Can new carriers ever get to
profitability in today’s environment? Will this become the new
measurement for early stage carriers success or ultimate failure?
Just a few short years ago CLECs
were measuring their value based upon multiples of their Physical
Plant & Equipment (PP&E). Capturing customer lines and
revenue growth were given higher priority than margins, costs and
ultimate profitability. Miles of fiber in the ground became more
important than managing operational costs. The number of switches
deployed in the network became the rallying cry.
To compete in the competitive
telecommunications industry, large executive teams were created.
After all, if you wanted to be
a phone company, you needed to look
like one. Investments in offices, network operation centers (NOC)
and facilities were needed to show customers that you were a player
in the industry. Multiple executives were needed for focus and
control of each operational department, and in turn, executives
needed management staffs to be efficient. Wasn’t this the way
business was conducted at a phone company? Didn’t everyone want to
be a phone company?
It is well known that the
largest cost for a carrier is the capital expense of building a
network. Once operating, the costs of operations and SG&A become
the largest expenses for a carrier. Successful carriers have managed
these costs effectively, but new carriers, by necessity, must manage these costs even more effectively.
Recent history has proven that
new carrier models were not effective - and in all probability never
will be. Carriers have to abandon the business model of capturing
market share at any cost, and instead target profitability and
positive cash flow. The mantra of "build it and they will
come" has proven to be a false model. Failure to focus on
margins and expense control led to recent industry failures such as
GST, ICG, PSI-Net, Star Telecommunications and 360 Networks - to
name a few.
The
capital markets have run dry, and
current stock valuations will keep acquisitions and mergers down.
Raising money used to be easy, with both the financial markets and
the vendors getting in on the action. After all, the bulk of the
money was going into plants and equipment that would ultimately be
valued at a multiple of four to five times the book value. Early
pioneers such as MFS, TCG and Brooks Fiber were proof of this
concept.
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