“The Bear” on Business

2007 has been a truly amazing year for Zayo. In November of 2006, we began to seriously consider a roll-up of fiber-based telecom companies. We didn’t really get started until after the Christmas/New Year’s holidays. January and February were spent researching the company and developing the plan.

The feedback we received from investors was consistent: “We like the investment thesis. We want to back the management team. We like your execution plan. However, we are skeptical that you’ll get any acquisitions done.” They took a flyer on us anyways. Thank you.

What did we accomplish in 2007?

• 1Q07: Developed Business Plan and Attracted 5 Tier-One Equity Sponsors
• 2Q07: Completed $225M Equity Deal; Signed definitive agreement to acquire PPL Telcom, Memphis Networx,
• 3Q07: Signed Definitive Agreement to acquire Indiana Fiber Works, Onvoy, and Voicepipe; Closed on Memphis Networx, PPL Telcom, and Indiana Fiber Works. Sold a customer deal with a contract value of approximately $17M
• 4Q07: Closed Onvoy and Voicepipe. Completed a debt facility of $85M. Signed a Definitive Agreement to acquire Citynet Wholesale.  Finally, with only hours left before 2008, a customer deal with a contract value in excess of $20M was completed.

A whole lot of people deserve credit and thanks for this. On the management team side, John Scarano and Matt Erickson deserve special recognition for their role in every item listed above. Others on the early team who had their hand in most included Troy Kau, Sandi Mays, Scott Beer, Andy Sredojevic, Chris Murphy, Tim Gentry, and Chris Yost. John Siegel from Columbia Capital and Gillis Cashman from M/C Ventures helped us from inception and provided tremendous support. Our other investors–Oak, Battery and Centennial–also earned recognition. David Kendell and his law firm KKO were integral to our success. To all these folks–this is a year you will be able to remember fondly for the rest of your careers.

Many people have joined us along the way. Lots of these people were with us on past endeavors–thank you for having the confidence in us to join us again. Many others have joined us through the acquisitions. I appreciate that you are giving us the opportunity to earn your trust and respect.

Here’s to 2008!

We have been working on the Envysion business for a number of years now. Prior to 2007, our focus was on developing a business plan to apply a software-as-a-service business model to the video surveillance industry. In early 2006, we raised our first round of institutional funding and began to build the technology. We also used 2006 to learn more about the marketplace, using a more traditional video surveillance product to gain feedback on what customers desired. We knew as 2007 approach that it would be a make-or-break year for the company.

As I reflect on 2007, I could not be more pleased with what the team accomplished. During the year, Envysion progressed from an intriguing concept to a real service. The traction and positive feedback the company is getting is, frankly, more than I expected. Here are some of Envysion’s accomplishments in 2007:

• 1Q07: Closed its second round of funding, bringing total capital raised to $9.5M; launched Envysion Video (the software-as-a-service product Envysion had been developing since early 2006) six months ahead of the original plan
• 2Q07: Won its first anchor Envysion Video customer, Chipotle, which committed to putting the service into all of their locations, something unheard of in the video surveillance space. This was a strong indication that Envysion’s core investment thesis–that video surveillance will need to be treated as a corporate-wide IT infrastructure solution instead of a local security system purchase–was spot on.
• 3Q07: Ramped its installation capabilities to several dozen sites per week, dramatically increasing the company’s ability to scale; rounded out its management team, attracting several key people
• 4Q07: Installed the 500th site on Envysion Video; entered into trials with several large national brands, positioning the company well for 2008; materially exceeded the 2007 revenue plan

I am most excited by the feedback Envysion gets from its customers and potential partners. It appears Envysion has put something together that is truly special–something that will change the way video is used in managing distributed businesses. It will be fun to see the progress the company makes in 2008.

Matt Steinfort and Rob Hagens provided tremendous leadership. Congrats to the two of you and the extended team. Thanks also to John Siegel and Columbia Capital for believing enough in Envysion and being a major financial sponsor. Thanks to Jerome Contro and the High Country Venture fund for seeing the promise in our plan and giving us a strong local investor. I’m looking forward to 2008 and beyond.

I received a spam email last week. Please read the first two sentences.

Do you find yourself with unused budget dollars, but you are running out of year? Freedonia has a couple of offerings which help you get the best value for your 2007 budget dollars.

Great idea. You didn’t spend all the money that your budget said you could. Party time. Spend it on something you don’t really need. Why not? Otherwise you lose it? This brought back bad memories.

