GLG News by P.J. Louis

Implications: All stock holders need to calm down.  Of course things are going to get worse before they get better. It is the nature of restructuring – pain first, followed by healing, followed by growth. Sprint needs ot rid itself of non-core assets now to pay down debt.

Analysis: I am not trying to minimize shareholder concerns.  I am trying to provide a sense of reason.  Dan Hesse is restructuring a very large, complex, and mismanaged company.  One of the first things to expect when restructuring any company is that you will lose customers.

The important thing for equity investors, bond owners, and creditors to do is to examine Hesse’s actions as a whole.  Do not judge Hesse’s actions as discrete activities designed to raise the price of the stock.

I often say that Wall Street is mostly hype and almost no substance.  Stock prices go up on expectations without any proof of action.  If you look closely at Dan Hesse is doing, you will see that each of his actions are designed to turnaround the company.  If Wall Street was looking for a quick bump in the stock it would float around the rumor that Google wanted to buy Nextel.  With news (even false news) like that the stock would jump up for a few days, long enough for brokers to generate transaction fees.  However, there would be no truth to it.  Of course, I have no foreknowledge; at the time of this writing Google could be seeking to buy Nextel for all I know.  However, at this time I have not heard or read anything of the sort.

Please don’t read anything into my comments – I was just making an illustration.

Despite, what Hesse is saying, Nextel needs to go.  By selling Nextel, Sprint will generate an enormous amount of cash.  What Hesse needs to do is shift as many of the high paying Nextel customers onto the Sprint network before he jettisons the iDEN network.  Hesse also needs to pay down corporate debt as quickly as possible.

Investors, bond owners, and creditors need to be patient.  By the end of this year, Hesse should have put into action every critical step needed to right the company.  If Hesse has not implemented or put into place all of the critical steps, then everyone can go ballistic on him.  

Implications: I find it appalling that no one is complaining that Apple has kept hidden the kill switch. I find it appalling that a vendor is watching what you are doing.  

Analysis: Well I got to give Apple a lot of credit.  The company has so many people brainwashed into believing it is the only game in town that not one financial analyst has made a stink of two facts:

    -    First there is a kill switch on the phone.  In 25 years I have never heard of a handset vendor putting a remote kill switch in the handset.
    -    Second the vendor is essentially able to monitor what is on the phone.  I think the term is spying?  The company is not directly monitoring the phone rather looking for so-called unauthorized apps; it is spying by proxy.
    -    Third the vendor has kept it quiet.  What else has Apple hidden?

I disagree with some analysts’ views that the consumer will accept just about anything if you let them know what it is they are buying.  I think the normal consumer would be outraged if another vendor did what Apple is doing.  This has to be an Apple only surreal happening.  I also disagree with analysts’ complacency regarding the heavy handedness and Big Brotherish action – it is WRONG.

I will say one thing about Apple’s sales and marketing force.  Darn it’s good.  If it were any other manufacturer, the public would have been screaming so loud you would have been able to hear them in outer space.  Any company that can control its customer base like the way Apple does should give its head(s) of sales and marketing a medal and a one year vacation.

I would like to congratulate Jonathan Zdziarski for uncovering the secret.  I take my hat off to Jonathan Zdziarski.

Thank you to Apple for making it acceptable for a vendor to spy on its customers.  I wonder what Apple is going to do with that monitoring capability and kill switch?  I would say that is the end of Apple’s support for open networks.

As for investors, it is time to watch carefully what other vendors will do and how they will react.  Other vendors may use this event as a lever for themselves.  Hopefully there will be consumer concern and competitive reaction.  Hopefully consumers have not become sheep.

Vendors should view this as an opportunity for themselves.  Vendors can seek to differentiate themselves from Apple.

Implications: The telecom business operates in a series of rapid cycles. As an issue, roaming alternates between being an issue and not being an issue – and that is such a mistake.

Analysis: As long as we have had cellular, roaming has been an issue.  It will always be an issue.  Roaming is not just about access charges.  Roaming is about revenue reconciliation.

Roaming will need to include new wireless technology-based carriers.  The addition of Internet-based carriers has added a level of complexity that roaming service companies of the 1990s and early 2000s may not be able to deal with.  Despite the re-emergence of the super carrier, there are still dozens upon dozens of smaller carriers and service providers.  Today we see a plethora of wireless local area network providers and Internet service providers and all are interconnected with the larger carriers. 

Mobile Virtual Network Operators (MVNOs) will require roaming services as well.  Despite the fact that MVNOs operate on particular individual carrier networks, the MVNOs need to be accessible from other networks.  The MVNO will need to be accessible everywhere for the paying consumer.

Femtocell deployment will usher in a new era of wireless providers.  These providers could be landlords or corporations serving their own employees’ needs.

There are the old timers like Syniverse (the old GTE TSI) and Verisign but then again there are newbies like Mach.  Investors need to take a very close look at Mach.  Mach has not been burdened with legacy systems or legacy customer needs.  Mach is the result of a merger between IBM/TDC created Dan.net and the old Mach.  Impressive lineage.

Now here is the kicker.  In 2007, Cibernet merged with Mach.  Now that is an impressive lineage.  Remember Cibernet?  These are the guys who helped (along with dozens of industry professionals and telecom companies) write the roaming reconciliation rules.

