Net Neutrality Friday

As we enter 2017, there is a big change coming. We have a new FCC coming with the new Administration. There will probably be some changes coming with that new FCC. Instead of a 3 - 2 Majority for Democratic Politicians, it will be a 3 - 2 Republican majority. By the way, that should tell you something. Being an FCC Commissioner is a political position. In general, those folks are worried about being reelected or positioning themselves for their next appointment. We don't have 5 Engineers there that make the best technical decisions. We have 5 Politicians that make political decisions. They are backed up by a Bureaucracy. That is called the FCC Staff and it is mostly lawyers. Very little technology understanding goes on there either, but at least they have no formal ties to parties or next steps up the political ladder. If it is not blatantly obvious, I am highly cynical when it comes to politicians. I have visited the FCC many times and have not come back with a great deal of respect.

The one thing that we do know is that President-Elect Trump has taken a negative view on the AT&T-Time Warner Deal. People in communications services probably forget that the FCC has jurisdiction over the broadcast industry as well. I am not sure if it will go through, be modified, or blocked by the FCC or DOJ.

What I hope we don't see is a repeat of CAF and CAF-II. CAF stands for the Connect America Funds and was intended to help get us to Universal Broadband coverage. We have allocated Billions of dollars and essentially nothing happened. There were some networks built but in the grand scheme of things we have not seen the kind of gains on this.

I have recently run into the second push I have seen for Open Access, particularly funded by Municipalities. This time it comes from the MEF (Metro Ethernet Forum). One of the problems with Forums like this is that they try to keep going after they have won. They want this notion of services over Ethernet instead of over the Public Internet. For residential services, I think this is a failed approach equivalent to the old walled garden services of the feature phone era of cell phones. That ship has sailed and we now have completely viable OTT (Over The Top) video services on the public Internet including Netflix, Hulu, Sling TV and many others. That kind of approach is a step into the past and I think it is a bad idea. The MEF should probably just throw a victory celebration and declare itself defunct. The former CEO of Vinci Systems had an ATM concentrator company that he exited out of cleanly as ATM died. There was no bankruptcy and all the employees were laid off with severance. Now that is a clean death for an organization that has lived past its useful life. The MEF should do the same. It created standards, promoted them and got them adopted by the industry. It won and that means it is done.

So, we are probably up for another eventful year. I look forward to sharing it with you!


Jim Sackman
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Net Neutrality Friday

So, this is my year in review for all things Telecom and Telecom Regulation. Unlike others, I will provide what I think are predictions for next year.

First, Title II was implemented this year for Residential Internet Services. People are concerned that this will be overturned by the incoming Administration as it allocates new people to the FCC Commissioner Offices. I think that Title II will stay. I know that the large Service Providers don't like it, but there is little real push to stopping it. If ISPs were really concerned, they would have exited the residential market. There is no obligation to continue the business. But there has been no inkling of any CAPEX changes or any market exits by incumbents post the ruling. So, this time next year Title II will not be a topic.

Second, Google Fiber stopped its expansion. I think that this signals an end to the growth of overbuilders and possibly even CLECs. Deploying capital for Internet Service clearly did not do it for a company that can afford it. Where are the investors going to come from who are going to do this kind of deployment when there are so many better things to invest in. My prediction is that next year will be quiet on this front. There will be an occasional Municipal Network, but the proliferation of these carriers has peaked.

Third, there will be ongoing consolidation between the Content Providers, Internet Infrastructure Players, and ISPs. This trend is long-standing, but it is clear that it is cheaper to buy networks than make them. There are a lot of 2nd and 3rd Tier Businesses in these markets that have either interesting properties or significant revenue streams but uncertain or troubled futures. Consolidation continues to play a role in an exit strategy for these businesses.

Fourth, People will still be haggling over NFV and SDN and how to deploy them to build modern Service Providers. IT SaaS companies will continue to deploy the IT equivalent technologies and be another year ahead of the Service Providers. The Large Service Providers need to have internal incubators and have no business model for doing it. Their vendors need to think about what this means for them. They have simply been listening to their customers or at least one guy within their customers without thinking about what they will do with the technology. It causes them to develop all kind of products that nobody actually uses (see IMS).

