The Finer Points of Asset Management

Sure, you can buy a Lucent Technologies 5ESS or its related components on eBay. You may even be able to buy a cell site enclosure with weathered stains that have formed the image of the Virgin Mary.

But would you really want to?

Telecom equipment historically has enjoyed a fairly long life-cycle. Large infrastructure technologies often lived for decades. They were eased into retirement with dignity as new generations of equipment gradually took their place. And like aging baseball players whose bats still hold some pop despite their ailing knees, network gear often found new life in the networks of emerging markets.

Every relay, switch and trunk-card flipped, switched or terminated until they could flip, switch and terminate no more. Well, that may be stretching the truth a little. The old Bell system was surely pragmatic and patient in its new technology introductions, but it was not always ideally efficient. Still, these days, the pace of change in both technology and market dynamics, such as competition and merger mania, has truly created wasteful, expensive operations with huge collections of abandoned network assets.

However, those same drivers — and a nudge from a little piece of legislation called Sarbanes-Oxley — have encouraged network operators to refocus on assets, stranded or otherwise.

Network operators looking for a circuit pack here and there or some premises-based key or PBX equipment can try an online outfit such as Telecomauction.net, 1st-used-network-hardware.com, telecomfinders.com, Powersource, First Tech Communications or telconetworking.com. However, the serious buyer, looking to buy, sell or move serious infrastructure assets might want to look at a larger firm.

Today, the choices are few. That may change soon, given that Lehman Brothers analyst Steve Levy puts the market for used infrastructure at about $1 billion dollars per year. Coppell, Texas-based Somera is the only public company in the business of brokering used and spare network assets. Other vendors, such as Lucent, which does about $200 million per year selling its own and others' used equipment, dabble in this market, but for Somera it is a core business.

Besides being public, which gives it an additional edge of accountability in the eyes of operators concerned with Sarbanes-Oxley compliance (as all should be), Somera repairs, reconfigures and, in some cases, recertifies equipment before selling or redeploying it. That, said Somera CEO David Heard, is what both sets his company apart and provides a steady source of revenue.

“Our core competency is turning hidden value in a carrier's network into dollars they can use to compete,” Heard said.

Somera has 1100 customers worldwide and does about 10,000 transactions per month, according to Heard. The company deals with 350 different manufacturers and represents 60,000 different products. Heard came to Somera last May after leaving Tekelec subsequent to its acquisition of Santera, which he led. Heard also served as vice president of Lucent's access division and held positions at AT&T and Chrysler Motors. Throughout his career, he had been focused on new technology introductions, having been involved in the early days of cellular as well as with the development of UMTS.

While looking for his next challenge after leaving Tekelec, Heard heard one refrain coming from his network of contacts: There are too many new technologies hitting us all at once. We need time to digest. And we need help managing our legacy assets.

That's what Somera had doing for approximately nine years. Heard was brought in to help the company better demonstrate its full value to service providers, which was utilizing the intellectual property it had built over the years managing legacy assets and evaluating their value on the open market.

Somera has a patent-pending technology called Recovery Plus that it uses to identify excess network assets and then offer the carrier several options for turning those assets into capital. “Companies, like Cingular for example, are focused on winning customers,” Heard said. “They're looking at putting more bars over their customers' heads by using less gold bars out of their vault.”

Somera's focus is helping them get the most from their existing assets. He calls his company an information-enabled, technology-powered, financial assurance company. Somera finds assets sitting in warehouses — as well as sitting idle in the network — with unused ports or having been dislocated by new technology. The company claims to be able to save a network operator 10% of its capital costs through the recovery and re-allocation of legacy assets.

And contrary to popular perception, it isn't always carriers ripping out Class 5 switches or 2G cell sites and dumping them into third-world markets. In fact, Levy said, one of the biggest such sales was a couple of years ago when Somera found a network provider in Chile pulling out a lot of wireless equipment because they were upgrading to a new technology.

“Somera bought $20 million worth of equipment and resold it in the U.S. over the next four quarters for $40 million,” Levy said. “So that should dispel the old notions about emerging markets.”

Another large wireless infrastructure re-allocation project was agreed to last month between Qwest and Verizon Wireless. Verizon paid $418 million in cash for Qwest's PCS licenses and related wireless network assets. Qwest is moving to an mobile virtual network operator model and will use the Sprint network to offer a nationwide service. Qwest already has transitioned 95% of wireless customers onto the new infrastructure.

Qwest CEO Dick Notebaert said the move helped Qwest transform from a regional wireless provider to a national provider without any capital investment. More important, the sale will help Qwest realize $270 million in 2005 from re-negotiation and termination of purchase agreements.

“We believe the cost containment we put in will be permanent,” Notebaert told analysts last month.

Notebaert also singled out another asset relocation initiative in Omaha, Neb., that was indicative of company's efforts that have reduced capital expenditures from $8 billion in 2000/2001 to around $2 billion today.

“We've been able to do something I have never been done before in my career,” Notebaert said. “We have been able to take a lot of equipment out, recycle it into … other markets to better utilize the assets we have already bought. And I'm not talking about just plug-in cards — I'm talking about frames and processors and capacity.”

It is unclear whether Qwest or Verizon used a third party to negotiate their sale or if either will contract with one to redeploy the actual equipment, but the mega-merger is a market-driver Heard is counting on.

Using Cingular as an example, Heard said that his Recovery Plus service could look at the technologies of Cingular and AT&T and determine which of its likely several hundred cell sites overlap and help get them redeployed.

“The historical method was to write off equipment and put it in the compactor,” Heard said. “We could cannibalize some equipment to use as spares or offload them onto the market, sell them, and gradually provide the operator with more capital dollars to provide other services and new technologies.”

Somera has built a proprietary database for the real-time market for telecom gear. The company tries to minimize the price wars that can start among the smaller players and drive up the price of equipment, especially when the seller knows the identity of the buyer and presumably the depth of the buyer's pockets.

Somera also acts as a one-stop shop for operators looking for used, spare, manufacturer-discontinued or refurbished equipment from various vendors. “Since we have an inventory base of multi-vendor technologies in one place, we can more efficiently manage the needs of the carriers,” Heard said.

Because Somera holds such a large inventory of equipment, it can offer exchange services on some equipment. It often buys a carrier's excess inventory and then leases it back to them. The company expects the Class 4 and Class 5 replacement projects over the next couple of decades to keep it very busy in this regard.

Major equipment categories

SWITCHING	TRANSMISSION	ACCESS	WIRELESS	DATA	MICROWAVE	POWER
Switches	Channel banks	Digital loop carriers	Base stations	Routers	Antennas	Power bays
Circuit cards	Multiplexers	DSL	Combiners	ATM switches	Dishes	Rectifiers
Shelves	Digital cross-connects	Channel service units	Transceivers	Hubs	Coaxial cable	Batteries
Racks	DSX panels	Multiplexers	Shelters	Bridges	Connector	Converters
	Echo cancellers	Network interface units	Towers
Source: Somera