The protocol developed was called CIBER and the function known as CIBER Roaming Settlement System (also known as financial clearing and settlement) was developed and provided as a service to the members of CTIA by the CTIA.  Cibernet was CTIA’s roaming settlement arm.  Cibernet was used by CTIA members who could not afford their own reconciliation systems or vendors. Twenty years ago there were many, many more small cellular carriers than there are today.

People like to credit GTE and Cibernet (which was a part of the Cellular Telecommunications Industry Association) alone but a large number of professionals were involved.

Bottom line, Cibernet (and its allies) created the CIBER protocol.  CIBER stands for Cellular Intercarrier Billing Exchange Roamer.  We used to call it the CIBER record.  CIBER is a roaming message exchange record.  At divestiture in 1984, wireless carriers owned by Regional Bell Operating Companies (RBOCs) were enjoined from using any of the landline standards, so the wireless industry created its own standards.  Now Mach owns Cibernet.

Put two and two together.

The point I am making; Mach may be able to go toe-to-toe with Syniverse and Verisign in its own backyard.

The technology component of seamless roaming was solved over a decade and a half ago.  The issue is not technology but financial.  Roaming is about money.  The proliferation of wireless service providers and hot spot providers will require a powerful settlement system.

Roaming, reconciliation, and settlement – its all about making money.

Implications: Analysts have hated talking about selling off Nextel. Most analysts have seen the sale of the Nextel network as a failure on the part of Sprint; however, I don’t. Saving Sprint needs to be viewed from the perspectives of creditors and bond owners.

Analysis: Restructuring is not about failure.  Restructuring is about recognizing past errors and taking the appropriate steps to fix past mistakes.  Selling Nextel will generate cash.  Selling Nextel will generate stability in the network operations side of the house.  Further, the company can finally look like one company instead of a company operating two distinct, dissimilar, and disconnected networks with two disconnected customer bases.

Sprint needs to raise cash now to reduce its debt load and stabilize itself.  Selling Nextel would generate cash for the company and better position itself for growth.  Sprint can continue doing joint ventures but the reality is that the joint ventures are partially designed to offset Sprint’s capital expenditures.  It would be wise for Sprint to reduce its debt and to fill its coffers.

iDEN is a TDMA based cellular technology.  I have said in past analyses the iDEN network offers litlle to no value to Sprint.  Motorola has done little to nothing to enhance and upgrade iDEN to keep pace with the various 3G and 4G technologies.

However, do not get me wrong, iDEN can still work for a carrier.  I have said this over and over and over again; Morgan O’Brien ought to buy the Nextel network for his company Cyren Call.  O’Brien is the first CEO and the only CEO to ever operate a wireless network that was comprised of that many disparate frequency bands; quite literally a patchwork of frequencies.  O’Brien founded FleetCall in the late 1980s.  O’Brien is the only guy I know who can operate the patchwork called Nextel.  He did it once before and he can do it again.  The Nextel network could be converted to a public safety network more easily than if Cyren Call built a new one from scratch.  Of course there are a bunch of local and state public safety regulatory and political issues to consider.  However, O’Brien has a relationship with all of the public safety dispatch agencies – the man is almost a legend in that community.

Raising cash now is paramount for Sprint.  Dan Hesse can get a couple of stalking horses to bid for Nextel.  I am sure stock brokers would want a buying frenzy to occur to boost Sprint's stock.  However, the danger for this kind of orchestrated speculation is the scrutiny other analysts and the trade press will place any potential buyers under.  Here is the bottom line, Telus is not a viable candidate, Deutsche Telekom is not a viable candidate, neither is SK Telecom, and neither is AT&T Mobility.  Once the trade press starts asking questions; the dumber the deal looks, the worse it will be for Sprint’s and the potential suitors’ stock prices.

On Telus – the company currently uses CDMA and is contemplating GSM (as of this writing).  Do we really want our Canadian neighbors to spend money on acquiring a company when they should be spending the money on the conversion?  Where is the synergy?  Telus could end up spending over $250 Million on a conversion – that is not chump change in Canada or even the USA.  I hope the Canadians are not going to fall under the pressure of the stock market and do another Sprint-Nextel merger.  Yes Nextel can bring cash into Canada but for goodness sakes, the Canadians have a major undertaking they want to launch now.

As for Deutsche Telekom; please read my analysis entitled; “Forget About Deutsche Telekom – Cyren Call May the Next Owner of Nextel”.  Also read; “Sprint’s QChat – A Step Closer to Selling Nextel – Thoughts on Buyers”.

As for SK Telecom, read, "SK Telecom Says No To Buying Sprint – GOOD !!!!!"

As for AT&T Mobility; no.  The company needs to focus on integrating the operations already under its roof.  To add a disconnected and disparate patchwork network like Nextel is nothing but trouble for a company that has spent the last 3 years trying to pull itself together.

We are in a recession; cash is in short supply for acquisitions that make no sense.  Please let us limit the number of senseless acquisitions using leverage. 

As I have said, a more logical buyer for the Nextel network and spectrum is Morgan O’Brien and Cyren Call.  The Nextel network could be converted to a public safety network more easily than if Cyren Call built a new one from scratch.     

Implications: Equity holders are up in arms. However, the creditors and bond holders were very happy. Raising cash now is paramount.

Analysis: Hesse, was showing fiscal responsibility.  The company needs to pay down debt.  The action Sprint is taken is not designed to keep the equity markets happy.  The action is designed to satisfy bond holders and creditors.   Hesse is doing the right thing.  If Sprint does not get control of its debt, the creditors will be running the company completely.  This is what happens when a company goes into bankruptcy.

