Telecosm - Ike Elliott

4Q07 Consumer VoIP Rankings

Now that Charter has reported the 4th quarter earnings, the consumer VoIP rankings can be published. I've put together a chart of six of the larger consumer VoIP companies and ranked them by quarterly VoIP revenue.  In order to be shown in the rankings, you have to be a public company and you have to provide segmented revenue numbers for your voice services.

	4Q07 Revenue (MM)	Approx. Revenue Share
Comcast	$     523	36%
Time Warner Cable	$     336	23%
Vonage	$     216	15%
CableVision	$     147	10%
Skype	$     115	8%
Charter	$     107	7%
TOTAL	$  1,444

No surprise here, Comcast leads the pack, and four of the top six are cable companies.  The only two on the list that don't own their own network are Vonage and Skype.  Of course, the list is incomplete, since there are many more companies offering consumer VoIP services, several of whom aren't public or don't report segment stats for their consumer VoIP businesses. 

Here is a slightly different take, showing subscribers per company:

Comcast's PR Problem, In Pictures

Yesterday I posted about how Comcast was caught hiring seat-warmers to hold seats at the FCC's Net nuetrality hearing at Harvard, apparently in an effort to keep Net neutrality proponents from dominating attendance at the event.  Some claimed that these seat-warmers slept through the event, and now there is photographic evidence, thanks to a post on Save The Internet called "Comcast Blocking: First the Internet, Now the Public":

Save The Internet also has pictures of people waiting outside the hearing room in hopes of getting in to get a seat, and pictures of Comcast people allegedly recruiting disinterested bystanders outside of the building to be seat-warmers.

If the allegations turn out to be true, I've got just one question: What was Comcast thinking?

Level 3 Cross-Licenses Patents With IBM

This morning, Level 3 Communications and IBM announced a patent cross-licensing agreement, giving Level 3 a non-exclusive license to IBM's enormous portfolio of over 42,000 pending and issued patents, and giving IBM a license to Level 3's 850.  Other terms of the deal were not disclosed, but you can bet that Level 3 is paying IBM some money in the deal, given the disparity in the sizes of the patent portfolios.  IBM reported $958M in intellectual property and custom development income in 2007, and I suspect it was mostly patent licensing income. 

Comcast Shoots Self In Foot, Again

As if 'Net neutrality proponents didn't have enough ammunition, already.  A few months back, Comcast provided an ample supply of "fishy behavior" to their critics, when they failed to fess up over their BitTorrent "traffic-shaping" policies.  This got the Neutralitarians all up in arms and provoked an FCC hearing.

Now, we hear that Comcast allegedly packed the FCC hearing with paid seat-warmers.  Are you kidding me?  Comcast just keeps making this public relations fiasco worse.  The paid seat-warmers had the combined effect of keeping Neutralitarians out, while ensuring an ample pro-Comcast cheering section. Now, the Neutralitarians have all the ammo they need to rain fire on Comcast for another few months.  Harold Feld, over at WetMachine, is justifiably on the warpath.

If only Comcast had just come clean at the start and published an honest traffic shaping policy, they would have been much better off, in my view.   Now, with the negative publicity from their mis-handling of the matter, the punishment may exceed the "crime." 

Net Neutrality Interview

Michael Morisy interviewed me for a Net neutrality article that was published on Search Telecom yesterday, here.  The article discusses some of the pros and cons of the proposed Net neutrality legislation and its chances for passing. 

Skype: The Real VoIP Game-Changer

Last week Skype announced that they carried their 100 Billionth minute of voice over IP traffic since the service was born in mid-2003, and also announced they had crossed the 12 million concurrent user threshold.  The milestones have been widely hailed in the blogosphere, by Jon Arnold, Dan York, and Jim Courtney, to name a few, so I'll try not to repeat what all of those esteemed ones have already said, and instead will offer my two cents on what I think of Skype at this historic juncture. 

FCC Rattles 'Net Neutrality Saber

The FCC held a hearing today on Comcast's alleged 'Net neutrality violations, and the commissioners sure sounded serious about doing more than slapping Comcast's wrist. 

Like a bookend, the day started with a rabid anti-Net neutrality editorial by former hedge fund manager Andy Kessler, entitled Internet Wrecking Ball, in the Wall Street Journal.  Kessler argues that more bandwidth is what is needed on the Internet and that Net neutrality legislation actually works against that goal, and he goes on to blame archaic state and municipal video franchise rules for slowing down broadband deployment.  He even says

"I personally would climb telephone poles on my street to run fiber if I could get 100 megabit Internet service."

Right.  I'd like to see somebody call his bluff...  they could charge admission to see a hedge fund manager climbing a telephone pole. 

