Reality Check: When capital calls

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.
Each of us who works in the telecom industry is a manager of assets – whether networks, systems, circuits, or handsets. These assets provide the basis for the customer relationships used to create cash to pay back the shareholders and bondholders of our companies. When we fail to focus on the title “asset manager,” we miss the call of capital. We starve our networks, we separate our systems, and we demoralize our employees.
Management team/board table discussions proceed as follows: first margins (usually focused on OIBDA or cash flow for each business segment), followed by cash flow (which usually involves a discussion of the next quarter’s capital spending). If your (telecom) company does it in a different order, or blends the discussion of margin to focus on the returns on capital up front on a consistent basis, consider yourself the rare exception to the rule. Thanks to accelerating maturity in the industry, “How should we invest?” is now being replaced with “How much can we invest?” Perhaps there is a heavy debt load, or increasing SG&A expenses, or shareholder dividend expectations. There may be no single reason why capital gets slighted in any particular month or quarter, but it’s certainly not for a lack of good investment opportunities. Capital investments as a whole usually take a backseat to operating cash needs; capital re-investments usually take a backseat to new/overlay network investments.
For a capital-concentrated industry such as telecom, managing value through good investment decisions is vital. Shareholders do not look to telecom for lending expertise, managing the spread between borrowing and lending rates. They don’t look to the industry to be proficient oil futures managers, as they do with airlines. They want communications networks that meet today’s and tomorrow’s needs. Furthermore, when the industry fails provide clear answers, there’s someone waiting in the wings to fill the gap (see the recent Google broadband announcement – more commentary on Google at www.thesundaybrief.com).
This is not an esoteric discussion. The long-haul fiber networks (and their point of presence infrastructures) of the 1980s and 1990s need to be reconstructed and replaced. The frame relay, asynchronous transfer mode, and private line electronics that ride over them are quickly being replaced by IP-based networks. The central office infrastructure (through which nearly all wireless backhaul is transported) is aging. The circuit switches, along with and their corresponding systems, inside many of these central offices is under pressure. The 2G wireless networks are quickly being replaced by 3G and 4G but will have clamshell and candy bar phones using them for at least the next decade. All of these are trumped by the largest and most at risk asset of all: Copper. Hundreds of billions of (re)investment dollars are at risk, shareholders continue to doubt the abilities of current management to deliver returns in excess of the cost of capital, and time waits for no one.
Verizon understands the role of asset manager, and has sold or spun off assets in Hawaii, Vermont, Maine, New Hampshire, not to mention the majority of the GTE purchase to Frontier. We can argue about debt load levels and transition mistakes, but without the willingness to transition from a LEC heritage, it never would have happened. Last year, Qwest saw the cost of the bill to upgrade their long-distance network for the next decade and tried to sell it. At least Qwest and Verizon looked ahead and had the discussion – how many more discussions remain?
The winner in the telecom industry is not necessarily the company with the highest margins, or the company with the most customers (although local scale is critical), or the company with the highest employee productivity. The greatest rewards go to the company with a persistent focus on managing invested capital. This requires knowledge of what assets you have, how they work, the threat of obsolescence, and the replacement/ reinvestment schedule. It also requires a culture that demands accountability for return on invested capital, and distinguishes between responsibility for the returns (which usually resides with the COO) and corporate accountability (which is shared between the sales and operations organizations).
How good is your company at managing assets? Have they put the customer cart ahead of the asset horse? Is there an asset replacement plan and do customers acknowledge that this plan best meets their needs? Take the capital call – it may not be a pleasant conversation at first, but can produce an asset management discipline that will richly reward your owners.
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 jim@mobilesymmetry.com.