Hesse is working feverishly to stabilize the company’s cash situation.  He is doing the right thing.  When a company is facing distress as Sprint is, the goals of equity players (stock owners) and creditors/bond holders will conflict.

What did people expect?  The move was a bold one and one that had to be executed now.  Unfortunately, the deal fell through because Sprint could not get the right price.  This is not good.  However, Hesse, is a clever man so don’t panic.

Sprint needs to find a way of generating cash to pay down its debt and deal with operational cost issues.  A joint venture with SK Telecom or the current venture with Clearwire will not help create cash; just opportunity.

Cash pays the bills; kind words and good intentions do not.

The company needs to find a way of raising cash without giving away the farm.  So far Dan Hesse has done all of the right things for a company in severe financial distress.  Yes, this also means he will tick off stock holders.  Who Hesse needs to worry about are the creditors and bond owners.  

Implications: We can speculate as to what will happen to Qualcomm with the loss of Sanjay Jha but I would prefer to focus on Motorola. I am going to ask investors to give Sanjay Jha time to get his feet wet.

Analysis: Sanjay Jha has an uphill battle on his hands.  It is too bad that Brown could not have brought him on board sooner.  With the holidays coming up, yes you need to think about them now and Motorola has not done or shown anything new.  The holiday season is a huge time.  Even worse, back-to-school is coming and Motorola has not announced a thing yet.

Jha will not be brining any Qualcomm secrets to Motorola.  If investors are thinking that Jha will be bringing secrets you would be wrong.  What Jha brings are management skills, insight, technology leadership, and experience.  These are not exactly tangible things that an investor can get his or her hands around.

Jha may be criticized for leaving a successful company like Qualcomm.  However, I look at it this way and I am sure Jha does as well -  Where there is disaster and chaos there is work and opportunity.  Jha’s attitude is important.  Now the question is has Jha ever operated in such a crunch environment?

I think he has.  People forget or don’t realize, 14 years ago, Qualcomm was still fighting its way to the top of the business.  In 1994, Qualcomm was still a cowboy and an aggressive pain causing the established vendors nothing but trouble.  I remember those times.  You heard Qualcomm, and you thought Oh Boy!

Don’t get me wrong, I am paying these folks a compliment.  Qualcomm was and still is a force to be reckoned with.  I guess what I am saying is that since Jha came up through Qualcomm during those lovely tenacious days he probably has what it takes to help Motorola.  Of course you may accuse me of being kind but you know the man just stepped into a hornet’s nest of trouble so give him some air.  Heck, even Paul Jacobs paid Jha a compliment.

The key thing for investors is to hear Jha’s strategic plan and action plan for the next 6 quarters.  I can’t wait until 90 days passes.  

Implications: My view of femtocells has been focused on how a company like Verizon could leverage the technology with its FiOS business.  Sprint’s use of the technology is an interesting way of managing its capital.  I would love to tell you that I had thought of it earlier but I did not.  It just goes to show you that Sprint is definitely in the restructuring mindset.   Femtocells could even play a role with SK Telecom.

Analysis: Assuming Sprint is actually deploying femtocells in order to grow its network incrementally and defer/manage capital, I think the move is very smart.

From a landline perspective, I saw femtocells as a way for a telecommunications corporation like Verizon to leverage a wireless technology in order to further mine the value of its landline company’s fiber optic network.  From a wireless perspective I had been viewing femtocells as a way of deploying intelligence into the wireless network.  In other words, as I had stated in past analyses I saw femtocells as the next generation of intelligent cell sites and base stations.  The difference is a small difference but there is a difference.  I had not considered the technology a tool for capital deferral/management.

Restructuring professionals are not all about shutting down companies.  Restructuring professionals focus on salvaging companies - quite literally performing extreme makeovers.  To restructure a company requires the management and the advisors to be very innovative.  In other words Sprint is a largely untested technology and deploying it to support its 4G initiatives and its cap ex reduction plans.  Interesting to say the least.

I am a supporter of femtocell technology.  Despite its newness, the technology has the potential to play a pivotal role in 4G deployment.  The wireless industry has spent years deploying technology that has not completed the rigors of standardization - if you heard different than you heard wrong.

Given, the current economic environment one might think I would be supporting a roll back of cap ex on this technology.  You would be wrong.  There is a time and place to spend cap ex dollars even during a time of distress and under performance – and this is one of those times.  Sprint needs to do something to deploy its next gen network as quickly as possible in order to re-establish itself in the marketplace.  Dan Hesse has already re-organized most of his executive team.  Dan Hesse has also started cutting costs and selling off assets to generate cash.  The next thing Dan Hesse has to do is physically position the company for growth.  The company’s new Clearwire venture is one step in the process of growth.  However, that step is very dependent on a complex partnership working correctly.  Dan Hesse has to hedge his bets and do something for Sprint alone.

If Sprint decided to use femtocells, Sprint ought to test them with SK Telecom.  I could not think of a better cooperative venture partner.