UK ISPs Want To Return BBC's Christmas Gift

My friend and colleague Darren Loher pointed me to an article about how online video is making a mess of the "unbundled ISP" business models in the UK.  Apparently, the BBC launched an online "iPlayer" service on Christmas, 2007, that allows viewers to watch online streaming video of any television show from the prior week.  The service is wildly popular, and has caused a sharp increase in the number of people who are viewing streamed video, and a sharp increase in the amount of video viewed, in the UK.

The net effect of this utilization spike is that unbundled ISPs have to buy more capacity connecting their networks to tier one Internet backbones, or the ISP customers will experience network congestion that impairs streaming video and every other application they use.  The BBC has basically created an "unfunded mandate," requiring the ISPs to buy more "middle mile" capacity (see diagram) in order to serve an application that the ISPs did not create, and for which the ISPs see no additional revenue.  In fact, we may see (or may already be seeing) costs exceed all-you-can-eat subscriber access revenue at these ISPs.

HOME BREW, GUNS, WRESTLIN’ & THE MOTORCYCLE (by Fred Faber)

Dad would ask, “Did I ever tell you about the time I road a motorcycle?”, and we would reply, as usual, “yes.”  He would then proceed to tell the story.  This was in his later years, and dementia was certainly setting in, but he obviously loved the story from his younger days. His retelling would emphasize the importance of dust, mud, bugs and the corduroy road.

Dad attended Marshall College (now University) in Huntington, WV, during the Depression; times were tough and money hard to come by.  He had accumulated enough for another semester and told his cousin, Bill Vickers, that he was going to hitchhike to Huntington.   He didn’t want to spend the money on a train ticket down there to enroll for the fall semester and secure a space in a rooming house.  Bill had been trying to collect a debt from someone and finally resorted to taking title to a motorcycle, in-lieu-of cash.  Bill really needed the cash, but had the cycle, and offered it to Dad for the purpose of making the trip.  That was not the age of Interstate Highways.  Most municipalities had some granite cobblestones, or brick on the main streets and there were a few sections of newfangled concrete roads, but for the most part, the road from Charleston to Huntington was dirt and gravel.  Macadam was not yet in wide use.  I have never seen such a thing, but lowland bogs, in those days, were crossed by what was called a corduroy road.  Since course stone, gravel or pavement would settle into the ooze and not survive, tree trunks were laid side by side on the gunk and the ride over these timbers was enough to jar the teeth out of you or ruin your vehicle.  The Civil Engineers of the time knew how to dewater such places, place stone bedding and such, but highway taxes were not in place and funds for major all-season roads was a distant dream.

Housing and Credit Woes Seep Into Telecom

Earnings season provides a great window into how the economy impacts specific sectors.  Yesterday afternoon, I listened to the earnings call of CBeyond, a competitive local exchange carrier that is focused on selling a bundle of Internet access and local and long distance voice services to small and medium-sized businesses.  Of all of the earnings reports I've heard or read this season, CBeyond provided the perhaps the clearest insight I've heard on the impact of the weakening economy on telecommunications.

Net Neutrality vs. Walled Gardens

This week, I've been posting about Ed Markey's proposed Net neutrality law, trying to point out some of the pitfalls involved.  Today, I'll look at the problems with "walled garden" networks that Net neutrality is supposed to solve.

Why I Am Long Level 3

Level 3 Communications stock has been in a free-fall this week, and today it hit a 52-week low of $2.12 before settling at $2.25 at the end of the day.  I already owned the stock but bought some more this morning.  Couldn't resist. 

Why am I obsessed with owning this stock?  Could it be because I helped build the company and worked there for its first six years of existence?  Sure, I'll admit to some bias from that, but I think it goes deeper for me.

StorageTek Site Bought By ConocoPhillips

Just heard a radio report that the mystery buyer of the old StorageTek site (see aerial photo at left) is not Google...it is ConocoPhillips.  The Texas-based energy firm plans to use the Louisville, Colorado site as a renewable energy research center.  So, alas, it's not the big boost for neighboring Level 3 Communications that was dreamed by those that haunt the investor message boards.  They had hoped for a Google data center right next door to Level 3. However, we get a heckuva consolation prize: it's great news for the local economy!

ConocoPhillips plans to tear down the existing buildings and re-develop the the site, so it could be a few years before the full economic impact is felt.

Earlier this month, when Microsoft announced that they didn't buy the site, I guessed that Google hadn't bought it either.  Still, I couldn't have guessed ConocoPhillips.  You've got to hand it to them, they know how to keep a secret.

Net Neutrality Bill Nitty Gritty - "Unreasonable Favoritism"?

Okay, let's get down to the nitty-gritty on the proposed Net neutrality bill, HR 5353.  Yesterday, we looked at some pretty broad phrases in the proposed legislation, and wondered how far these phrases could be taken.  Today, we'll start to look at one of these phrases, the bill's proposed prohibition on "unreasonable discriminatory favoritism, or degredation of, content by network operators." 

