Reality Check: Mystery solved! The money-making middle mile

Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile industry to give their insights into the marketplace.
After a column a few weeks back where I took the industry to task on its poor asset management discipline, a colleague came into my office and proclaimed “So – there is nothing new under the sun?” That got me to thinking – “Where would I put my money?”
The middle mile and regional networks represent the next great hope for telecom and cable, and could very well sow the seeds of the next billions of value created. It’s easiest to define the middle mile through deduction: It’s not the last mile (meaning the connections to specific buildings and homes), and it’s not national/international backhaul. However, it is everything in between. There’s a lot in the middle, and some of the companies I’ll cite will be a hybrid of last and middle miles (the connection being usually to a very tall and shiny building).
Buyers include wireless companies, long-distance providers, systems integrators, state and local governments, and independent data center operators. In some very large (Fortune 100) cases, they may even be enterprises. They tend to sign long-term contracts (5-10 years), and most customers are very regular in their payments with low churn. Middle mile companies take advantage of a) enterprise data growth; b) content transmission coming from increased smartphone usage, and c) broadband (4G) buildouts. No handset subsidies here – and they may even have the luxury of assessing a non-recurring fee from time to time. Are you salivating yet?
Who does this, and, more importantly, who does it well? Here are a few examples. In the Northeast, it’s Fibertech. They are happy to be private. No flashy VC backing (Nautic and Bank America are their only investors), and they are Rochester-based. This year will be their 10th as a business, and judging from $820+ million in signed contracts and over $80 million in recurring revenues, they have many more bright years ahead of them. I remember meeting their CEO, John Purcell, in 2003 – John may be the antithesis of Joe Nacchio – very soft-spoken, every bit the thinker, shaped by his days at Frontier putting together what became the foundational principles of the 1996 Telecom Act. Mike Hurley (marketing) and Dan Berl (sales) were others that I met in 2003 – both are still there. Long-tenured teams are rare in this industry, and Fibertech has one of the longest. Here’s their service area – a nice concentration from Concord, N.H., down the coast to Montgomery, Md., through Pittsburgh and across upstate New York.
Heading south, there’s a utility-backed fiber and Ethernet company called FPL Fibernet. Here’s part of their Miami map. FPL Fibernet has been around for about a dozen years with a fairly stable management team (I remember negotiating the Sprint/ FPL deal with them during a particularly cold winter in 2003). Their local focus is intense, and their knowledge of Florida business is impeccable. Unlike their Carolinas counterpart, DukeNet Communications, which focuses almost exclusively on end offices, FPL builds to cell sites, central offices, international landing stations, and office buildings (see the aforementioned map). Unlike the discussion of larger network providers, FPL Fibernet continues to grow revenues, not just from wireless data cell sites, but from the data centers that provide content to the cell sites. This allows FPL and others to provide low-latency content to wireless users in Florida.
There are many more like these three: KDL has a massive fiber network covering 26 states, Zayo is newer to the game, but serving wireless and cable customers, Towercloud is completely wireless-focused, AboveNet (Craig McCaw and John Kluge are beneficial shareholders) covers the same “to the data center” territory with fewer buildings than FPL but more long-haul fiber (also another long-tenured management team). Lightcore was purchased a few years ago by CenturyLink and covers the Midwest along with KDL. Electric Lightwave, now owned by Integra, focuses on the West. There are smaller regional network associations as well, such as the Missouri Network Alliance, a dense collection of fiber assets connecting primarily northern Missouri.
Then there’s RCN – yes, that cursed and snubbed overbuilder who, like AboveNet, went through a painful bankruptcy but ended up acquiring the Con Edison fiber network in New York City in 2005 and NEON networks, a large New England fiber network, in 2007. A cable company with underground assets that cannot be replicated – there’s enough value there for ABRY Partners to announce that they would buy RCN for $1.2 billion ($535 million of this is stock, the rest debt). A much healthier cousin to RCN is Optimum Lightpath, a division of Cablevision (their map highlights their breadth in the NYC area). Earning a very healthy 35% OIBDA margins on just over $250 million in 2009 revenues, this business (and especially Ethernet) gives Verizon and SNET fits every day.
Bottom line: Value is disappearing from telecom right and left (Verizon and AT&T have lost their shareholders $29 billion in the first nine weeks of 2010). Applications revenue is going to developers and operating system providers; handset subsidies make money for the providers but no one else, and voice yields reflect an industry moving quickly from brunette to grey. Landline substitution is in its middle stages, and small business is going through both wireless revolution and cable conversion. But demand for data, especially outside of our largest cities, continues to grow unabated. These networks are ready for growth and expansion. In many cases the fiber is already in place and the marginal costs to grow are low. The competition is handcuffed by tariffs and complacency. The result: Independent middle mile represents a diamond in the rough.
Next week we dive into a few 10-K releases. Until then, stay tuned to developments through www.thesundaybrief.com, or follow us on Twitter (@mobilesymmetry). Thanks again for your suggestions and comments.
Five you may have missed:
1. On the fragmentation of the mobile (software development) industry from the Braindumped blog. Follow the link in the article – very good paper.
2. On “Topeka to be Google, Kansas.” Honest, we can’t make this stuff up in the Midwest. This is the local (Topeka paper) article.
3. How Microsoft will make your mobile phone an extension of the X-Box. Don’t rule them out – yet.
4. From The Onion (note the source) on
Google’s apology. Without the aforementioned disclaimer, a good for a practical joke article for your colleagues.
5. How collapsed is smartphone pricing, especially for Windows Mobile OS? Verizon Wireless is unloading HTC Touch Pro 2s and Samsung Omnia IIs for free (after mail-in rebate) on walmart.com. Not available in Verizon retail stores (yet). A sign of distribution changes to come.
Jim Patterson is CEO & co-founder of Mobile Symmetry, a start-up created for carriers to solve the problems of an increasingly mobile-only society. He was most recently President – Wholesale Services for Sprint and has a career that spans over eighteen years in telecom and technology. He welcomes your comments at [email protected].