If Sprint were going to leverage a relationship with SK Telecom, I would suggest it include femtocell technology as a first joint venture.  SK Telecom could end up using Sprint’s network for its MVNO (mobile virtual network operator) ambitions in the United States.  SK operates as Helio in the United States.  This could work; SK is a sophisticated telecom company with deep experience in wireless.  Don’t forget SK has experience with the Korean version of WiMAX known as WiBRO.  So the femtocell deployment could support CDMA in Sprint but imagine, if Sprint wanted to deploy femtocells in a WiMAX configuration.  Okay, the WiMAX thoughts are a bit of a stretch for now.  However, the point is there may be more method to the madness than Sprint is willing to let in on.

For now, investors need to think about this one for now and start watching femtocell vendors closely.

More deep thought and discussion is needed.  

Implications: Call it good corporate citizenship or call it consumer focused publicity; the result will be the same; AT&T will look good. Even better, AT&T will end up saving money.  

Analysis: I am a big proponent of the telecom carriers’ GREEN efforts.  There is nothing wrong with good corporate citizenship; it is good business in this day and age.  Is promoting efficient use of power a good Green initiative?  I think the answer is:  YES.

The first place the carriers are going to get hit in their wallets is the bill for power.  People and telecom professionals often forget that telecom carriers have to pay their own electric bills.  Carrier network operations centers and carrier data centers (for bill processing and customer care) were not originally designed to be energy efficient.  Folks like me never gave the cost of power a thought.

However, nothing speaks louder than the rising cost of energy.  Oh my goodness, just look at what the cost of fuel has done to your own personal energy bill.  In this day and age of environmental activism, the rising cost of fuel is making corporations look at reducing energy bills and hence impact Greenhouse gas emissions.  Carriers know how to remotely monitor their own centers and it was only a matter of time they would apply that knowledge to their own customer bases.

Carriers are not only taking steps towards making their own centers energy efficient but also helping customer make their centers (and homes) more energy efficient.  Now by focusing on M2M (machine-to-machine) Communications technology, the carrier is helping its customers monitor their own energy consumption.  I love M2M (machine-to-machine) communications technology because it brings the carrier one layer closer to the customer.

Carriers can go Green and still generate revenue.  Carriers can leverage their knowledge on information management in this environmental age.

If carriers want to help with the Green movement even further, then all telecom carriers need to consider promoting telepresence.

With rising fuel costs and other travel related expenses, the need for a way to do business without having to get on an airplane is critical to corporate survival.

Telepresence is an answer to doing business in a more cost effective manner.  Please look at my past analysis entitled:  “Telepresence – A Solution to Rising T&E Costs for Corporations”.

Telepresence not only saves money for the carrier’s customer but opens up a new revenue opportunity for the carrier.  Telepresence needs to be actively promoted in the enterprise space now as quickly as possible.  The sense of urgency amongst customers is the greatest sales tool the carrier has right now.

Implications: It has been long overdue.  The United States needs more than just empty commitments from carriers to implement broadband systems across every part of the country.

Analysis: You don’t ask business people to commit to something as audacious as a national broadband policy without giving these folks some kind of incentive or at least how to make money.  The marketplace has been waiting for the telecom carrier community to tackle these issues of deploying broadband across the nation and in every community.  However, regulation and legislation has been so haphazard in the manner in which broadband deployment would be managed no telecom company in its right mind would want to move forward.

Policy facilitates clarity.  The clarity could ultimately lead to companies deploying broadband technologies so that they are affordable to everyone in the country.

Larry Irving is an old hand in the telecom space; principally as a policy maker.  Nevertheless it is good that someone familiar with the space is leading the charge.  The policies they help to create will hopefully generate jobs and generate investment opportunities as well.

A national broadband policy may or may not make the United States more competitive.  However, it is clear that doing nothing has done the nation no good.  Small businesses across the nation are working feverishly to use the Internet to sell their products and services.  It would seem logical that a national broadband policy is necessary to enable not just the large mega corporations to do better business but the small business as well can do better business.  

Implications: I originally viewed Equinix as a company with a solution in search of a problem.  In a day an age when the large carriers prefer doing direct connect to business customers, the Internet and in general enterprise technology has a created an environment where neutral data center are a necessity.

Analysis: The current recession actually helps Equinix. The company has taken a very simple model of network interconnectivity neutrality and targeted markets that were up to about 2 or 3 years ago largely ignored by the traditional connectivity customers.

Equinix’s customers are carriers and the IT (information technology) organizations of corporations.  Through the company’s Internet Business Exchanges, the company provides a variety of connectivity services.  From its beginning, the company focused on providing Internet connectivity support.  The company emerged at a time when the traditional back bones and outsourced network managers were focused on supporting TDM (time division multiplexed services) but beginning to look at IP (Internet Protocol) based technologies.  The carriers, up until a few years ago were still very much focused on maintaining and oeprating their substantial TDM based networks.  Market needs and demands of the times have forced the big carriers to be IP focused. 

Equinix’s corporate sales have zeroed in on not just corporations but financial institutions.  The company’s financial exchange services targets financial institutions.  They went where the money was.  They went where the decisions were made.  In a word, CLEVER.

The company has capital deployed in the right places.  I believe the company deployed sufficient capital ahead of the recession.  I would not say that this was necessarily foresight on their part but simple aggressive management and marketing.  In order for the company to build a critical mass of customers a widescale equipment deployment was necessary.

I believe their sales and marketing was brilliant – going after the sources of cash and financial decision making is smart; it was clearly a smart move to embed themselves with the holders of the keys to the gates.

