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.
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