When one of my sons was little, he would sometimes get pretty mad at me if I wouldn't let him get his way.  He'd pull the usual kid stunts, like crying and yelling and turning all red in the face.  I'd tell him to shape up and stop being unreasonable, and he'd turn redder and scream "I'M NOT BEING UNREASONABLE!"  What a crackup. I guess the definition of the word "unreasonable" can be kind of personal and situational. 

Vague New Net Neutrality Bill Too Loosely Defined

Last week, Ed Markey introduced the "Internet Freedom Preservation Act of 2008," HR 5353, and the bill really amounts to a loosely-defined new broadband policy:

(1) to maintain the freedom to use for lawful purposes broadband telecommunications networks, including the Internet, without unreasonable interference from or discrimination by network operators, as has been the policy and history of the Internet and the basis of user expectations since its inception;

(2) to ensure that the Internet remains a vital force in the United States economy, thereby enabling the Nation to preserve its global leadership in online commerce and technological innovation;

(3) to preserve and promote the open and interconnected nature of broadband networks that enable consumers to reach, and service providers to offer, lawful content, applications, and services of their choosing, using their selection of devices, as long as such devices do not harm the network; and

(4) to safeguard the open marketplace of ideas on the Internet by adopting and enforcing baseline protections to guard against unreasonable discriminatory favoritism for, or degredation of, content by network operators based upon its source, ownership, or destination on the Internet.

So, what is "unreasonable interference or discrimination by network operators"?  What is "unreasonable discriminatory favoritism, or degredation of, content by network operators"?  When the bill names "broadband telecommunications networks, including the Internet," which networks is the bill talking about?  Does it apply to non-Internet broadband networks, too, and if so, which ones? 

Tomorrow, we'll look at some potential interpretations of these lofty phrases, with an eye toward their breadth of application.

Net Neutrality Push Could Have Unintended Side-effects

Last week, Representative Ed Markey re-introduced legislation to regulate the Internet with his "Internet Freedom Preservation Act of 2008,"  and the blogosphere is buzzing with arguments for and against the proposed law.  This week I'll be posting about some blogger's reactions and chiming in with my own.

GigaOm opened the debate last week with a post that leaned in favor of the proposed legislation.  Paul Kapustka points out that many large incumbent telcos, including Verizon, AT&T, and Comcast, have only reinforced fears about anti-competitive behavior since the last time Net neutrality legislation went down in flames.  Also, he says this latest attempt has some improvements that might make the legislation fly:

• An easing of video franchising laws
• New language around preferential pricing and preferential treatment of traffic, with some caveats
• New language about parental controls

At last week's Silicon Flatiron conference on public policy, here in in Boulder, Level 3 CEO Jim Crowe said he believes that regulators have good reason to worry about monopolistic practices of the big incumbents, but thinks that the Federal Trade Commission (FTC) should have role instead of the Federal Communications Commission (FCC). 

On the more skeptical side, Matt Sherman has an interesting post over on his Rich vs. Reach blog, in which he points out that regulation doesn't always achieve the intended effect.  While regulation is often intended to help and protect the little guy, it often has the opposite effect of creating higher barriers for small competitors breaking into a market, and therefore helps large incumbents preserve their franchise.  Here is a quote from Matt's post:

Let's keep this in mind when we consider the possibility of "Net neutrality" legislation.  If we place restrictions on what sort of networks can be built (by legislating architectures and economic models), we shouldn't be too surprised if fewer networks get built.  The incumbents ultimately face less competition.  Guess who wins?

That's part of why I came out against Markey's Net neutrality bill last time around.  It's not that I am against Net neutrality in concept.  Like the Net neutrality crowd, I am very afraid that incumbents will abuse their market power in order to hurt competitors.  I'm just not sure that legislators and regulators understand networks well enough to anticipate all of the unintended side-effects they might create with a Net neutrality bill. 

I'll have a few more posts on this topic this week, looking at the proposed legislation in more detail and trying to separate out the parts that worry me most. 

 

Buying Your Way Out Of The Army In 1907

I hear that my great-grandfather, Shelly Oshell Faber, was a mountain of a man, about 6 and a half feet tall.  He served in the US Army about a century ago, until his discharge in May of 1907.  Back then, you could buy your way out of the army, and that's exactly what Shelly Faber did.  My Uncle Fred Faber, who guest-posts on this blog most weekends, found Shelly Faber's discharge papers back in the late 1960's, at around the time that Fred and his wife Sue made an unplanned visit to Goldtown, West Virginia.

Shelly Faber paid a year's wages, or $29.73, in 1907, to leave the army and return home.  Here are the discharge papers:

Comcast Digital Voice vs. Vonage: No Contest

The contrast between Comcast's and Vonage's voice businesses is stark.  Vonage announced earnings on Tuesday, and Comcast announced theirs on Thursday, providing a good head-to-head comparison between their voice products. 

