Telecom Strategist

  • About

    Thoughts and reflections on strategic issues facing the telecom industry.
The box mobile operators find themselves in March 19th, 2017

I joined Sprint in 2003. Until then, my entire career had been in wireline telecom. In previous roles, I’d cared about wireless because it could be either an opportunity (driver of growth) or threat (substitution). But 2003 was the first time I had really looked at the world as a mobile operator.

One of the first questions I asked was “what applications really require licensed spectrum?”

I was surprised that no one inside the company seemed to understand my question. In 2003, WiFi really wasn’t a threat to mobile operator core revenues (primarily voice in 2003). While I had been talking about a future where everything would be connected to the network for years (I called it “bandwidth built in”), very few people were really thinking about an “internet of things.” The only smartphones with any commercial success (and tiny at that) were Palm and Nokia/Symbian. In fact, in my first few years at Sprint, there was real resistance to including things like Bluetooth and WiFi in our handsets. Can you imagine?

What I was seeing was the first side of the box that mobile operators find themselves in.

Over the next 11 years in strategy roles at Sprint I began to see the other sides of the box. I wish I could claim that I’d been successful helping my fellow executives to see them and to either build the best possible inside-the-box business or launch and fund outside-the-box growth businesses. But Big Bell Dogma rules.

So what are the other sides of the box?

The four sides of the box can best be seen by asking four questions, starting with the one I mentioned above:

  • What applications require licensed spectrum? (e.g. what won’t work on WiFi?)
  • What applications/services work best using network vs. device intelligence? (e.g. GPS/location based services)
  • What applications can best be met by a single operator? (e.g. RCS/joyn vs. WhatsApp)
  • What applications are best served via carrier billing? (i.e. What could never be offered for free?)

There is no question that mobile operators offer an incredibly important infrastructure that has enabled innovation that has literally changed every aspect of our lives. I’m proud to have been a part of that. Unfortunately, telecom companies move slowly and have expensive operations. Innovators can’t afford to wait for, or pay for, the mobile operators to provide what they need, so they have innovated around them and increasingly pushed operators back into their box.

To be successful, operators need to figure out either how to be the best inside-the-box (nimble, low-cost commodity transport and related services providers) or… (I tried to find a hopeful way to end that sentence, but each option I thought of I could shoot down. There’s nothing in the nature of a telecom company that positions it to prosper outside the box.)

For today, mobile operators can have some level of success selling voice and data connectivity services to consumers. That’s clearly inside the box. Will the box shrink to squeeze even those services? What options do operators have for growth? Those are great and important questions.

The Law of Mobility whitepaper November 5th, 2005

A whitepaper on The Law of Mobility is now available here.

You’ve Got to Survive to Thrive November 2nd, 2005

This article was originally written in October 2003 for the January/February 2004 issue of Success magazine.

“Successful telecom startup.” Isn’t that an oxymoron? Looking at the hundreds, if not thousands of companies launched between 1996 and 2000, you’d be tempted to think so. Hundreds of billions of dollars raised in debt and equity markets, with nothing to show for it except empty office buildings and unlit fiber networks.

Thankfully, Covad Communications stands as a shining light amidst this doom and gloom. Not only has Covad survived the sequential bursting of the Internet and telecom bubbles, but the company has a fully funded business plan that is expected to carry them to profitability in the second half of 2004.

How have they done that?

Much of the credit must go to Charles Hoffman, Covad’s CEO who hired on at the company’s lowest point, and who has steered the company through treacherous waters to today’s position of strength. However, Hoffman is quick to share credit with wise decisions made in the company’s earliest days.

Chuck McMinn, Covad’s chairman and one of the company’s founders, describes three things they did right from the very beginning: they built the right team, they built an infrastructure for long term growth, and they focused on a growth plan that was fully funded.

“The first person we hired was a great salesperson,” Chuck recalls. “We didn’t yet have a product to sell, but we needed someone who could spend time with customers and listen to their needs instead of talk about our capabilities. What we learned from these buyers turned our plan for the business upside down.”

Chuck and his co-founders, Chuck Haas and Dhruv Khanna, came across a technology that had been lying dormant in telephone company labs for years. That technology, Digital Subscriber Line (DSL), could deliver information over existing telephone lines at speeds twenty-five times faster than conventional analog modems. These three envisioned a killer application for the technology of connecting remote and home-office workers back to their corporate headquarters at speeds that would rival in-building local area networks (LANs).

But that’s not the application that got corporate network buyers excited. What customers wanted was an inexpensive way to gain high-speed access to the Internet. And DSL could accomplish that task for a small fraction of the cost of existing telecom services.