The company’s global outlook also provides a broader customer base than one would normally see with the connectivity providers of old.  Equinix’s competitors like Neutral Tandem and Level 3 originally began as time division multiplexed based connectivity providers.  Neutral Tandem has since begun shifting into IP (Internet Protocol) based services; as has Level 3 but what both have dealt with is something we call legacy systems and legacy customers.  Don’t get me wrong I think a lot of Level 3 and Neutral Tandem.  However, Equinix has the advantage of beginning its life as an IP –based provider.  I am not going to opine on the technology because in my experience the state of a company’s technology literally has no bearing on their commercial success.  Equinix’s technology is not so proprietary that its competitors given time and money could not duplicate Equinix’s network.

Equinix is operating in an environment that needs a company to facilitate communications between corporate locations and between corporations and their customers.  Time is money and money is time.  Bottom line, Equinix is providing a valuable service at a time when companies are working feverishly to stay afloat and profitable.  

Implications: Back during the early 2000s meltdown, CenturyTel had been sucking up rural telcos across the country.  I was frankly doubtful the company could sustain itself unless everyone else in their territory rolled over and disappear.

Analysis: CenturyTel has weathered the meltdown of the early 2000s and appears to be surviving the current recession.  The company does not really have any competition of note in its markets.  Bear in mind there is nothing wrong in that situation.

The company has made some smart moves; one of them is its relationship with DISH.  I am a believer in the wireline segment.  Wireless carriers can only provide users a limited amount of bandwidth.  The landline companies can provide more bandwidth to users via fiber optic systems.  Of course the limiting factor for landline carriers is time and money.  It takes more time to deploy a physical piece of transmission plant to every home than it does to drop a cell tower.  Then again there is also the question of whether or not landline carriers are providing users more bandwidth than they can even use.

Then there is that killer of any technically superior product or service – CONVENIENCE.  Convenience of use is a powerful inducement for a consumer to buy wireless.  Wireless technology offers users convenience on so many different levels.

The challenge for CenturyTel is staying in the game as a viable carrier in a day and age when more and more younger people are moving towards wireless followed by more and more older people moving towards wireless.

CenturyTel and other rural telcos need to think about viewing themselves as not only a telecom carrier but also as a full service communications and media company – this might be the only way for the rural telcos to survive.

Implications: LG has stepped up the handset development race by incorporating high-end audio technology. The standard bearer has just arrived.

Analysis: I hate to say this but thank you Apple.  Thanks to Apple’s entry into the handset space, handset vendors have stepped up development with a variety of handsets with multimedia capabilities.

LG’s licensing of Dolby technology for mobiles is a result of Apple’s entry.  I am no Apple worshiper, but I do give credit where credit is due.  Apple’s presence in the space has raised the bar for handset manufacturers.

Getting back to LG.  LG has taken a bold step towards turning the handset into a high-end audio system.  This makes sense.  The industry has been concentrating on video for quite awhile.  I recall during the early days of mobile video how horrible the visual quality was.  Since then production techniques have been adjusted for mobile displays and the handset displays have improved.  Audio always seems to be the last thing people seem to pay attention.  Don’t ask me why it just appears that way.

In short, this announcement is huge for the handset business.  The handset is on its way to becoming a full blown entertainment center.  The Dolby Mobile technology is an audio processing technology that is supposed to deliver the kind of audio experience we hear today in movies and music platforms.

Dolby has noted that its mobile platform has been designed to enable users/customers to tailor the audio experience for their own ears; which by the way is a huge leap forward from what users can do today.  Right now the only thing users can do on the handset is adjust the volume levels.

According to LG and Dolby, the Dolby Mobile features that are to be incorporated into the LG handset include:

    -    Mobile Surround, delivers a realistic surround sound experience using headphones
    -    Sound Space Expander, creates a wide, rich, and spacious soundstage experience especially suited to music playback
    -    Natural Bass, adds powerful boost and bass extension
    -    High-Frequency Enhancer, enhances music and other content by restoring high-frequency effects
    -    Graphic EQ, helps tune the audio experience for different content types
    -    Sound Level Control, helps level out audio for a more consistent playback volume
    -    Mono-to-Stereo Converter, improves the playback experience of user-generated content

In a word WOW.

The term “entertainment center” is a bit old but I believe it is accurate.  As a media advisor I have often said the handset will one day become as important to the entertainment industry as filling that concert hall seat or movie theater seat. Dolby’s entry into the wireless industry brings us that much closer to that reality.

I look forward to seeing Bose jump into the game now.  Let’s ratchet up the competition.  The more competition in the handset space the better it is for the consumer.

Implications: Verizon is being honest.  The trade media and the analysts don’t seem to understand what is happening. Verizon is not your typical carrier.

Analysis: Verizon never said it was not being impacted by the recession.  Verizon said the recession is not having a “major” impact on the carrier.

When you dig down into the numbers of Verizon you will find that its international base is helping to bolster its numbers.  Yes wireless is helping as well.  But the international sector broadens the base.  There is nothing wrong with having that kind of diversity in your customer base.  Analysts want to infer via Verizon that all is well in the telecom sector, which is a dishonest thing to do.

Telecom carriers are working feverishly to reduce operating costs via job reductions, squeezing out every last bit of capacity out of  the base station ports, looking for revenue leaks, and selling as deep into the under 18 years of age customer base.  The carriers’ aggressive push to reduce operating costs has been underway since 3Q2007.