Have a great weekend!


Jim Sackman
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Sonoma County: News and Notes

This week I review the earnings of Keysight Technologies. The company reported $751M in Revenue and $0.64 per share earnings. This is approximately flat results from a year ago. Since the call the stock has been up a bit but has started giving back the gains that it had from the call.

Here is a direct quote from the call (courtesy of Seeking Alpha): "Lastly, we are committed to continue to opportunistically deploy capital through our share repurchase authorization, but are assuming a base case diluted share count of 175 million shares at year end. We remain committed to investing in the key growth areas of our markets to drive the long-term growth of our business while at the same time staying consistent with our operating model. As a reminder, our operating model is structured to deliver high-teens operating margins at current revenue levels."

Okay, that's great. They are getting quite a lot of money out of the business. Essentially, they are making very good money. But the shareholders are not seeing the benefits of this on a return into the share price. The quote here says that they do not think that they have lots of excess cash to spend on stock. This is true even though the gain about $40M per quarter, are paying down their debt, and the operations are generating, even more, cash. This is a good sized company with meaningfully profitable results.

But the situation reminds me of a movie called "Other People's Money" that starred Danny Devito. It was the story of a company that was about to be taken over in the 80s but done as a comedy. There is a scene in the movie where he talks about the reason he does what he does and says that he wants people to invest their money where it makes them money. And that is my commentary on management. The goal of your investment is to grow the share price or to find some way to spend the money that it returns it to shareholders. Another quote from the conference call via Seeking Alpha: "We’re very, very pleased with the progress that we’re making and again, as you know, when you invest in R&D sometimes it’s a 24 to 36 month investment before the product even hits the market and then a product ramps from there and has to go through a customer’s buying cycle so you don’t always see it in the quarter or even the fiscal year in the actual result. But, we are very pleased with the path that we’re on and the results that we’re getting in at this point."

They have upped the R&D spend but not the value of the stock. If you can not meaningfully impact the share price, consider giving the cash to the owners via a dividend. Let them invest in areas that have a great potential for growth and help them get a return on that $40+M a quarter you get to put in the bank. The cash is doing nobody any good there.

Jim Sackman
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Net Neutrality Friday

This week I want to talk about the potential merger of AT&T and Time-Warner. On the surface, this does not look to have too many anti-competitive issues. Deeper down there are some really troubling trends here.

AT&T/Time-Warner would be the 2nd major ISP to have control over significant amounts of content. The other is Comcast as it owns NBC-Universal. Verizon has seemed to focus more on infrastructure, but Yahoo! does have a few popular content properties (particularly Yahoo! Sports). Google has a similar business. Many infrastructure properties but not a lot of direct content. Facebook is notorious for taking ownership of the user generated content posted on its site (which is why I don't post there originally). Apple is another company in the content infrastructure business. Amazon is starting to straddle the line by having original content.

Why should this trouble us? It smells a lot like the old movie theater days. The major studios owned the vast majority of the movie theaters. This meant that they controlled distribution as well as the content. By doing this, they limited independent competition. If you really want to focus on Net Neutrality, to me this is the fight. Can we have clear neutrality in content ownership and assure a wide distribution of original content.

I think (and this is my opinion) that Netflix will be the test case here. As large as Netflix is, they still address a pretty small market. They are starting to build a significant original content library. What will they do once those shows go out of production? Will they license the content to cable or other online or linear content delivery channels? The longer the content is on the shelf the less value that it has. One would think that they might want to capitalize on the buzz around their shows to make a bit more money.

And I hope this is what keeps content neutral. Locked up content loses value. If you own content, you want to maximize its value. Wide distribution is the best way to do that. Think about the ongoing value of Seinfeld or The Lucy Show.

But we shall see as things evolve. Have a great weekend!


Jim Sackman
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Net Neutrality Friday

Following on from last weeks post, I want to spend some time talking about the money problems associated with being an overbuilder like Google Fiber was. Now, why is the money discussion so important? People want to blame lots of things for why Google is pulling back. Most notably they want to talk about the right of ways and pole attachments. These are problems but not the big one.