Thus, the broadband Internet industry was born. But Covad wasn’t alone in chasing this market opportunity. The cable industry had formed @Home to begin delivering broadband Internet services to residential customers over their coax infrastructure. Meanwhile, dozens of startups formed around the DSL opportunity, with two main competitors, Rhythms NetConnections, and Northpoint Communications, joining Covad as the market leaders.

Rhythms, Northpoint, and the vast majority of Covad’s startup peers have long since gone out of business. What enabled Covad to survive?

“Our second critical hire,” continues McMinn, “was our Vice President of Engineering. He began putting in place the automated software systems that would allow us to add lots of customers without adding lots of employees, and to turn up those customer orders quickly. That makes the customers happy and gets the revenue in the door.”

It also proved to be the difference between corporate life and death for Covad.

“Rhythms and Northpoint are gone because they didn’t have the systems that would allow them to scale the business while drastically cutting operational costs when all sources of funding dried up,” says Patrick Hurley, broadband analyst for TeleChoice, a telecom consulting firm that closely tracks the industry. “From day one, Covad focused on execution, quality, and efficiency, and when the cash disappeared, only Covad could quickly implement a plan to both rapidly reduce burn rate and steadily grow the company to reach break even and profitability.”

And that’s exactly what the company did.

When Covad was formed in 1996, the founders knew they only had enough cash amongst them to build out and serve the San Francisco Bay area. So, that’s all they focused on. In 1998, when they landed their first outside funding, they were fully funded to build out and serve six cities, so that’s what they did. They continued this disciplined approach through their IPO in January 1999 and additional debt financing in the first half of that year, cautiously expanding their plan to only include the 16 cities that were fully funded with their existing financing.

Unfortunately, even Covad got caught up in the go-go telecom spending days of 1999 and 2000. Customers wanted nationwide coverage, and Covad’s competitors were rapidly building out additional cities, so Covad followed suit, assuming that the cash that had flowed so freely into the industry would continue as long as they needed it.

Obviously, that was a bad assumption. By the second half of 2000, it was clear that the company’s existing capitalization plan wasn’t going to happen. In short, the company would run out of money before reaching profitability.

Covad’s board and management team huddled and agreed that a financial restructuring was required. Bob Knowling, Covad’s CEO at the time, stepped aside and the board brought McMinn out of semi-retirement to serve as chairman while they began a CEO search. That search uncovered Hoffman, a seasoned telecom executive who proved to have what it takes to navigate these stormy seas.

As Hoffman came on board, he recognized that there were four critical stakeholders that would need to be managed through the process.

To have a sustainable business, of course Covad would require employees and customers. Even though these groups are merely passengers in a financial restructuring, it was critical that Hoffman and Covad keep them totally on-board through the entire ride.

Similarly, since Covad’s path would involve bankruptcy, existing stockholders were clearly not in the driver’s seat. However, the company hoped to deal fairly with these investors or risk alienating Wall Street and cutting off potential future funding sources.

The final group to be managed was the company’s creditors. In a bankruptcy proceeding, the court is primarily focused on ensuring that the debtor is doing all that can be done to pay back outstanding debts. In virtually every bankruptcy coming out of the telecom industry over the past few years, creditors have ended up with a significant equity stake while existing shareholders have been wiped out.

Thankfully, Covad was blessed with two tremendous assets in working through these issues.

First, the company actually had a significant amount of cash on hand. Hoffman put this cash to work, both as working capital in operating the business, and as one of the currencies for satisfying the company’s debt holders.

Second, Covad enjoyed a great relationship with its creditors and that group still believed in the company’s opportunity. The creditors actually presented a plan that would allow Covad to eliminate all the existing debt by exchanging it for a combination of cash and equity that would still leave existing shareholders with majority control of the company.

However, Hoffman and McMinn couldn’t kick back and coast. The plan presented by the creditors would get the company through bankruptcy, but wouldn’t leave Covad with a fully-funded business plan that would carry them to profitability. Chuck and Charles didn’t want to be back in that position again. For the plan to work, the company needed to work out three additional components to the plan.

The emotionally hardest change would be a reduction in headcount. The company’s new plan would not support the existing level of staffing. Since Covad had beefed up operations primarily to support an aggressive nationwide roll-out, scaling back the expansion plan eliminated significant capital expenses and made it possible to scale back the organization. Of course, the early engineering decisions to automate processes played a key role as well.

Covad also needed to rationalize its customer strategy. The company’s early growth had largely been on the backs of other startups that were growing as rapidly as Covad to provide high speed bandwidth to the explosion of Internet companies. As those Internet startups stopped paying their bills, and eventually shutting their doors, Covad’s customers stopped paying their bills, and eventually started shutting down as well. Covad had to work through complex legal issues to extricate the company from serving non-paying customers while, whenever possible, retaining the subset of end users who were financially stable.