It's clear from the table below that Comcast is kicking Vonage's butt, and that Vonage is trending worse over time:

	Comcast	Vonage
Total Subscribers	4,377,000	2,580,227
4Q07 Subscriber Growth	604,000	56,000
4Q06 Subscriber Growth	509,000	166,267
Addressible Market	42,000,000	111,162,000
Approximate Market Share	27%	16%
Years in Service	3 years	6 years

Vonage added a third as many subscribers in 4Q07 as they did in 4Q06, reflecting their out-of-control churn rates and their reduced marketing spending due to their need to conserve cash after enduring an onslaught of patent lawsuits.  Meanwhile, Comcast added about as many subscribers in 2007 as the entire Vonage customer base.  Shortly, Comcast will have twice the subscriber base of Vonage, after offering the service for about half as many years. I don't have good churn data from Comcast, but given that Comcast is provisioning their services on their own DOCSIS network, with quality-of-service mechanisms to ensure voice quality, it is highly likely that Comcast has a much lower churn rate than Vonage's 3% churn. 

Comcast doesn't necessarily have an easy road ahead of it, though.  Digital Voice subscriber growth slowed down a little in the 4th quarter, and I expect that the company will see tough competition from wireless phone alternative offerings from the incumbent telephone companies.  Comcast and the other cable companies don't have a coherent wireless strategy yet.

In yesterday's post, I speculated the Vonage might survive if they are able to refinance their debt.  That's good news for Vonage's customers, and for Vonage's vendors, like Level 3 Communications (Vonage is one of Level 3's top 10 customers).  However, survival for Vonage may be like an amateur runner staggering across the finish line at a marathon, four hours after the winner. 

Risky Business: Vonage Hopes for Debt Refinancing

Vonage announced 4th quarter earnings yesterday, with a loss of $0.06 per share, beating analysts' estimates by $0.04, and on a day when the market was up strongly, Vonage shares also rose.  Investors saw the potential that the company might survive the multiple patent violation lawsuits and settlements that weighed on the company in 2007.  If Vonage can refinance their $253M in convertible debt before December, 2008, then it looks like the company can avoid bankruptcy. 

However, the debt refinancing is problematic in today's credit environment, and Vonage did not project a timeline for completing the refinancing.  The company said that if the refinancing is not completed in time for its annual report, its auditor's report would question whether the company could continue as a "going concern," and for good reason.  My most pessimistic model shows that without improvement in key metrics, the company may have as little as $50K in unrestricted cash left by December of 2008, when the company would need to pay the $253M back to its bondholders.  That's why refinancing the debt is one of the company's top two priorities for the year.

The other top priority is reducing churn, which remained at a record high of 3% in the 4th quarter.  Vonage hired a new customer care executive in recent weeks in hopes of improving their atrocious churn statistics, and said that they would not ramp up their marketing spending until they saw some improvement in churn.  The company has claimed that 70% of the churn they are experiencing is "self-inflicted" and is due to factors under their control, yet they list quality of service as a factor that is under their control, when in fact any "over-the-top" VoIP solution that runs over third party connections like DSL and cable internet access does not have any control over key factors such as packet loss and jitter.   I do expect some improvement in churn in the coming quarters, but not dramatic improvement.

Overall, if the debt can be refinanced, I expect that Vonage will show some improvement in churn, direct cost of telephony service, and SG&A as a percentage of revenue, while marketing costs will increase on the year.  By the end of the year the company could be coming close to generating free cash flow (see attached model).

Download vonage_21408_realistic.xls

The harder question for Vonage, though, is whether the company has an exciting growth business any more.   The company has stated that they expect to achieve $1B in revenue in 2009, from a base of about $803B in revenue in 2007, which implies an uninspiring growth rate of 13% per year for the next two years, in an overall industry that is growing at 30% per year.  So, while Vonage projects to grow from 2.5M subscribers to about 3.6M subscribers in two years, the overall base of VoIP users is expected to grow from 16M users to 27M users in the same time period.  If this happens, then Vonage's market share would drop from 15.6% down to 13.3% in the next two years.

If Vonage's market share is shrinking, then who is gaining more market share?  Clearly, the cable companies are taking share.

So, if Vonage can refinance their debt, it looks like they will survive for the time being.  However, Vonage looks to be losing market share and may not be able to raise enough additional capital to invest at the levels required to stop the loss of market share. 

The more worrisome scenario is if the debt cannot be refinanced, in which case the company may need an injection of capital from wealthy founder Jeffrey Citron, or may need to declare bankruptcy.

Vonage Earnings: Slower Growth, High Churn, Constrained Spending

Vonage announced their 4th quarter earnings this morning, with these highlights:

• Subscriber growth declined, with only 56,000 net subscriber lines added, compared to 78,000 net subscribers added last quarter.
• Customer churn remained high, at 3% per month, same as last quarter.
• Average monthly revenue per line declined to $28.19 from $28.25 last quarter
• Marketing cost per gross subscriber addition grew to $223, up from $206 last quarter
• Overall spending was reduced, including a reduction in SG&A to $77M, compared to $84M last quarter. 