Early in my career, I was with Ameritech (a RBOC which is now part of AT&T). Specifically I was with Ameritech Development, their corp dev arm. Sure enough, it was near year end in about 1990 and the senior management of Ameritech Development was giddy. “Order up whatever research reports you think you might want,” we were told, “we have surplus money in our expense budget. If we don’t use it, we lose it.” This came from 5th and 6th level management–for those who know the Bell system, this was very senior in the ranks. “Worse,” they explained, “if we don’t use our entire budget, our budget will be reduced next year.” They made it sound so horrible.

It seemed odd at the time–that is why I have a vivid memory of it. Money was spent only because there was extra money in the budget. I chalked it up to the monopoly and rate-of-return regulation roots of its heritage. I learned later that even competitive companies assume this mentality at times. The spam email I received confirms this mentality still exists.

So say me: If you have unused budget, DON’T SPEND IT. Instead, high-five your closest co-worker and send a note to finance letting them know they can shave a little off the budget for next year.

I promised you a new killer application with the following features:

• A bandwidth hog
• Reasonable initial bandwidth requirements, so it is affordable
• Lots of room for future bandwidth growth
• Complementary, not cannibalistic, to your existing portfolio of converged services
• Something that a big cross-section of your customers will need

Your gift is Internet Video Surveillance. Video cameras are going up everywhere–schools, retail stores, banks, hospitals, homes, public institutions, manufacturing locations, and data centers just to name a few. Increasingly customers want to use a web browser to gain easy access to live and stored video. Moreover, they are looking for easy ways to share interesting video. As they use the Internet to gain access to their video cameras, they want higher resolution, faster bit rates, and more cameras. Bandwidth requirements will naturally grow over time. Moreover, they want to use their existing broadband connection for this application.

If you want to add Internet Video Surveillance to your product kit, contact Envysion or visit www.Envysion.com.

Merry Christmas.

Continued from yesterday…

So the top spot on your XMAS list is a new killer application, one that is a bandwidth hog. Though you want the initial requirements to be reasonable (so it is affordable), you also want to know the bandwidth requirements will grow and grow.

Since it is a wish list, what should the other characteristics of this new killer app be? Well, you don’t want it to cannibalize the services you already provide. You don’t want it to be an alternative for voice, Internet or data requirements. You want something new to truly add to your converged services product portfolio.

Oh, and by the way, you don’t want this to be something that is a small niche. You want it to be something that a material portion of your existing customers need.

So am I right? Is that what you want? Tomorrow, on Christmas day itself, I will tell you what this killer application is.

Are you an ISP? A CLEC? A Broadband Service Provider? A MPLS/Data Provider? Perhaps a Telco? Maybe a CATV company with designs to serve the SME marketing place?

I bet I can guess what the number one item on your XMAS list is. Ready? Drum roll please… The top spot on your list: a new killer application. Not just any killer application. You want one that is a bandwidth hog.

Not too big a hog though, at least not initially; you don’t want the day one bandwidth requirements to scare customers away. For now, you want it to be big enough that you can sell another T1. You’re greedy though–you want the application to cause steady growth in your customers’ bandwidth needs. Something that they will use more over time–and use in a way that leads to greater bandwidth consumption.

To be continued…

Below is an abstract from a market research report entitled “Bandwidth Trading”. It was published in 2001 by New Paradigm Resources Group. I suspect you can get a slight discount off the $75 price. If interested, call them at 800-774-4410. Let me know what they say. As a follow-up to the two earlier posts on bandwidth trading, I will provide some of my thoughts on the viability of the concept. I thought this description of what bandwidth trading means would be useful context to the readers.

Bandwidth Trading by New Paradigm Resources Group: February 2001

Bandwidth trading is defined as the exchange of rights to move data across telecommunications lines at a future date. While this trading of a commoditized service might sound like something thought up at Chicago’s Mercantile Exchange or Board of Trade, the concept really is not new. Bandwidth brokers have been providing the service for years. Similarly, utility companies trade energy; so the trading of bandwidth is not much of a conceptual stretch for many large-scale players.

What is different is the standardized way in which the commodity bandwidth trading market is developing. Traditionally, in the worlds of direct inter-company or broker-facilitated exchange, companies execute bandwidth trades through a lengthy process of carefully negotiating each individual contract. Then comes the even more laborious part: provisioning and installing the physical lines. On top of all this are the considerable administrative costs. The bottom line is that the process is inefficient. It is too inefficient to constitute a effective market for apportioning under-used bandwidth.