Covad shifted their focus from primarily growing through wholesale deals to other start-up service providers, to selling directly to small and medium businesses while establishing strategic partnerships with top-tier wholesale customers. Covad established and strengthened relationships with companies like AT&T, Sprint, and MCI Worldcom while strengthening their own direct sales capabilities. Needless to say, this was no easy task.

However, perhaps most challenging of all, Covad would need to raise additional funding as part of the restructuring process.

What was needed was an investor who could spare about $150 million in cash, who clearly understood the DSL value proposition, and, in a best case scenario, could become a strategic partner – working side-by-side with Covad to ensure each company’s success.

They found that perfect partner in SBC Communications, the parent company of Pacific Bell, Southwestern Bell Telephone, Ameritech, and a handful of other household-name telephone companies. SBC has been one of the most aggressive incumbent telephone companies in introducing DSL services; the company clearly sees broadband as the future of the telecom industry. However, SBC’s customers want end-to-end solutions, and SBC struggles to deliver broadband connections out of its regional footprint. Covad provides an excellent network extension solution to meet that need. Similarly, Covad’s greatest reliance is on companies like SBC who own the telephone wires into customers’ buildings. A strong relationship with SBC could provide easier access to approximately 40% of those lines.

That’s not to say the negotiations were easy or smooth. But, through the combination of McMinn’s creativity and Hoffman’s focus on getting the deal done, Covad and SBC were able to come to terms in a true win-win relationship.

On August 15, 2001 Covad Communications submitted a pre-packaged Chapter 11 filing in the U.S. Bankruptcy Court for the District of Delaware. On December 20 of that year, the company emerged from Chapter 11 with all existing debt eliminated, its network intact, its customer base generating revenue, and with $150 million in new funding from SBC. That new cash is expected to be enough to carry the company to profitability. Covad also emerged to a drastically simplified competitive space, with most of their traditional competitors eliminated.

What did it take to make it through?

Charles Hoffman makes it sound simple: “It was critical that we have a clear plan for how we would, not only emerge from bankruptcy, but emerge with a fully-funded plan that would carry us to profitability. We took that plan to our key partners and customers, to our vendors, to our employees, and to our investors. The plan was clear and it was compelling. We then began execution on that plan and continued to communicate every step of the way.”

Vik Grover, a Wall Street analyst with Needham and Company who has followed Covad since the telecom boom days describes the company’s rebound this way: “By 2001, in a miraculous comeback, Covad performed a prepackaged Chapter 11 filing, eliminating its entire debt load through the payment of cash and 15% of its equity to creditors. This reorganization plan positioned common shareholders to salvage their investments and enjoy the upside offered by Covad’s revamped plan. The company also made needed corrections to its account management and sales growth strategies. Overall, we believe these maneuvers positioned Covad for long-term success and could make the company the comeback story of the year.”

The fact that Wall Street is pleased with Covad’s progress is a testament to the company’s ability to continue to tell the clear and compelling story. Communications, after all, is the company’s business. Unfortunately, for many in their industry, it hasn’t been the practice.

Hoffman sees communications as a critical component for success for any technology startup. “You’ve got to get the right people and develop them into leaders. You have to have a clear, well communicated plan. You have to build the company with a long term focus and never stop improving how you serve the customers.”

“And, you’d better be fully funded,” adds McMinn.

The Law of Mobility November 2nd, 2005

This article appeared in the September/October 2005 issue of Business Reform magazine.

So far there have been two major technology mega-trends that have defined business in the information age. The first was the personal computer. The second was the Internet. I believe we’re on the cusp of the third, which is mobility.

The PC revolution was defined by Moore’s Law which states that computer processing power doubles every 18 months at the same cost point. This made it productive to put a computer on the desk of every information worker. The implications of this could not have been foreseen, but in hindsight have radically transformed business. For one thing, this revolution gave small businesses the kind of processing and creative power that previously had only been available to the largest of their competitors.

The Internet revolution was defined by Metcalfe’s Law which states that the value of any network increases exponentially with the number of users. When the Internet had a thousand users, it was only mildly valuable to those thousand users. When it reached a million users, it was more than a thousand times more valuable to each of the users, and the value continued to increase. Once the Internet reached a mass market tipping point, it was so valuable that everyone had to have it. For most of us, the Internet has become an increasingly valuable part of our business and our personal lives. The implications of the Internet also could not have been foreseen, but in hindsight have radically transformed business. Among other things, the Internet revolution has given small businesses the kind of reach and connectivity with markets that previously had only been available to the largest of their competitors.

