Ajit Pai and the Federal Communications Commission, listen up. You want to can Net Neutrality. Clearly you need a serious lesson in how the telecom business works.
The big, big problem plaguing all carriers worldwide is capital-efficiency. They don’t have it, but the Cloud demands it.
To function as the FCC, you must think through the fundamentals of carrier economics before you allow the words “net neutrality” to enter your heads.
The Cloud is universal access to unlimited computing at marginal cost.
This makes it the biggest event in human history. The impact of the 1440 Gutenberg Press—and everything that followed—was nothing in comparison.
Unlimited access to marginal cost computing is shredding business models faster than you can say “Uber,” including phone companies.
You can expect Apple and Google to Uberize the common carriers at their earliest opportunity. Publius has already shown how this will be done.
Cloud economics demand that everything that touches the cloud—apps, app enablement devices (smartphones, cars, even shale oil rigs and soon solar-sensitive high rise windows tied to smart grid arbitrage systems) and the app delivery architecture that connects the two (the net in all its flavors from Bluetooth to fiber) must be exceptionally capital-efficient. Or die.
All great except for one thing: the telco business model is already dead. It met the Grim Dude about a quarter century ago when telcos ran into gigantic debt-equity problems (VZ’s today is an eye-watering 4.9) and monster FCF insufficiencies. See Publius’ 2002 publication, “Management Failure.” It was scary when he wrote it and it is terrifying now.
Dick Jalkut, then CEO of NYNEX Telecom (now Verizon) told Publius on June 15, 1994 that, “My outside plant is so old I no longer have the cash flow to maintain it and there isn’t enough capital in all the world’s markets to replace it.” Dick’s one sentence said it all 25 years ago and says it all today. And every carrier CEO knows it!!
What saved the telcos from breakup under this load in the mid 1990s was cellular. It gave them a nice revenue run. Until it didn't.
But, as Commissioners you can see at a glance that, for 25 years already, all the elements needed for growth in wireless are capital-efficient shared assets—cell towers, data centers (both typically REITs), fiber backhaul and, critically, Wi-Fi.
Telcos were saved from their mid 1990s Kodak Moment by capital in which they did not have to invest.
The price that carriers paid, however, was that they didn’t get to profit from these shared assets. But any carrier CEO who could count could have told you at the time that this shift to shared assets put the legacy network on the clock. It had to be restructured fast. Or else. Yet, not a single one of these CEOs so much as lifted a finger. Makes you wonder if they can count.
Sadly, Publius has an answer to this.
He went into Verizon in about 2002 with a proposal to move the bulk of its legacy plant onto a shared platform to free up VZ’s balance sheet for big new moves. VZ acted like it had no idea that it had a balance sheet!! Let alone that it was only a matter of time before it came back to bite the company.
Predictably, along came the next gen in capital-efficiency, Wi-Fi. This rapidly diverted carrier revenues as bandwidth demand outstripped cellular frequency limitations and high prices.
The result is that today, Dick Jalkut’s telco crisis, put off for 25 years, is back and it’s bigger than ever.
Telco revenues are now falling during the long-running Obama Boom. This is unprecedented and a very, very bad sign.
In the 140 years since Bell started the first telco in 1877, U.S. telco revenues have never fallen during a boom. The last time they fell was 1935 and it took several years of the Great Depression to force them down.
Telcos desperately need you to kill net neutrality to get them out of this hole!!
You are being asked to bail out the telcos, nothing less.
Your answer to telco management should be clear: “The market will naturally replace the capital-inefficient with the capital-efficient. Just like Uber and taxis, AirBnB and hotels. Let the market do its work. If you cannot see your way to capital-efficiency, call in the investment bankers. Don’t call us!!”