Hence the need for a commoditized service traded in a standardized arena. A step in this direction is the buying and selling of point-to-point circuits among telecom carriers. Only through such total connectivity can bandwidth be effectively traded. But because no company has access to every point on the map, connectivity needs to growth still further. Another right foot forward is the leadership shown by a company such as Enron Broadband Services, which is pushing the market to commoditize according to standard criteria, including:

• Quality of Service (QOS) benchmarks that can be developed and measured;
• Interconnection between carriers’ networks, enabling the immediate provisioning of contracted services; and
• Master Agreements that expedite trading, replacing individually negotiated contracts.Such moves are a step in the right direction, a trend toward a standardized marketplace in which performance expectations are filled, and filled in a timely manner.All of this needs to be done as rapidly as possible. Bandwidth demand is growing at a very rapid rate; some say the use of bandwidth consumed on the Internet doubles every four months. And bandwidth infrastructure is indeed being deployed. The problem is that these existing infrastructures are not being fully utilized. Capacity under- utilization is a considerable threat. Yet it is one that can be helped along by the development of an efficient bandwidth trading market.

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact.    — Warren Buffett

What if a bad management team tackles a business with good economics? In this case, I suspect, the reputation of the business will NOT do all that well.

Yesterday’s blog contained an article from the fire of the Telecom Boom: 1999. Enron was rolling out Bandwidth Trading over the Enron Intelligent Network. This raises an interesting question: was Bandwidth Trading a bad idea? I’ve asked this question of several people. The answer I received was almost always decisive. Frequently it was emotional. Often, it came with looks like I was a bit of an idiot for even asking the question.

One thing the answers weren’t: consistent. That is, some people were adamant that it was fundamental flawed from the get-go. If you have a history with Level 3, my guess is this opinion hits home to you.

Others, though, were vehement that it was a great idea. Enron just screwed it up. If you were involved with one of the many companies who were involved with Bandwidth Trading, you probably believe this to be true.

So what is it? Was Bandwidth Trading Dead-on-Arrival, a flawed idea from the beginning that was destined to crash and burn? Or is it in hibernation, waiting for the right technical and market developments and some clever entrepreneur to re-kindle the idea?

I’d welcome any thoughts the readers might have, so if you are inclined to do so shoot me a note. I will provide my thoughts in a future blog.

It is a cold winter night, a week before Christmas. Time for some nostalgia. Do you remember Enron’s Intelligent Network? Do you recall Enron’s Bandwidth Trading initiative? I thought you might enjoy this article from 1999.

December 3, 1999
Enron Opens Bandwidth Commodity Trading Service
By Maura Ginty

Cutting the red ribbon for bandwidth commodity trading, high-bandwidth application service company Enron Communications Inc. Friday officially introduced its new approach to bandwidth.

“This is ‘Day One’ of a potentially enormous market,” said Jeff Skilling, Enron president and chief operating officer. He compared the present inflexible agreements for pre-set capacity amounts to pre-reform “oil contracts in the 1970s, natural gas contracts prior to 1990 and electric power contracts prior to 1994.”

The first contract for Enron’s (ENE) new structure is for DS-3 bandwidth between New York and Los Angeles which transmits video and other high-bandwidth data at 45 megabits per second. Global Crossing (GBLX) is selling the capacity, and has expressed its excitement to be involved in the new system.

Skilling said that his company will prove that bandwidth can be traded without losing quality standards, adding that both the buyer and the seller will be monitoring the transactions.

Enron introduced plans for the new bandwidth capacity reservation system in May, promising that bandwidth trading would make Internet applications more efficient and cost-effective, as well as pave the way for development of new applications. Cisco Systems Inc. and other major companies welcomed the concept, which would free them from signing long-term capacity contracts.

Enron Communications also announced that the currently operational North American (New York-Los Angeles) Benchmark Segment is expected to be connected to the mid-construction Atlantic (New York - London) Benchmark Segment soon after its introduction in May of next year. Once tapped, the connection will allow international bandwidth trade in the near future.

Global Crossing enters the picture again as the facility owner of the UK bandwidth pooling point.

Enron’s IP broadband infrastructure, the Enron Intelligent Network, is also expected to expand into Europe, Japan, Asia and South America early next year.