Telecom M&A shifts from fiber to cloud

At the CompTel Plus show this week, I was reminded of the prediction made at last year’s show that 2010 would represent something of a volume peak for fiber-based mergers and acquisitions. That prediction appears to have been borne out, with dealmakers reporting this week that, even assuming some more transactions before the holidays, fiber M&A in 2011 will be “not even close” to the volume seen in 2010. There simply aren’t as many assets left on the market these days.

As my hastily assembled list indicates, telecom M&A in 2011 shifted more toward cloud-centric services, including hosted communications, particularly after the starting gun of Verizon’s (VZ) $1.4-billion acquisition of Terremark Worldwide in January. (Yes, I know: This list is far from exhaustive. Please feel free to harangue me about the ones I omitted in the Comments section below.) Cloud M&A will continue to hold the spotlight for some time (more on those trends here and here), but even large-scale fiber M&A hasn’t closed its curtains yet; expectations for cable MSOs to buy nationwide fiber networks continue to grow as trade associations lobby regulators for a green light to such deals.

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Frontier’s next big move

Amid a wave of cloud-centric M&A from historically rural carriers large and small – CenturyLink’s (CTL) acquisition of Savvis, Windstream’s (WIN) purchase of Hosted Solutions, TDS Telecom’s (TDS) VISI deal – one carrier we haven’t seen make a cloud acquisition yet is Frontier Communications (FTR). That’s primarily for the obvious reason that Frontier currently has its hands full digesting its last acquisitionVerizon (VZ) wireline properties in 14 states – which closed at the beginning of last year’s third quarter.

As with any telecom carrier, key to Frontier’s success is its penetration of business customers, which contribute 51% of its revenue. But attacking that market – or even retaining it — while assimilating Verizon’s properties has not been easy for Frontier, and the next nine months will be a crucial period for it to make progress.

Before Frontier acquired it, Verizon’s business it was losing about 30,000 access lines per quarter on the business side alone (nearly quadruple that on the residential side). In the long months leading up to the acquisition’s close, as both companies plodded through a politicized regulatory approval process, Frontier could only stand by and watch as cable companies (Comcast [CMCSA] in particular) pilfered those Verizon customers, easily spreading fears that the transition to Frontier would create the kind of horrible service headaches that FairPoint Communications (FRP) saw when it executed a similar deal. (That’s another reason why Frontier had to make the integration of these assets its sole focus throughout this transition before tackling any other new initiatives.)

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Fiber rollouts fuel rise of Ethernet backhaul

A quarterly update from Zayo Group today gives a refreshed view of technology trends in wireless backhaul. More than 60% of Zayo’s fiber-to-the-tower revenue in the June quarter came from Ethernet services, having been less than 40% in the same quarter last year.

It’s another sign of how quickly Ethernet is penetrating the backhaul market. Just three years ago, despite widespread recognition of Ethernet’s benefits in this application, there was also widespread reluctance to use it for several reasons. Today Ethernet is becoming mainstream in backhaul networks, and mobile operators are even starting to use Ethernet exchanges.

One historical obstacle to Ethernet adoption in backhaul has been the relative scarcity of fiber at cell sites, a condition that is rapidly being reversed as 4G deployments fuel wireless bandwidth demand.  As Zayo’s Ethernet mix grew from roughly 40% to 60% of backhaul revenue over the course of a year, the number of towers it serves with fiber jumped nearly 90% — to 1,978 in the June quarter, with another 500 under construction. As fiber continues to proliferate, so will Ethernet. What will the charts look like a year from now?

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When call analytics become more valuable than calls

When will we reach the point at which the value of a voice call is eclipsed by the value of the data surrounding the call?

Businesses are rapidly learning how valuable call metrics are to their operations in multiple ways: Knowing how the length and volume of customer service calls can be affected by the particular customer service rep, the particular customer, the particular topic or circumstances, time of day, etc. – all of these things can help businesses optimize their processes and keep customers happier.

The more call data is unleashed, the more businesses and service providers will learn about how best to harness it. And more data is being unleashed all the time. This week Google added its Voice service to those included in its Takeout offering, which allows users to download data associated with services like Gmail and Google+’s social app, Circles. So now Google Voice users will be able to download their call history, voicemail (both audio and transcripts), greetings, recordings and so on.