The only bright spot for the company appears to be this last point, but one could argue that the company had no choice but to excercise some spending discipline.  All of the other operating metrics on this list were not improved.   

I'll have more analysis later today, after the company's conference call.

The Level 3 Layoff That Wasn't

"There is no smoke without fire." - Latin Proverb

Heading into Level 3's 4th quarter earnings call last Thursday, TheStreet.com reported that a massive layoff was underway at the company, up to 16% of the work force.  At the time, I corroborated the claim of a layoff, since I personally knew friends and former colleagues who lost their jobs.   

The earnings call came and went, and the company did not mention a layoff on their call, even in response to questions.  So, what happened?  Was there a layoff or not?

I can verify that there most definitely was a layoff, though it was not of the size TheStreet.com predicted.  The company hasn't provided an announcement so there aren't official numbers, but it appears that between 100 and 200 people were laid off, or about 1.5% to 3% of the work force.  With a layoff this small, and with previously announced plans to trim the workforce due to acquisition synergies, it's clear the company didn't feel the need to draw attention to the layoff on their conference call, and considers the layoff to be part of the previously announced acquisition integration plans. 

I expect that Level 3 will continue periodic work force reductions this year as more progress in made on integrating acquisitions, and as the company tries to meet its goal of realizing $200M in synergies from eight acquisitions over the past two years.  For now, though, it looks like TheStreet.com had some bad information when they predicted a reduction of 1,100 people. 

Verizon Strikes Again: Patent Lawsuit Against Charter

The VoIP patent wars are accelerating, with Verizon now suing a second cable company, Charter Communications, for patent infringement.  Last month, Verizon sued Cox Communications. 

Add this to the Net2Phone VoIP suit against Skype, and we have the makings of VoIP World War I. 

The latest Verizon lawsuit against Charter is identical to the one brought against Cox, so it may portend similar lawsuits against every cable company that has deployed the PacketCable architecture for VoIP, developed by CableLabs. 

I'd give the cable companies a hint on finding prior art, and point them at my patent 5,867,495 which was about a year earlier than the Verizon patents in question, but there is a problem: Verizon bought MCI, and I was working for MCI at the time and MCI owned the patent, so now Verizon has that patent, too.  Oops!  Still, there should be enough prior art around to mount a good fight.

For those of you keeping score at home, here's the list of VoIP-related patent suits in progress:

1. Verizon versus Cox
2. Verizon versus Charter
3. Net2Phone versus Skype
4. Sprint versus Broadvox, Nuvox, Broad River Telephone, and Paetec

These active lawsuits follow the recently settled lawsuits:

1. Verizon versus Vonage
2. AT&T versus Vonage
3. Sprint versus Vonage, VoiceGlo, and theglobe.com
4. Vonage versus Nortel

The huge number of VoIP patents out there are like mines and unspent ordinance laying around a tense border area.  Maybe it was inevitable that someone would use one of these weapons and then war would erupt.  Most of the patents being used as ammunition in this war have at least ten years of life left, so we could be in for a long one. 

Content: King or Not?

“There is nothing so horrible in nature as to see a beautiful theory murdered by an ugly gang of facts.”
Benjamin Franklin

In my recent hunt for value in networks, I've covered the roles of connectivity, reliability, and capacity, but I would be remiss if I didn't consider the theory that content plays a primary role in creating network value.  For today, we'll consider those that believe that content actually is a prime driver in the creation of network value, and poke some holes in their arguments.

In his paper "Content Is Not King", Andrew Odlyzko quotes several industry leaders on the role of content in creating network value, including this one from Leo Hindery, who led Global Crossing for a time.  His strategy was

...to turn this global Internet-based network into a mature content distributor. ... "I don't want to be anyone's dumb pipes," says Hindery. "If all you do is racks and servers, that's dumb. What we're doing is melding the network and the content."

Norio Ohga, once CEO and chairman of Sony, said that

"[w]ithout content, the network is nothing"

Juan Villalonga, former chairman of the Spanish communications carrier Telefónica, said that

"[t]he key ... is content. Without it, ... phone companies risk becoming simple commodity pipelines" [Baker].

What are these leaders really saying?  Are they saying that their networks need to be capable of distributing content, or are they saying that they need to own (or have exclusive distribution rights for) content?  I believe they are saying that networks need to be the sole distributor for selected content, and without it, their networks are commodities.

So, the theory is that without content, your network is nothing more than a dumb pipe, a commidity, and worthless, or at least "worth less" than it would be without captive content.

There is no question that content is valuable.  Just look at the $44B+ bid that Microsoft made for content-centric Yahoo, or the $1.65B acquisition of content-centric YouTube by Google.  The question, though, is whether captive content has anything to do with network value. 