Verizon is a special case.  Unlike the other carriers in the USA, Verizon has MCI.  When Verizon purchased MCI (cheap) it acquired not only a domestic long distance business but also an international business as well.  One of the things I like about Verizon is that when it speaks about its financial performance, there is no hype, they make no pretense about representing the industry, they speak only of themselves, and what you find is that the company really does understand that telecom is about “managing pennies, nickels, dimes, and quarters”.  The company understands how to optimize its own business.

In regard to bleeding out local access lines, the numbers have been dropping for the last few years.  Local access lines are a flat revenue business but still a good margin business.  Local access lines are literally a legacy business.  In regard to Verizon, much of its landline revenues comes from a few dense urban markets.  Manhattan island in the City of New York still brings in more money per square mile than any market in the country.  Don’t forget, a few years ago Verizon wanted to sell of Upstate New York.  Hence, you can guess what the company thinks about landline in areas less dense than New York City, Boston, Washington, D.C., and Philadelphia.

Despite the fact that investors will not be happy to hear that Verizon’s subscriber adds have been almost entirely made up of post-paid users, the company added to its base.  Could the number of post-paid customers impact the company’s plans to sell high-end data services?  The answer is Yes.  However, we need to bear in mind that the company is still making money.

In a recession there are winners and losers.  Even a recession that is as long, deep, and wide as this recession is, there will be one company doing well in each sector.  Verizon has managed itself well.  It is being impacted by the recession but not as badly as many might think.  The company is managed intelligently and well.  The company does not go out of its way to seek a lot of marketing hype – it does what it has to do.

Implications: It was time for Pat Russo to leave.  I have been one of her biggest supporters but I have also been a very vocal proponent for her departure. I have nothing but the utmost respect for Russo.  I suggest she take a year off and in 2010 jump back into the fray.

Analysis: Pat Russo did the impossible; she oversaw the restructuring of a company as complex and big as Lucent, oversaw the merger of Lucent with Alcatel, and survived.  Her mistake was staying beyond the initial months of the merged Alcatel-Lucent.

Restructuring is exhausting.  Restructuring typically drains the life out of CEOs and other executives.  The reality is that Russo had to go to let someone with a fresher set of eyes take the reins of the company.

Pat Russo leaves along with Chairman Serge Tchuruk this year.  Along with Russo and Tchuruk, Henry Schacht, Russo’s predecessor, will leave the board immediately.  They will have left behind a company that has lost billions in valuation.  There are three questions now facing Alcatel-Lucent shareholders:

-    Who will take over the reins of the company?
-    Will the company be able to survive the recession into 2010?
-    How will the company survive the recession?  

I have made many suggestions and comments in past Gerson Lehrman postings.  See:

-    “Alcatel-Lucent: The Story Just Keeps Getting Worse“
-    “Alcatel-Lucent – Making a Positive Move – Hope It’s Not Too Late”
-    “Alcatel-Lucent - Restructuring is the Correct Painful Remedy – Part 2”
-    “To The board of Alcatel – Time To Fire Russo and Sell Off Lucent”
-    “Alcatel-Lucent - Restructuring is the Correct Painful Remedy”
-    “It Is Time For Change At Alcatel – Sell Lucent To Motorola and Nortel"

My immediate thoughts are that Alcatel-Lucent needs to shed Lucent.  As I have said in the past, I am a full proponent of corporate restructuring.

Alcatel and Lucent need to say goodbye to one another.  Since Alcatel runs the show the process goes like this:  Alcatel gets to pick what it wants and gets to toss what it does not.  By the way this is not a bad thing.

The key thing is to leave with what will enable your company to grow and whatever is left needs to be able to exist on its own or be sold off to someone that wants the leftovers.  It is way too late to spend time identifying how to keep the Alcatel-Lucent company together as a going concern.  The company needs to be broken up.  The pieces will bring more value than the existing structure.  

As it stands, the merged company is a disaster.  Product lines have never been merged.  There is no corporate identity.  The company looks like it has been glued together.  The company looks like a car wreck.

I am not saying Lucent has no value because there is.  Lucent has a troubled wireless division.  However, the division needs to be kept by Alcatel.  I say the wireless division needs to be kept by Alcatel because that is the only piece of Lucent that has any value to Alcatel.

Lucent can be sold off minus the wireless division to other telecom manufacturers.  Lucent still has Bell Laboratories and Lucent still has non-wireless divisions.

An American company can acquire the remaining pieces of Lucent plus Bell Labs and integrate them into its structure.  The American company I am thinking of that ought to acquire Lucent and its labs is Motorola.  Of course, Alcatel can always sell a chunk of Lucent to the Canadians.   My suggestion to Alcatel’s board and interim CEO is to sell Lucent in two chunks.

For decades Motorola and Lucent have shared a common heritage.  Motorola and Lucent employees get along.  Even during the worse of the competitive battles the two companies in the wireless arena were still respectful of one another.  Motorola can integrate Bell Labs into its structure and use the intellectual property of the Labs to enhance existing Motorola products or create new products.

The wireline part of the business, sell that to Nortel.  Nortel and Lucent teams have also gotten along for years.  Do not forget that Nortel and Lucent were both part of the original Bell System.  This common heritage also means the companies think alike and the employees should get along.

Both Motorola and Nortel are in deep trouble.  Both companies have motivated shareholders and bankers that need to think about how to salvage their companies.  Both companies likely share a set of common bankers and hence multiple mergers may be possible.  Both companies have shareholders that have the ability to close a deal and make it happen.  Lucent still has intellectual property and talent that can be integrated into Motorola and Nortel.

