Hi TSF,
While I've deferred at times to replying to some of your earlier posts, they were so spot on that I really couldn’t add much to them, nor could I find much to disagree with. As is the case with this last one, but I’ll comment here, nonetheless.
”Carriers have been selling building access really cheap, or even giving it away for the last 5 years assuming that demand would scale in those buildings in order to compensate the expenses.”
I don’t know quite how to take that. If you are including the ILECs and the Top 3 IXCs with metro builds in place (ATT's TCG and the myriad of WCOM CLEC acquisitions), then we are talking about one thing. If you are referring to next-gen'ers and green fielders, it’s something else. In the case of the former “incumbents”, it’s price-shifting and cost displacements, and other numbers shuffling tactics that allow them to play with their vertically-integrated pricing schemes. In terms of the latter, however, it’s almost invariably called: Buying market share.
”Well, I'm sitting in a building that is lit by a carrier right now and all they have is a single t-1 lit (I went down and looked) and I'm pretty sure that isn't covering their POP space, power, lateral build costs, ect.”
Begin Digression: Do you recall the age of the so-called co-carrier strategies? Circa ’94 through ’96, the ILECs (at least NYNEX and BEL) were embracing the encroaching CAPs/CLECs/call-em-what-you want, and they were building OC-48 rings to beat the band. These were truly architectural oddities. I had one coming through the building we resided in on Broadway during this time period that was a SONET Ring co-carrier'ed by Nynex and MFS. Weird. Here’s how the facilities were constructed:
MFS had a fiber ring that went from Jersey City to Broad Street in Manhattan and back, which was shared by tenants of both Nynex and MFS along the way (so the story goes). The ring in downtown Manhattan where I was served was Nynex’s in the street and into the buidlings. The T1s that I leased on that Ring belonged to MFS through some magic that occurred on the third floor easement space through a DDM 2000 that saw absolutely no flight time to speak of.
The Nortel PBX in my Manhattan office was tied to a Class 5 Ericsson switch in Jersey City (oy, what fits we had for about three months) over this T1 that was provisioned with a Reltec channel bank (a refrigerator-sized unit that we managed to fit into a wall closet). And like you say, this was the only T1 in my building that the new carrier (MFS) could call its own, at the time.
I suppose they figured that they had to start somewhere, so they used us to break the ice in this particular building. Yet, they had a DDM 2000 (an OC-12 mux) sitting in the easement that is probably still sitting there six or seven years later, still eating dirt. But I'll tell you a little secret. At the time that we moved into this building we were commissioned to oversee the fast-track migration of ADP Brokerage Services to Jersey City.
I suspect that the carriers didn't know to what extent and just how "final" this migration would be, given the fast-track nature and nebulae that surrounded the move. Just the same, their long term plans for the area went ahead right on schedule, as though nothing had changed. End digression.
”MFN and LVLT had really cheap building entrance costs until recently, but have since bumped them up, but still not enough, IMO, to cover their actual costs… Customers express that just because a carrier's cost is $150,000 to light a building they shouldn't have to bear a large portion of those costs, and in most cases they can't afford to pony up that money.”
When you speak of recovering costs, how much time do they have, in your opinion, in which to amortize the costs of those builds? We are, after all, talking about capital construction costs here, not expensed items, right?
”Carriers say they won't build to a building unless they recoup those costs in somewhat of a timely manner. Some carriers have said they could get more demand from the building, so they could lower the cost paid for the first customer, but that demand never comes quick enough.”
Couple of things there... Each carrier’s approach to this will be driven by their financial status.
An incumbent will not blush at bringing in an OC-192’s worth of hardware and fiber into a new building that is now being erected, in which Goldman Sachs is a tenant. Gratis, as it were. But move the location a klick to the north and a few blocks to the west, and you couldn’t get the same carrier to even explore a franchise for the lateral (subsidiary) pull.
”If you look at MFN's 10-k, they are saying that they have spent $1 odd billion on construction YTD, and they are only allocating $400mm for the rest of the year. How many buildings will that light and how much of that will go to their employees?”
I’ve not looked at their 10K. Please tell. Do those construction costs include the still-enormous costs associated with their wdm’ed metro Ethernet rings for the Opteras that cost on the order of 20k per lambda or more, per end? Or, are those merely (cough!) the costs of straightforward street cuts and building penetrations with a commensurate number of ROW permits and franchise fees thrown in?
”Now if we are talking about dark fiber, since payments could be $90 per month per strand and $1,500 per building entrance, how long does it take to recoup $150,000?”
I’d have to ask once again, how many years do they have to depreciate those outside plant construction costs? Not that it makes any difference if they have no money to start off with, but I'd just like to hear your take on this.
”Even if we are talking $50,000, we are still looking at 2+ years just to break even on the BUILDING costs, not the SG & A, fiber, conduit, franchise fees, ect.”
At this point I’m losing you, because the variables could either reinforce what you are saying, or they could extinguish your argument in a flash. It would depend on the traffic and uptake mixes in the building in question, and whether they were selling dark fiber or wavelength services, and which kind.
The outcome would also depend in large measure on what their stated break-even horizons were, vis a vis what they plotted in their original biz plans that their principal investors (assuming they've already pony'ed up the cash) agreed to endure.
”Also, demand was pretty high a few years ago, and it has slowed considerably. Is there enough demand to support all of the new metro players?”
No argument there. The liquid in the straw doesn't know which way to go in some places. The only offset to this argument might be the inertia that exists in a lot of two-year rollouts by the very large first adopters that are only halfway done at this time, and where there is no turning back from an architectural (read as: business lifeline) standpoint.
But you can believe you me, the subscribers in this class wish there was a way of turning back at this time. They surely would be moving in the direction of a withdrawal if they could, even if it made no sense to do so whatsoever from a real numbers perspective, if it suited their needs from an image perspective. I.e., in such a way that they could make it appear that they were saving a few bucks right now, even if they were choking the wrong, er... skunk?
Having said all of this (seemingly in a favorable light towards the new carriers thus far), I have to also add that I’ve been among the first within my circle to highlight the risks associated with continuing to deal with some of the startups we’ve mentioned here.
[Late edit: I've decided that discretion is, indeed, the better part of politics, so I just decided to delete the last paragraph that I'd previously posted here, in case you're wondering where it went! ;]
FAC |