I don't believe that captive content imparts any value to networks.  Here is a prime example:  the "old major" television networks, ABC, NBC, and CBS, for many years operated their businesses as if the captive content was the crown jewel of their network.  In the past, though, these television networks used "free" public airwaves to broadcast their content, and over the past thirty years or so the content has migrated to wireline cable networks, and the wireless spectrum formerly used for broadcast television is being auctioned off, presumably for use in wireless Internet access, or for connectivity-centric wireless phone applications.  The bidding for the spectrum has reached over $19B so far...and that is for raw spectrum without any capital equipment, and without any captive content.  How is it that now that the spectrum will be used to distribute open Internet content, it is worth more than it was when it was used to used to distribute captive television content?

A good test case is going on right now, with Time Warner Cable's decision to distribute HBO on the Internet, but only if the subscriber also bought a bundle of cable high speed internet and digital cable television.  Time Warner owns HBO, and they clearly think that part of the value of their network is their exclusive access to content.

My prediction: Time Warner will find that their captive content adds little or no value to their network. 

Dynamite Wire and Snapping Turtles (by Fred Faber)

The rebuilding of the high road above the big creek was a major event in this kid’s life. The things all of us did during that year and the rest of our lives seemed to spin off of that one great summer. I missed the opportunity, as a kid in the country, to enjoy turtle soup, but I have lived long enough to mature in my eating habits and learn of finer things.

DYNAMITE WIRE AND SNAPPING TURTLES

Yards speak volumes about the owner of that yard. Our yard was always mowed and prominently featured two weeping willow trees. The one to the side of the house toward the large garden was huge and a favorite resting/playing place for everyone within its shade and innate, nice environment.  The willow in the front yard, outside Mom and Dad’s bedroom window was smaller, but much fuller, weepier and graceful.  Between the back portion of the porch that wrapped around the house, and the playground, was an apple tree.  I would willingly climb onto the lowest limb, but Phyllis, the double-jointed “tomboy” of the family, would climb up to the highest twigs of that tree.  Mom would have heart palpitations when P. would get up high and spend some considerable effort coaxing her back down to a barely sane level of altitude.  Just off to the south of that tree and adjacent to the storage building was a large walnut tree.  There was another walnut tree beside the rear of the coal house at the playground and another near the fence of the chicken coop.  Our front yard, as it neared the Elk Twomile Creek, was lower then the major portion of the main yard and was defined by an abrupt drop-off in the lawn of several feet.  When I was young, Dad transplanted a row of small hemlock evergreens from the woods to along that divide; hemlocks like moisture and these transplants thrived to a high height even before we moved away from the place.

Surviving Winter In Colorado

"We love to expect, and when expectation is either disappointed or gratified, we want to be again expecting." - Samuel Johnson

I've learned that it's easier to endure most things when I'm looking forward to something, and the long Colorado winters are no exception.  For many Coloradans, the winter itself is eagerly anticipated, because winter brings great skiing and snowboarding and hockey.  For me, though, winter sports hold little pleasure and I long for the glorious Colorado summertime. 

Every year, the anticipation of warm weather intensifies right about now, in February, after the Super Bowl hype is over, in the dead zone while there is little to do outside of work.  The flip side of this equation is that midwinter is often the most productive time of year for me, but it is also the least joyful.

Having lived in Colorado now for 15 years, I've learned to cope with the windy, cold, dry, and sometimes snowy wintertime by clinging to two lifelines: gardening and baseball.  Right around Christmas I start receiving the garden seed catalogs, the one category of junk mail that I treasure.  I love to page through them and dream of the coming growing season.  I'll draw and re-draw a dozen garden plans each year, continuing long after the obsessive preparation achieves any actual gardening benefit, for the sole purpose of raising my spirits.  On the occasional warm day, I'll sometimes go out to the garden and turn the compost pile, and I'll even make half-hearted attempts at digging compost into the frozen ground. 

Growing up in Virginia, I would long for the smell of the fresh-mown grass as the sign that baseball had arrived.  Here in Colorado, baseball season begins before grass-mowing season, and in our dry climate even mown grass loses some of its delicious scent.  So, instead, I greedily await news of spring training, roster moves, injuries, and the development of the young pitchers. 

Whatever you eagerly expect in your life at this time of year, whether it be baseball, gardening, March Madness, golf, or the end of a school year, I wish you joy in your anticipation.  Looking forward to it is half the fun.

More Softswitch History: Working In A Closet

"The art of being wise is the art of knowing what to overlook." - William James

My friend and former colleague, Dan Caruso, has been writing a series on his excellent "Bear On Business" blog about the history of the Softswitch, and has just reprinted a "softswitch history" post I did early this year.  The post provides some of the details of the journey of creating the industry's first operational softswitch platform back in 1997 and 1998.  Dan filled in the details of the months leading up to when I was hired at Level 3, including a few episodes that had me cracking up, where he and some of the other Level 3 founders were trying to figure out what Jim Crowe was talking about with the convergence of SS7 and IP.