Google has long offered APIs for its services that allow others to cultivate and process data surrounding their use. Various developers have created mashup apps for tracking call data through Google Analytics. And Google also offers call metrics with its AdWords advertising service, so that users can measure the effectiveness of ads by looking at the number of people who place calls through the ads. But that application serves Google’s ad sales (as a sort of ad-spend-ROI calculator) more than it serves users’ own direct needs.

What may turn out to be especially valuable about Takeout for Google Voice is its

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Inside the Vocalocity Aptela merger

If you’re like me, when you saw today’s announcement that Aptela was merging with Vocalocity, your first thought was how convenient it is that Aptela and Alteva, two companies in the same space whose names you were sure to keep confusing, were both taken out of the game in the same summer.

Believe it or not, today’s deal has significance even beyond that.

As I’ve documented, M&A has been accelerating in the hosted business VoIP space for a while now — there was another deal just last month — and today’s merger (which technically closed yesterday) adds mass and momentum to that fast-growing snowball. Increasingly, we’re seeing carriers acquiring hosted VoIP providers,
such as TelePacific buying Telekenex, Earthlink (ELNK) buying STS Telecom and CBeyond (CBEY) buying Aretta Communications. But we’re also seeing pure-play hosted VoIP players combine with one another, as we did today.

Because there isn’t a great deal of product differentiation in the hosted business VoIP space right now, M&A among in this sector is typically about acquiring customer bases to build scale and, secondarily, acquiring talent to more effectively compete.

Eight-year-old Vocalocity, which had roughly 11,000 customers and 150 employees, grew by about a third with the addition of Aptela’s roughly 4000 customers and 40 employees (including one important gain in particular: Aptela’s CTO and founder, Mahesh Paolini-Subramanya, who is now CTO of Vocalocity).

The new improved Vocalocity, with nearly 15,000 customers, should have annual revenue

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Sign of the times: Qwest becomes CenturyLink

This week the Qwest sign atop the company’s headquarters building in downtown Denver was replaced by one bearing the logo of the new management: CenturyLink (CTL). It’s a milestone rife with meaning for anyone who remembers the last time that sign was changed.

In the year 2000, at the height of telecom bubble mania, the name on top of that building was “US West,” one of the regional incumbent telephone carriers spawned by the court-ordered breakup of AT&T. At the time, US West was being acquired through a hostile bid by Qwest, then helmed by CEO Joe Nacchio, a tenacious former AT&T executive whose aggressive, risk-taking demeanor propelled him quickly through the ranks of an otherwise conservative corporate culture.

Nacchio had a good view of the US West sign from his office on the 15th floor of Qwest’s headquarters about a block away. As legend has it, within minutes of the tumultuous acquisition’s close, Nacchio phoned US West’s then-CEO, Sol Trujillo, and, with characteristic chutzpah, ordered him to replace the US West sign immediately.

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Businesses need multimodal communications

Years ago there were only three ways for companies to communicate directly with customers—phone, mail and door-to-door canvassing. (Radio, television and print advertising isn’t really direct communication.) Today companies still use these three avenues but to a much lesser degree, at least for mail and door-to-door. The phone is still a very effective way to reach customers, especially those few who haven’t embraced the newer avenues yet. And phone communication is more efficient now with the help of automated systems. But the Internet has opened things up considerably.

New communication avenues have quickly become vital for reaching targeted audiences. And unified communications have made it easier to manage them. Business has followed our private lives and the way we communicate there—texting, emailing, writing on social networking sites. It’s how we communicate now, and it’s how businesses have to communicate too.

When businesses started using email to reach customers, it was very effective. That effectiveness has lessened somewhat because of spam, but targeted email campaigns still generate a lot of sales leads. Texting almost immediately became the most used communication tool on cell phones when it came out. It’s still the most used. And now companies are using it perhaps most effectively for high-touch service to current customers (sale announcements, appointment reminders, thank yous, et cetera).

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Fiber-to-the-tower players raise their bets

Carriers building fiber to cell towers are raising their bets, even in an M&A environment that has left them little time to close their wallets. CenturyLink (CTL) and Windstream (WIN), for example, having racked up numerous acquisitions lately, are nonetheless freeing up more funds to chase the wireless backhaul opportunity while it’s hot.