The mobility revolution is also defined by a new law. The law of mobility states that the value of any product increases with mobility. If a product is available for my use an increasing percent of my time, without a significant increase in cost (in terms of product cost, operating cost, and convenience), then it will be more valuable to me. As the cost of building mobility into products approaches zero, then virtually every product will become mobile. This is happening by converging devices you normally don’t have with you into products that you always have with you, and by using wireless networks to make information products always available everywhere. The implications of mobility on businesses are unforeseeable, but I would venture to guess that the mobility revolution will empower small businesses in ways that had previously only been available to their largest competitors.

Let me try to make this mobility concept more tangible. There are lots of places you probably go without your camera. If you’re like me, there are times when you say “I wish I had a camera.” If you are one of the growing millions of people who have camera phones, then you have a camera with you almost all the time. The camera in a camera phone is typically not a high end model, but the value of that camera is significantly increased by the fact that it is always with you. Camera phones are not significantly more expensive than camera-less phones, further adding to the increased value of the product.

A second tangible example of the law of mobility is my Bible. My phone runs the Windows Mobile operating system. I’ve purchased the Bible Reader software from Olive Tree and so I always have with me five different translations of the Bible, plus Greek and Hebrew dictionaries, plus a collection of commentaries. There have been a number of times when I’ve unexpectedly found myself with a spare 10 to 15 minutes where I can pull out my phone/Bible for a mini-quiet time or to work on a Sunday School lesson. These moments would be lost if my Bible collection hadn’t been mobilized.

How will this change business? I think we have yet to see, but let me give a couple of examples. A friend of mine recently told the story of how using wireless e-mail allowed him to avert a minor business disaster. It was a Friday afternoon and he was four hours from home. Just before starting the drive, he pulled out his Palm Treo phone and checked his e-mail. He had received a message from a vendor saying that a product couldn’t be shipped to one of my friend’s customers without a missing piece of information. My friend called the vendor, provided the missing data, the product shipped, and the customer was thrilled to receive it Monday morning. Without mobile e-mail, my friend would not have seen the message until Friday evening, after his vendor had shut down for the weekend, delaying shipment until Monday meaning that my friend would have failed to meet his commitment to his customer.

As a second example, one dumpster company has armed all of their truck drivers with camera phones. When a customer complains that their dumpster wasn’t emptied, often, the truck driver will have taken a picture of the dumpster, blocked by someone’s improperly parked car, and will have uploaded it wirelessly into the customer service database. The customer service rep then e-mails the picture to the customer so that everyone is better prepared to have a successful transaction next time around.

What does this mean for you? I believe that businesses will be as transformed by the mobility revolution as they have been by the PC and Internet revolutions. These changes may come from your employees finding new ways to do their jobs using the power that is unleashed by the increasing mobility of a variety of products. They may come from customers who encourage you to change the way that you do business with them. Changes may be forced on you as competitors learn these changes faster than you do. No matter where they originate, be very aware of these changes. Seek out the power that is inherent in these opportunities that can differentiate your business and improve your performance. But also be cognizant of the danger inherent in extending your business information into a mobile world. Stay on top of emerging tools and services to manage these risks while maximizing the benefit of mobility.

As with the previous two technology revolutions, the mobility mega-trend must factor into how you can be the best steward of the resources with which you have been entrusted.

Article Archive November 1st, 2005

Russ McGuire has been a regular columnist for Business Reform magazine and BR’s online partner, WorldNetDaily, for Success magazine, for Network World magazine, and authored the TeleSparks newsletter for TeleChoice.

Note that any article written before November 2003 was written before Mr. McGuire joined Sprint and could not knowlingly reflect Sprint perspectives.

The most relevant of those articles are linked below for reference:

About the Strategist October 31st, 2005

Russ McGuire is director of business strategy for Sprint Nextel. He has been in technology industries for over 20 years. The first 10 years of that career were spent writing mission critical software for the defense, nuclear power, and telecom industries. But for the past decade or so, he has been involved in bringing new categories of products to market and developing core business strategies in telecom and closely related industries.

Prior to his current role, Russ served as Vice President and Chief Strategy Officer for TeleChoice, “the strategic catalyst for the telecom industry.” At TeleChoice, Russ created an innovative process and place called “the strategy lab.” The lab process enabled companies to greatly accelerate development of core business strategies, distilling the core essence and value-creating focus of the business in a few days rather than the weeks or months previously required. More than two dozen organizations benefited from the lab under Russ’ guidance. Before joining TeleChoice, Russ was Vice President of Strategic Development for Williams Communications, now called WilTel. Russ played a significant role in preparing for Williams’ record-breaking initial public funding. Russ has also founded or co-founded two technology startups during his career.

In his current role, Russ focuses on the competitive environment Sprint faces in serving business customers. Russ and his team lead development of competitive strategies for Sprint Business Solutions and address specific strategic opportunities and threats facing the company within these markets.

Posted in About || No Comments »