Dan's posts provoked more memories for me of those early days at Level 3.  For December and January, as I recall, I was flying up to the Chicago suburb of Lisle to work in a cube farm there.  It was kind of a first-come, first-served deal, where you would walk into the room and try to find a free cube for the week.  You were lucky if you got the same cube two weeks in a row.  I was sitting in one of those cubes doing some initial design work on the softswitch when Kevin Dundon pulled me into his office to hear Ron Vidal's ideas about buying XCOM. 

Somewhere around February of 2008 we opened our first Colorado office, along Parker Road down in Aurora.  I was thankful that my commute no longer involved flying, but I still had a 60-mile drive from my home in Colorado Springs every day.  And the office conditions were still pretty strange.

I now had a permanent desk, so I was moving up in the world, but the desk was in a closet...kind of the polar opposite of a corner office.  Actually, there were two desks in that closet, so I had to share the closet with another guy.  Jack Waters, who eventually became Level 3's CTO, sat just outside the closet in the hall, where I could hear him chuckling as he overheard me pleading with engineering recruits to come join us so that we could build something really cool together.  We had a pretty good batting average on those recruits, but sometimes it took some patience: it took three months to convince Andrew Dugan to make the leap. 

We had an interesting hiring practice, back then, in that nobody had job titles.  The thinking was that we just needed to hire really talented people and we would sort out the unimportant things, like titles, later on.  It worked really well, too, at least until the title assignment game commenced later that year, and we all started to get title jealousy and title inflation and so on, as with most big companies.

Looking back on it, though, I was probably happiest at Level 3 in those early days of working in a closet without a job title and trying to change the world.  There's a lesson in there, somewhere.

700 MHz Auction: It Keeps Going, And Going, And Going...

Earlier this week I speculated that the 700 MHz auction might wind up late this week or early next week.  It appears that I was way wrong on that prediction.

Greg Rose over on WetMachine says he thinks the auction will last at least another two weeks, maybe three, due to continued bidding in E block. 

I'm dying to know who won C block...the anticipation is killing me.

Microsoft and Google Cooperate on OpenID

Who said Microsoft and Google can't get along?  Yesterday, the OpenID Foundation announced that both companies are founding board members, along with IBM, Yahoo!, and Verisign. 

OpenID is a good idea and long overdue.  The foundation press release describes it this way:

OpenID is free technology that simplifies the on-line user experience by eliminating the need for multiple user names across Internet sites, enabling individuals to take more control and ownership of their digital identities. This user-centric digital identity technology helps users reduce the pain of managing dozens, even hundreds of user-names and passwords, and provides more control over what personal information they share with Web sites when they sign-in using an OpenID.

Brad Fitzpatrick is known as the "father of OpenID" and now works for Google but started working on the OpenID movement while he was a SixApart.  He acknowledges the open source roots for the movement:

“Nobody should own this. Nobody’s planning on making any money from this. The goal is to release every part of this under the most liberal licenses possible, so there’s no money or licensing or registering required to play. It benefits the community as a whole if something like this exists, and we’re all a part of the community.”

OpenID is not just a centralization of all of your usernames and passwords.  It actually creates a protected digital identity for you and ensures your security information isn't transmitted in the clear on the internet, making it much harder to hack than a simple username/password technique.

So, OpenID is cool for a bunch of reasons:

• It's convenient (no more remembering lots of different logins)
• It's open source (so you aren't helping any mega-techno-corp dominate the Internet)
• It's stronger and more secure authentication than plain old username/password
• It's free

Carleen Hawn has a good interview with Luke Sontag of Vidoop about OpenID, over on GigaOm.  Check it out!

Good News In Level 3's Earnings Report

Level 3 Communications reported good news in its 4th quarter earnings report this morning. 

Here are the positives from the report:

• The company has made significant progress in cleaning up its order provisioning systems, to the point that their provisioning capacity now exceeds the company's sales volume.  The company stated that they still have work to do on their provisioning systems, but it appears that from here forward, the provisioning issues will no longer be a drag on revenue.
• The company's top five executives did not receive year-end bonuses.  This reflects what I hope is a renewed commitment to a disciplined, pay-for-performance culture...at times the company seems to have strayed from this discipline in the past.  Given the missed targets in 2007, paying bonuses to senior executives would have been a mistake.  It's important to note that while senior executives received no cash bonuses, they did receive significant stock-based compensation at the end of the year.
• The company achieved positive free cash flow of $41M in the quarter, due in part to the reduced bonus payments, and also due to the earning a $16M performance bonus from AT&T (SBC).
• The company predicted sustainable positive cash flow for the full calendar year 2009, and CEO Jim Crowe said he would be "disappointed" if the company did not achieve sustainable positive cash flow on a trend line basis before the end of 2008. 

