Trading in buffalo nickels

By WOODROW CANNON, Kestrel Solutions Inc. Can carriers survive today without ignoring tomorrow? A recent study says they can through bridge technology.

Can carriers survive today without ignoring tomorrow? A recent study says they can through bridge technology.

Woodrow Cannon
Kestrel Solutions Inc.

A man has a nickel with a buffalo on one side. Since he's been down on his luck recently, the man has kept particularly close track of his purchases, limiting them to the most essential items and tracking everything down to the last penny. He's had some time to think about the nickel, and suspects that he might be able to get more than the coin's face value from his collector cousin in Bethesda.

"Naw," thinks the man. "I'm going to hold on to it. That way, I'll always know where my coin is, and won't break my own resolution to hold on tight to my money. And as long as that nickel's in my pocket, at least I won't be getting any poorer."

As it turns out, the man's nickel is not a rare collector's item, but a standard buffalo head -- nothing that would make a collector turn back flips. Nevertheless, if the man chose to offer the coin to his cousin, he could have received 45 cents in return -- the going rate for your average buffalo nickel. Had he then invested the 45 cents he received in return, carefully tending it in a fund that fostered exponential growth, he might have earned about $10 over time -- a comparative fortune as a reward for parting with an old coin!

In today's economic landscape, many carriers are keeping their buffalo nickels close -- perhaps at the expense of their long-term survival. Demand for broadband services has not waned, and actually continues to grow. With no apparent loss of customer demand, why are the competitive and incumbent carriers saying "no" to customer requests and revenues? Times of turmoil always represent significant opportunities for creative people and companies. Today is the ideal time to capitalize on these opportunities, stimulate demand, gain market share, and increase profitable revenue.

By laboring under a "no new fiber" edict and requiring detailed justification for each metropolitan build out, carriers may have begun to decrease their chances for longevity. Though the main sentiment is a good one -- grow networks in a healthy, controlled way, without the unbridled expansion of the last several years -- categorically stifling all capital expenditures creates problems for carriers in the long run.

A recent probe into current trends in network growth uncovered several startling results of the "hold on to your nickels" scenario -- the largest of which was vast revenue loss as a direct result of unsound capacity planning. While carriers regularly receive orders for service, the fulfillment process often stops short of spending capital to create revenue.

Easing the pain of CAPEX by taming OPEX

Today's economic climate has created a blind spot where the future should be. While in the past large carriers had the financial leeway to deploy fiber or DWDM technologies in anticipation of demand, today's planners necessarily have to ignore what might be ahead of them. For many competitive local exchange carriers (CLECs), the "fiber or electronics" question has been swept off the table completely as cornerstones of the industry scramble to remain viable.

The previously mentioned research, sponsored by Kestrel Solutions, Inc. (Mountain View, CA) and conducted by OMNI Research (Davis, CA), examines changing behaviors around capital spending (CAPEX) relative to the burden of provisioning and managing the operations of network deployment (OPEX). The study yielded some important results: real-world carrier data show an alarming deficit between sensible planning and mainstay survival.

Luckily, the way out of this dire set of circumstances is based on a simple principle: Carriers can grow revenue intelligently with "just-in-time" development of network infrastructure -- that is, by facilitating micro-expansion in locations where customers have already logged requests for more service. While most bandwidth solutions are not able to accommodate this kind of turnaround, new "bridge technologies" have emerged to meet pressing needs quickly, reliably, and in a way that shortens the cycle between capital spending and realization of profitable revenues.

Kestrel sponsored the study in May of this year to explore the economic effects of deploying bridge technology. The research, which was based upon actual network planning data and external study data, showed that the OPEX costs of network operations could be reduced in some cases by more than 39%. Applying these findings to current network management practices could help circumvent a hemorrhage of untold millions of dollars spent on maintaining networks that either lack capacity or languish with stranded bandwidth in sluggish markets.

From short-term viability to long-term growth

Safekeeping current assets and limiting cash outlay are fair tactics in recession conditions, but long-term viability requires planning for future contingencies. It would be difficult to refute the crucial role that fiber and optical paths will continue to play in the coming decades -- and the importance of how carriers eventually adapt their networks to sustain high-speed services of the future. The study shows that the most effective economic model incorporates a balance of matching near-term supply to corresponding demand for service while continuing to sustain optical investments in fiber and DWDM technology. But given carriers' current urge to "guard their nickels," achieving this balance will require particular insight and a host of strong solutions that can meet demand as it arises.

The use of bridge technology that addresses both the needs of the future and immediate demands on existing infrastructure is just plain smart. Why spend an entire buffalo nickel when you can purchase what you need for three red cents? Reality mandates that we think conservatively toward build out, spending only what is needed when the demand has emerged. In this way, managing broadband networks is not that different from making decisions about the coins in your pocket.

It's about customers and revenue

Keeping customers is a much easier (and less expensive) proposition than bartering for new ones. Revenue declines, which are common among today's carriers, result from a combination of decreased spending -- an unavoidable byproduct of a recession -- and customer attrition. This second element is absolutely preventable, however, with proper planning, attention to customer needs, and quality service. A carrier that is experiencing lower revenue must understand the problem and adjust appropriately, especially since it is usually not feasible to reduce costs to the point of restoring profitable growth. Further, CAPEX reduction at the expense of supporting customer demand is likely to yield terrible problems for years to come.

While carriers languish with lackluster revenue forecasts and a backlog of subscriber service requests, the clear choice is to make a difference on the bottom-line -- to grow intelligently, but with a deliberate future in mind. Bridge technology heralds a definitive step toward pairing revenue growth with real-time market demand. And the closer to a customer's pulse you come, the easier it becomes to plan for a healthy stay in the next cycle of the economy.

Woodrow Cannon is president, CEO and chairman of the board of Kestrel Solutions, Inc. (www.kestrelsolutions.com), an optical transport company based in Mountain View, CA. In his former position as president and CEO of Mariposa Technology (Petaluma, CA), Cannon led an acquisition of Mariposa by Marconi Communications. Previously, he served as president and COO of Digital Transmission Systems (DTS) in Norcross, GA. Cannon earned a BS in mechanical engineering from the University of Alabama.

OMNI Consulting Group LLP is an economic advisory and assurance firm with offices located in Davis, CA; www.omniconsultinggroup.com.

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