CenturyLink recently raised its spending expectations for the year, projecting capital expenditures approaching $2.5 billion, citing fiber deployment initiatives that had been underway at both Qwest and CenturyLink before the two companies closed their merger. Company executives plan to bring fiber to 6,000 towers by the end of this year, adding more over the next two years (at least). And they now expect a spending surge in the back half of the year to raise the firm’s total capex to 15%-16% of its revenue, following a trend seen among others such as PAETEC
(PAET) and Level 3 (LVLT).

While many large companies are sitting on their cash amid the turbulence of the macro economy, carriers such as Windstream and CenturyLink know that they have to invest now to get in on the current window of
opportunity for offering big bandwidth to operators rolling out 4G speeds. That fiber-to-the-tower landgrab is occurring as data center buildouts are also exploding, allowing carriers to combine purposes and stretch infrastructure across both markets.

Some carriers are already seeing revenue ramp up from these efforts, while some are just signing long-term contracts for future return. Time Warner Cable (TWC) reported its second-quarter wireless backhaul revenue had doubled from a year ago to $34 million. Windstream said its special access revenue was up 9% (or $11 million) year-over-year in the quarter due to backhaul. These contracts typically don’t yield revenue until 6 to 12 months after they’re signed, Windstream has said. But once the money starts coming in, the margins are high because the cost of operating FTTT is low. So players in this game need to be comfortable spending a lot upfront, building out fast, and then being very patient as they wait for the payoff.

For more on where the wireless backhaul market is headed, check out this NPRG report.

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Warwick buys Alteva: Are hosted VoIP valuations rising?

Last week Warwick Valley Telephone became the latest telecom carrier to acquire a cloud-based hosted VoIP provider, joining others such as TelePacific, Earthlink (ELNK) and CBeyond (CBEY). The $17-million acquisition of eight-year-old Philadelphia-based Alteva gives the New-York based telco hundreds if not thousands of hosted VoIP customers in the Mid-Atlantic and elsewhere and roughly $5 million in annual revenue (though that number is quickly growing). And the pricetag appears to carry a slight premium over recent similar deals. Is this the start of a trend?

For Warwick, which is an ILEC/CLEC hybrid, Alteva provides some much-needed revenue growth to compensate for line losses on the company’s ILEC side that aren’t being sufficiently offset by organic growth on the CLEC side. That may be one factor in the deal price.

Warwick is paying 3.1x Alteva’s annual revenue, a number that, Warwick says, seems lower if you consider Alteva’s growth trajectory (the company has averaged 60% annual growth over the past three years). That’s a slightly higher price than hosted VoIP players have been fetching thus far. In 2010, CBeyond paid $4 million ($2.3 million net of cash) for Arretta, which was expected to contribute about $2 million in 2011 revenue. The same month, M5 Networks paid $8 million for Geckotech, which claimed $4.7 million in 2009 revenue. And earlier this summer, West Corp. paid $120 million for Smoothstone, whose revenues are unknown but estimated by NPRG to be in the range of $60 million this year. Is Alteva’s multiple a sign of growing valuations in this increasingly hot sector or a reflection of Warwick’s uncomfortable position amid residential line loss?

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Dumb videoconferencing is here

A slew of recent events threaten to make videoconferencing easier and more pervasive than ever: Skype, which is now powering Facebook’s new videophone feature, is soon to power one for its next corporate parent, Microsoft (MSFT), when that acquisition closes. Google (GOOG) is dropping jaws with the videochat features of its new social networking service, Google+. And some cool new startups are making a stir in the space: Blue Jeans Network exited stealth mode this summer, promising to make videoconferencing interoperable in the cloud. And TokBox allows anyone with a web presence to embed videoconferencing functionality into it.

So that’s that. No more plain old voice calling, right? Consumer services shift cultural expectations, and business communications follow suit. You telecommuters better start ironing your shirts. Or at least start wearing them.

“If you aren’t videoconferencing, you will be soon,” says one industry observer.

“The genie is out of the bottle,” says a corporate management blogger. “Once people have developed a taste for a particular technology they will use it whenever possible.”

If videoconferencing is a genie, I don’t think it’s seen the inside of a bottle for years. But it still hasn’t intimidated the genie of voice. It’s true that the new ease and interoperability of video communication will likely lead to a lot more use, including business use. And unfortunately, Corporate America may, for a while, muddle through an era of “dumb videoconferencing,” in which people communicate via real-time video more often than they should, simply because they can.*

And that’s too bad, because, for a lot of business communication, video doesn’t add value.

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