Concerns from the report included:

• Now that provisioning capacity is more than adequate to meet sales volume, sales volume has trended downward and the company expects fairly soft revenue and profit in the 1st quarter of '08, largely blamed on seasonal demand patterns.  For the last three months we've been uncertain about the company's ability to install new sales in a timely manner, and now we are concerned about selling enough.  The company expressed confidence that revenue growth would accelerate after the 1st quarter, and for the remainder of the year.
• While the company did achieve better than expected earnings of ($0.06) per share versus the analysts' consensus forecast of ($0.11), about $0.04 of this performance could be traced to one-time events, like the lack of year-end executive bonuses and a one-time $20M tax benefit.  So, while Level 3 did beat the consensus earnings estimate, if you exclude one-time events it appears that they beat the consensus forecast by about $0.01.  Worth cheering about, yes, but not massive outperformance.

The company provided little to no guidance on a couple of key outstanding questions:

• No word was given on the selection of a new CFO, and no guidance on timing.
• No real data was provided on the size of the recent layoffs.

The bottom line: Level 3 seems to have righted the ship and is well-positioned for a good 2008 and beyond.  Given the uncertain economy and Level 3's recent sales slowdown, I would not expect to see upgrades as a result of this morning's report.  However, if Level 3 begins to report actual sales and revenue acceleration in upcoming quarters, we may see some analyst upgrades in the stock. 

A Pre-Earnings Report On Level 3: Not Out Of The Hole Yet

So, we now have press confirmation of what we all knew was happening at Level 3: yes, layoffs are in progress.  TheStreet.com has an article that estimates the Level 3 layoffs at 1,100 people, or 16% of the work force.  That's a big one, no doubt, and helps explain why so many long-time, faithful Level 3 execs and foot-soldiers are being let go, as confirmed by friends and former colleagues here in the Broomfield area.

Tomorrow morning, we should have an official pronouncement from Level 3 as to the actual size of, and purpose for, the layoff, in the form of the company's 4th quarter earnings conference call.  So, for the next 24 hours we can only consider the speculation about what that earnings call will hold. 

Here is my reaction to some of the Level 3 earnings prophecies that are floating around among analysts, blogs, and investor message boards:

• Revenue:  TheStreet.com says LVLT will report sales of $1.08B.  That would be at the low end of the annual growth range given by LVLT on the 3rd quarter call, and I think the revenue number will be at the low end of guidance, or possibly lower, considering that the company was almost certainly still experiencing the effects of operational system problems in the fourth quarter.  I would expect the company to report a low revenue number for the fourth quarter but predict some amount of revenue acceleration for the remainder of the year as the system issues improve. 
• Earnings: TheStreet.com says LVLT will report losses of 11 cents per share.  This would match last quarter's loss.  With the layoffs, I would also expect Level 3 to report a one-time charge for the layoff, and if the Vyvx advertising unit sale closed this quarter then there would be a one-time gain of $129M for that sale, so the 11 cents a share loss should be expected to exclude one-time events.  This will set the company up for an improved 1Q08 earnings report, even if revenue growth does not accelerate past the 2% per quarter that is the low end of the revenue forecast.
• "Big Announcement": Rumors have been floating around on investor bulletin boards that there will be a "big, positive announcement" of some kind on tomorrow's earning's call.  Personally, I'm not expecting a big customer announcement, nor am I expecting big news on the merger and acquisition front.  I'm guessing the only positives the street will see will be from the layoff announcement, possibly some executive changes such as the hiring of a new CFO, and possibly an improved earnings (but not revenue) forecast for 2008.  I hope I'm wrong and there is some bigger news, but I'm not expecting it.
• Negatives: My guess is that revenue will be at or below the low end of guidance from last quarter, though maybe not quite as low as the analyst consensus from TheStreet.com.  Analysts on the earnings call will likely do a lot of probing about softness in demand and whether the company is seeing an impact from the overall economic slowdown.  I'd expect the execs to say no, that the lower revenue is from the already-announced provisioning issues and that they see solid demand for their services for 2008.  Also, analysts will inquire about the depth of the staffing cuts, and whether they will hurt the company's ability to finish Project Unity.
• The Forecast: I think that management will re-affirm the 9-12% core communications services revenue growth guidance for 2008, but could reveal an improved earnings outlook, especially for the 2nd half of the year, benefitting from progress on system automation and acquisition integration and reduced payroll expenses due to the layoffs.  They might even announce a goal of positive earnings by the end of the year.

Overall, I expect the company to announce low-end revenue and earnings but to provide a more positive forecast for the future that will somewhat offset negative reaction to the fourth quarter numbers.  In the end, it could leave investors feeling like New York Giants fans at halftime of the Super Bowl: behind, but hopeful. Time will tell if the second half plays out for Level 3 as it did for the Giants.