This is not going to be easy but if shareholders of Alcatel want to maximize the value of their shares a sale is necessary.

The original reason for merging Alcatel and Lucent was valid; however, I still believe that the best merger would have been between Lucent and Nortel with a merger between Motorola and Lucent a close second.  However, what has been done has been done.  Time to deal with what you got stuck with.  I love restructuring.

The company is vastly underperforming.  There has been no integration to date and nothing to date shows that the integration will happen.  The shareholders and the board need to think about stabilizing the company, stopping the cash bleed, and prepping the company for future growth.  A sale could generate cash for Alcatel and provide Motorola and Nortel some needed talent and resource infusions.

Implications: Well it was bound to happen.  Google was proclaimed the next Yahoo. Now Cuil is the next Google.

Analysis: I am getting so tired of hearing about search engines.  The search business alone is no longer considered a sustainable model – just look at Google.  Yahoo is a DOA (dead on arrival) thanks to the incompetence of the executive time.  Now we have Cuil – pronounced Cool.

My question is what is so unique about Cuil?  It is summer and the news cycle for telecom is a little slow.  We do need a little excitement.  Yahoo’s goose is cooked.  Microsoft ought to purchase AOL and ignore Yahoo.  Google has been quiet of late.  Time to rattle their cage.

Cuil’s selling point is that it will not retain information about users’ search histories or surfing patterns.  Sounds great but I have a question – How do you make money from it?  Measuring demographics is where the industry is heading.  Now suddenly we have a company that says it won’t measure demographics?  Is this another situation where the company does not generate revenue but generates searches and then uses that information to establish a valuation?  Oh well, I should not complain it employs people.

I look forward to hearing what Cuil will do to make money.  I got my magnifying glass on them now.

Implications: Sprint and Dan Hesse are doing the right thing.  Generate cash without giving away the core business.

Analysis: Dan Hesse has taken the next step in turning around Sprint.  After reorganizing his critical parts of his executive management team (which I am sure is not finished), establishing a new path for Sprint (the new Clearwire venture) and renaming the company, Hesse is looking at simultaneously increasing the company’s liquidity and pay down debt.

The best way increasing liquidity quickly is by selling something you don’t need.  Sprint’s ownership of towers made sense when the company had no liquidity problems.  Controlling your own network assets is always an aspect of running a network that operators gravitate to.

However, when you are affected by a cash constrained environment then the only choice is to raise cash by selling something that is not core to your business.

The tower business is a real estate business.  Time to sell it off for cash and pay down that debt.

The cash generated by the sale and the debt repayment (even a partial debt repayment) will improve the company’s balance sheet.  Very nice.

As for Nextel, I have made several suggestions over the last several months as to the most ideal candidate.  My recommended candidate to purchase Nextel can only be made by the only person (that I know of)to ever assemble a wireless carrier comprised of a hodgepodge of spectrum and was successful at doing it.

Implications: What do you do when your market shows signs of drying up? The answer is; go elsewhere to peddle your wares.

Analysis:  Tellabs has already started moving into overseas markets.  The economy overseas is not any better than it is in the United States.  However, I give their executive team points for doing the right thing.

When companies are having sales problems in their home country the first thing you do is look outside the home country.  Nothing wrong with that approach.  On a go forward basis forward basis for the next 6 quarters, the company needs to do the following:


-    Review the current product line.  Determine what might sell overseas. Determine what product lines need to be focused on for sales and enhancements.
 -    Survey customers in the U.S. to establish a degree of intelligence for the future.  In other words, engage your customer to find out if the depressed economy is the only reason they have cut back purchases.
 -    Develop a sales and marketing plan for overseas.  Tailor all the plans for the countries you are targeting
 -    Hire sales people who know the sales territory and the business customs of the country.  It never hurts having locals represent you; however, you need to have headquarter oversight.
    -    Commit the company to this endeavor.  You cannot launch an overseas sales effort half way.

I believe that Tellabs needs to prepare itself for bad times over seas.  The markets are in trouble there already.  However, that does not mean they should not go overseas.  Tellabs needs to tap other markets but it needs to do it smartly.

My suggestion to investors is make sure Tellabs has its act together before going overseas.  You have a right to ask; it is your money.

Implications: LG’s story is just the tip of the iceberg.  Expect every carrier to issue earnings warnings over the next quarter.

Analysis: We are in a recession.  The telecom business, an infrastructure business, has just admitted it has hit hard times.  None of this should be a surprise.  However, the upside of this bad news is that telecom is not going away.

LG has issued the standard statement about upcoming bad news: they are cautious about the second-half outlook.  Blah Blah Blah.

What is the upside?  The answer is the telecom industry has been going through a sea change for the last 4 years.  The telecom industry has been transforming itself into a full blown information industry.  The change creates opportunity for investors.

Think about it.  Despite, the fact that we are on a recession, the fact is that customers are shifting away from wireline to wireless.  Yes this is not good news because one sector loses.  It is good news because change is opportunity.

Are thing going to get worse?  Yes.  However, there are sectors of the business that may benefit from the recession.  I am speaking of companies that reduce operating expenses of the carriers and vendors.

