding has created a boom in the Solar Power market. In particular, the incentives provided by the Federal Government that are ending next year. The question is why are these so successful and the ones provided for growing our broadband footprint such a failure?

The answer is simple. The grants and low cost loans don’t reduce the costs of the major ISPs. So, it does not affect their spending patterns at all.

Look at the credits used to fund the Solar industry. The firms that provide free solar systems to the owner and sell the owner power at a lower cost are a great deal for the firms. They get all the capital savings provided. The incentives essentially lowered the cost of deploying the systems greatly and these firms could provide great returns to High Net Worth investors who provided capital. At one point, the incentives made the cost of capital negative and essentially it made money to give these systems away.

In comparison, a grant/loan program makes the assumption that the limit is available low cost capital. Just to run some numbers, Verizon told us that each connected home in FiOS was about $1500. Costs are probably lower today, but let’s run with $1500. So a village of 1000 homes (about 4,000 people) would cost about $1.5M to install. So, the capital costs are not what is driving the decision making. Neither is availability. Verizon and AT&T spend $10s of Billions in capital each year. In the grand scheme of budgeting, our little village is no cost at all.

So, why does money go elsewhere within the network? It all boils down to Return on Investment (ROI). That $1.5M spend might take 5 years to pay back. Other places in the network will pay back sooner and at a higher amount. On top of that, the telcos have lots of places to spend money. They have business and wireless services to think about. They want to get more into applications and content. So, they direct their dollars to these other places and no amount of low cost capital is going to drive a major ISP to use it. They know that there is increased regulation that comes with that capital. Between the increased oversight and the small amounts we are talking about there is just no desire to deploy capital in unserved areas.

What would work is a set of incentives that move the needle. Something like a tax break for having no unserved areas or a write off for every new 1,000 homes passed with fiber. This would make the expenditure cost less than it does today and might make the spending have a better ROI. Until it does have a better ROI, the major carriers are not spending.

There are other alternatives to that type of funding, but we do need to look at this as an incentive and whether the incentive matters. Until then, the industry will continue to ignore the cries for broader deployment.

Have a great weekend!
Jim Sackman
Focal Point Business Coaching
Business Coaching, Executive Training, Sales Training, Marketing

Change Your Business – Change Your Life!