In the post called "The End of Tellabs" I talked about how we arrived at having to create a Tier 1 business. I want to provide a few more details about this.
It may not be clear why we thought the carriers and equipment vendors would consolidate. There was a trend that had already started in the decline of the price of a bit per second. T-1 lines were running at $1,000 a month and 1.5 Mb/s DSL service was $50 per month. These were not equivalent services but showed a trend that has continued to today. Now, I pay $50 a month for a 50Mb/s service - equivalent to a DS-3. We concluded that the best way for carriers to keep up with this trend was to lower costs. A traditional way for companies to deal with this situation was for companies to consolidate. The current AT&T was built from SWBT, PacBell, Ameritech, BellSouth and AT&T. Verizon is NYNEx, Bell Atlantic, GTE and MCI. Centurylink is Centurytel, US West, Embarq, Qwest and Saavis. By being bigger the goal is that the corporate costs are spread across a larger base. The carriers have struggled with introducing new important services but the consolidation has kept them quite nicely profitable. Before people cry for them in Q3: AT&T made over $3B, Verizon made over $2B and Centurylink made just over $50M if you exclude a $1.1B Goodwill writedown. So, nobody is losing money. As we discuss the market, let us all remember that.
One of the great things about the CLEC era from an Equipment Vendor standpoint is that there were more customers buying more gear. This drove up the total size of the market. Once these companies went away the market got smaller. As the carriers consolidated, vendors would have to cut costs to meet the needs of the larger customers would request a bigger discount. Vendors would have to maintain or gain from this smaller customer base and this handed control of the relationship to the carriers. This has continued until today.
I will add in a later post a trend that we missed and I think is very important to how the systems vendor/carrier relationship has changed. The reason I bring it out here is we got a lot right but we also got a lot wrong. Everybody needs to be honest with themselves about their history and how they got where they are. AFC was an imperfect company and we screwed up a lot of things. In some ways we were very lucky. One huge example of this is the business exit by Marconi and Nortel. AFC had just lost Winstar and Tellabs as major customers. Announcements by our competitors made up for this almost immediately. Marconi was the biggest immediate win. Their announcement caused Sprint LTD (later Embarq now Centurylink) to switch all their new systems to AFC. Previously we were splitting the business with Marconi. We were prepared to take advantage and we did. But the timing of the announcement was pure luck.
Now, we sent John Schofield out on the road to talk to firms: Lucent, Nortel, Siemens, Cisco, Juniper, Tellabs, and Adtran. Some companies that are not on that list are:
- Ciena: After the Tellabs/Ciena debacle, AFC went through an M&A process with Ciena. That ended when the share prices made the deal bad for Ciena and ended. This left lots of hard feelings.
- Ericsson: One of the biggest M&A disasters in Telecom Equipment History was the FTTH group of Raychem. We thought this made another wireline access deal impossible.
- Nokia: With their focus on wireless and handsets, we saw this as a bad fit.
- Japanese Firms: We thought that Japanese firms would be unlikely to buy such a US focused business that was as large as we were
- Chinese Firms: We thought politics would get in the way. We did end up talking to UT Starcomm but nothing came out of it.
The only company that we talked to about being acquired on that list was Adtran. The market model of AFC and Adtran were diametrically opposed and Adtran was not interested in the discussion. The other companies were interested but ONLY if AFC could get significant Tier 1 revenue. So that is where our Business Plan went.
A bit about our process is that we worked with two gentlemen on this plan and involved lots of employees along the way. The two external Folks were Steve Hoffman and Frank Anderson. Steve is still in the facilitation business (humansynergy.com) and Frank has founded yet another company. What I found most useful from working with them is two things: Strategic Thinkers need to have an agenda for the planning process that is least 1 quarter ahead of Functional Groups; It is important to be skeptical that any new initiative is going to win and if you can work your way through that skepticism then you really have something.
For an overall plan, we followed a model that Steve brought to us which is best depicted by the following webpage: http://www.humansynergy.com/?p=collaborative_planning We started with the Present Position part of the plan and that is where I will go next.
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