Outsourcing is the standard answer to most companies’ rising costs.  However, I am not addressing foreign outsourcing.  If you look at companies like Equinix and Neutral Tandem, they are providing alternate backhaul for carriers.  Of course you have the old timers like Level 3 still in the game.  However, Neutral Tandem and especially Equinix, have been established to serve the growing Internet based network market.

Vendors have outsourced as much as they can overseas without moving their headquarters overseas.  Telecom vendors are leaning on joint ventures now with competitors in order to increase their customer reach and product line breadth.  Look for synergies between companies to see investments bolstered.

Then there is the matter of continued distress.  This is unavoidable.  Investors need to focus in on distress investing tactics.  Buy more and buy low only works if the company is going to pop up.  However, when you have an entire sector in distress, you need o focus on the fundamentals of the company’s business plan, marketing plan, and organizational management structure.  The investor needs to focus on investing long.

Investors need to remember that the vendors and carriers will spin the story to keep their stocks bolstered.  The companies will say something but really give you no details while simutaneliusly caution you because they may be heading for bad times.  Just remember that about 7 to 8 months ago, the carriers and vendors said they did not see the current banking and economic crisis impacting their businesses.  Boy, were they WRONG but they are hoping you have a short memory.

Implications: How do you capture the value of FiOS?  You  combine content, voice, and Internet access.  However, Verizon needs to consider taking FiOS even further.

Analysis: FiOS is a big glass pipe.  This glass pipe is one that Verizon is filling today in various markets with Internet access, voice services, and entertainment programming.

I can access my FiOS pipe via my Wi-Fi network.  However, if Verizon wanted to create synergies between its landline business and wireless business, Verizon needs to consider installing femtocells on the FiOS network.

Now such an implementation would be a couple of years away.  But it is a way for the carrier to leverage new technology to deploy services in demand and leverage both sides of their company.  Verizon could even roll its enterprise business unit into this.

Imagine, next gen enterprise mobility.

Implications: The emerging trend I am referring to involves more than Verizon.   Carriers are emerging as full service provider of retail, commercial, financial, information, and telecom services. Carriers are emerging as entertainment distribution outlets. Recently, Verizon announced its intent to show made-for-mobile videos of Hellboy. It is time to consider content delivery network/content distribution network technology.  

Analysis: POTS (Plain Old Telephone Service) is not only the staple product of the landline carrier but also the wireless carrier.  Gone are the days we used to hear about speed dialing, caller ID, and voice mail.  Nowadays we hear carriers promoting video and music.

Surveys are being published now showing that mobile financial transactions will become commonplace.  This is no surprise to me or a lot of other professionals.

Recently, Verizon announced its new Hellboy programming.  What is interesting about this video event is that the Hellboy videos are being made for Verizon wireless.  This is a huge event in the telecom and entertainment businesses.  The telecom carriers may be emerging as entertainment distribution outlets for Hollywood.

Verizon Wireless ought to consider treating its customers like television viewers and movie goers.  Each handset can be treated as theater seat to be filled.  Verizon does not need to show full length movies only.  Verizon may be able to obtain, through a variety of partnerships, 10 minute videos from the entertainment community.

I have heard video naysayers tell me the screen is too small for good video viewing.  I don’t disagree I have trouble seeing the videos on my own kids’ handsets.  However, I am not the target audience for a company like Verizon or AT&T.  By the way the video iPod, called the nano, seems to be doing quite well.

The challenge for a Verizon Wireless is the network’s ability to cost effectively distribute content.  CDN (content delivery/distribution network) technology integration will be important for Verizon Wireless and Verizon Communications.  I assume that Verizon will have both networks work together to distribute content to their users.

The mobile handset is emerging as an all purpose consumer and business tool.  We have the Blackberry which started off only as a wireless email device/PDA to become a cell phone to then integrating a camera and a video driver.

We have the iPhone which began as a cell phone, a video player, and a PDA, to then integrating email.  Basically the cell phones have become smart devices known as smart phones.  Smart phones are high end communications/computers.

The point I am making is that we are seeing convergence.   Verizon’s VCast service started off with a bang with mobisodes of “24” and now a few years later it is showing Hellboy.  Hellboy is immensely popular.  The new Hellboy movie is great.  Unlike many Street analysts who opine on this new emerging mobile media marketplace, I actually watch the material.  Its tough on my eyes but it is fun to watch.

The latest addition to the mobile arena is the integration of consumer and financial transaction capabilities.

Convergence may not be the best way of describing what is occurring.  Maybe what we are seeing is a fusion of consumer and business interests on a single device.

How about calling it Fusion?  One thig I am sure of is that the carriers are now becoming full service carriers.

To make this all work the wireless and wireline carriers will need to deploy a network technology to make it work.  The reason for a delivery technology is that the carriers networks were designed around voice delivery first and then later on for Internet access.  Bear in mind carriers’ networks are comprised of various stages of technology not just types but age as well.  Try deploying new services on a network that was built to do “A” and not “B”.  The carriers need to retrofit/enhance/replace existing technologies to deploy these new video services.  The answer for the carriers is content delivery network (CDN) technology; also known as content distribution network (CDN) technology.

A CDN is a specialized Internet based network designed to efficiently delivery content to users.  CDN vendors are growing in number.  AT&T recently announced a content delivery initiative using the technology applications of ExtendMedia, Qumu, and Stratacache.

AT&T will be competing with the likes of Level 3, Akamai, and LimeLight.  I am sure Verizon will be right around the corner.