Success-based capital is industry’s only option

WASHINGTON DC – One of the themes that emerged from this week’s telecom forum presented by The Yankee Group, was that telecommunications service providers are focused as never before on the goal of generating “success-based” capital – funding for projects that will generate revenue from the outset and a positive return on investor capital in the near term. The days of getting funding “field of dreams” projects are long gone, probably never to return.

Verizon Communications Chairman and CEO Ivan Seidenberg said today in his opening keynote that the industry has spent too much time chasing growth and not enough effort on generating value for customers and shareholders. He said current ROI is “pretty miserable” across the entire sector – Verizon’s current ROI rate is 12%-13%, primarily due to a regulatory regime that forces the carrier to lease facilities to competitors at prices that are below its costs. It should be at least 18%, he said.

Seidenberg added that any companies looking to make acquisitions in the current environment needed to focus on “actual businesses that actually make a difference.”

“There are no Hail Mary passes,” Seidenberg said. “You no longer can just buy theories. Great theories have to be buttressed by outstanding execution.”

Rick Roscitt, chairman and CEO of ADC Telecommunications agreed, saying much of what the industry thought was innovation over the past five years was illusory. He added that “real” innovation is required to pull the industry out of the economic depression.

“The telecom industry sponsored what amounted to a massive science fair with no adult supervision,” Roscitt said. “The industry needs to put its firepower into applications that will drive demand.”

However, Kurt Gastrock, vice president of hosting solutions for Sprint, suggested that service providers thinking about expending capital in search of the elusive killer application do so cautiously with an eye on applications their customers currently are using, and then focus on improving what’s already in play. If they don’t, they will have a hard time finding capital, he said.

“You won’t find anyone who will go out there on a long bet, in the hope that something will stick in the marketplace,” Gastrock said.

Seidenberg further suggested that service providers stay true to their core competencies and focus on vertical growth, a strategy that worked well for Verizon as it built its wireless business.

Looking to the future, Seidenberg said, “We won’t try to be all things to all people. We’re going to focus on the things we know we’re going to be good at.”

While some believe that outside capital still will be available to companies with success-based initiatives, David Dorman, chairman and CEO-elect of AT&T, said that service providers would be better off if they took matters into their own hands. He added that capital once was easy to get “for any idea that had telecom wrapped around it,” but with the economic meltdown and criminal malfeasance that has plagued the industry, that is no longer the case. In fact, it has completely reversed, said Dorman.

“This is a capital-intensive industry, and this is the toughest environment for getting capital that I’ve ever seen,” Dorman said. “Free cash flow matters again. If you can’t create capital yourself, you’re not going to get it.”