So, let's dispatch with these other problems first. There is a presumption that the ability to physically deploy was some revelation over the time of Google Fiber. The truth is that these are local laws (and each city is different) and have been around for decades. If this was a problem for Google Fiber, then I would them as completely unprepared for what they were attempting. I would argue that this was the point of making it a community-based request. Google wanted to them to waive all kinds of provisions to get the network built. If they thought this would be an impediment, then they would not have started.

I am going to use some round numbers from what Verizon told us about FiOS and then go on from a numbers standpoint. They told us that to "pass" a home was about $1,000. That to "connect" a home was about $1,500. Connecting a home is obvious. Passing a home means that all the construction and equipment was in place to be able to sell service to the home. So in math terms that mean that an actual connection cost was more than $1,500 and that includes all the money to buy the equipment, lay the cable, install the equipment and turn up the service.

To get the money back on this, you would need to earn enough profit to make the investment come back to you. One easy mistake that people make is that they start with revenue instead of profit in a Return On Investment (ROI) calculation. Let's call a triple play home (voice, data, and video) $250. Profit margins on such a business might be 10% or $25 per month. That creates a break even of 5 years for the $1,500. Now, a more realistic break even is 24 months so the profit on these lines is more like $62.50. The problem is taken rate or the percentage of people that take the service.

Let me use 3 numbers for taking rate: 50%, 25%, and 10%. The profit from one home must cover the cost of all the homes that don't buy. Or in each case a total of $2,500, $5,500, and $10,500 respectively. As you can imagine at really low take rates the ability to pay the kind of money it takes to build a network. At our $62.50 profit margin, these are break-even times of 40, 88, and 168 months (the latter is 14 years). Now this is just a model, but at even double that profit it is a 7-year payback at low take rates.

Now, be a 3rd player in the market. 10% take rate is actually reasonable for somebody in that position. You can see why being a 3rd player is such a bad deal. Having a 33% market share is no picnic. Compared to the rest of the returns on Google Investments it is terrible. Now Google could afford to build out the entire US. But it would be an awful financial move.

This is why expecting new players to come out makes no sense.

Jim Sackman
Focal Point Business Coaching
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Net Neutrality Friday

Over the recent past, we have started to see some movement of the ISPs to be more conscious of the Cloud Application and Content Providers as companies to merge with. I think this is interesting as maybe now we can get rid of the notion that the ISPs are going to have some great competitive advantage in the world of The Cloud. Many analysts and planners that I know have thought that the ISPs would be able to set up special business arrangements to help them improve their pricing and help their margins. This has not been proven to be true and in a phrase: I told you so.

Why is this? Well, the other two communities don't want it to happen and they are Customers and Application Providers. Customers, even business customers, have to evaluate whether they want to have a special arrangement when they push applications into The Cloud. Those special arrangements can be problematic and generally the answer is no. Why is that? Because these arrangements (at least today) are one off. Each ISP does its own thing with a specific application or cloud provider. That means that customers would have to worry about lock-in to that vendor set for what can be a mission critical part of their IT infrastructure. This can be very problematic in a Disaster Recovery scenario. It can also be a problem because there is no assurance that the service will continue forever. If a service turns out not to be popular one side or the other can simply turn off the service. If you bet your company on that functionality, then you would be in real trouble. If you are setting up such an arrangement for a run of the mill application, then you have wasted a lot of money.

From the application provider, there is a similar story. Most every application out there wants to be available to as many businesses and consumers as possible. That means having a special deal with one provider greatly limits the market for their application. Unless there is a specific reason to do so, then why would you do it? So application providers generally make their service work on generic Internet service.

Let me give you a counterexample out of my own background. At Edgewave, we replaced an Internet connection with an Ethernet connection from Headquarters to the nearest Data Center (in that case San Jose). There was a technical advantage in that we could then tell whether a data center connection issue was related to the Internet in general or was specific to us. There was, in that case, a cost advantage as well. But we could use the Internet connection if the Ethernet connection was no longer available.

The result of this is that special connections have had a declining usage and value for The Cloud. So, ISPs are now trying to find a way to be more relevant in the data center, content and application parts of the market. Well, better late than never.


Jim Sackman
Focal Point Business Coaching
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