pdf

Getting into Telecommunications (The Allure of a Hot Industry)

Date: Jul 10, 2000


  1. INTRODUCTION
    1. The purpose of this outline is to provide a general entry issue 'road-map' for any capable organization desiring to enter the telecommunications market.


    2. The outline can be utilized by a broad range of organizations with the desire and interest to exploit opportunities within this lucrative field.


    3. Any such organization will require the services of individuals with the following skill sets in order to make an informed decision to enter the telecommunications field:


      1. Finance


      2. Marketing


      3. Network Design/Operations

      This foundation team will be responsible for research into services offerings, infrastructure requirements, business plan creation, operational guidelines, alliance development and generating the overall 'blue print' for the potential telecommunications opportunity.

      The team will be responsible for defining:

      • Control. Determine how the business will be managed - owned by the venture, contract for services or both;


      • Operational Responsibility. Define the requirements for the day-to-day operations of the venture - customer service, provisioning, maintenance, and billing;


      • Initial Financing. Secure funding for the start-up;


      • Project Management. Timeline development and accountability from start up to operations of the venture;


      • Cost/Profits. Taking the business plan to budget and tracking to a positive net income.

  2. ENTERING THE TELECOMMUNICATIONS MARKET.


    1. Who Are We Now?
    2. The first step for any organization contemplating a leap into the telecommunications market, is for the organization to determine who we are now by examining the following:

      1. Infrastructure. What, if any, resident infrastructure do we currently have in place?


      2. Geography. Where are we located, and what market can we feasibly serve?


      3. Services. Which services do we want to provide?


      4. Politics. What is the general nature of our decision making process? Highly bureaucratic or more fluid in nature?


      5. Financing. How much financing do we currently have, or, can we obtain?


      6. Alliances. Are there existing affiliations that can be used to support or gain competitive access to service providers?


      7. Champion. Who will take the roll in the organization to lead the effort, guide the work team, and provide milestone review for critical path decisions?


    3. Where Do We Want To Go?
    4. The next step will be to determine where the organization wants to go in the telecommunications market. The important issues to take into account are as follows:

      1. Control: What manner of control do we want to maintain over the proposed business and delivery of services:


        1. Manage all aspects of the business;


        2. Manage some aspects of the business;


        3. Focus only on receipt of revenue.


      2. Infrastructure: How do we want to establish our infrastructure:


        1. Find and purchase the necessary infrastructure;


        2. Build the necessary infrastructure;


        3. Lease the necessary infrastructure;


        4. Combinations of some or all of the above.


      3. Cooperation: What other entities may we want to partner with:


        1. A telecommunications company is an island until it connects with other telecommunications companies;


        2. Location of operations may limit the number of available telecommunications companies;


        3. Vendors can play a key roll in starting a telecommunications company, providing insight into available products and service as well as entry pricing options for new ventures;


        4. Relatively detailed agreements will describe the level and nature of cooperation.


      4. Geography: Where do we want to do business:


        1. Location of Points of Presence ("POP's") is critical for the new venture and gaining access to other service providers;


        2. Determine if the area is friendly for the development of a telecommunications company. Are there challenges (historical, environmental, or structural) that may present challenges in the development of the network infrastructure?


        3. Some locations will be easier to do business at than others.


      5. How Do We Want to Organize?


      6. The final step will be to determine the business entity through which the organization will conduct business.

        1. General Partnership;


        2. Limited Partnership;


        3. Joint Venture;


        4. Limited Liability Company;


        5. Corporation;


        6. Division of existing entity.


      7. What Regulatory Hurdles Do We Face?
      8. What regulatory filings must be made and certifications received to commence business?

          >

        1. State Regulatory Agencies;


        2. Federal Regulatory Agencies;


        3. Local Regulatory Agencies.


  3. Expanding Your Telecommunications Market.


  4. Once the organization has established a foothold in the telecommunications market, the next logical step may be to expand its footprint.

    1. Three Methods of Expansion into Telecommunications Markets:


      1. Interconnection:


        1. Contractual Issues;


          1. Significant contractual obligations;


          2. Examine current contractual obligations (i.e.: Are such arrangements allowed in the terms of current contracts?).


          3. Contemplate future contractual commitments (i.e.: Will an interconnection agreement impact the ability to partner or merge in the future?).


        2. Operational Issues;


          1. Management issues


            1. Control;


            2. Operational Responsibility;


            3. Cost/Profits.


          2. Which manner of interconnection is best?


        3. Legal and Regulatory Issues;


        4. What regulatory filings must be made and certifications received to commence interconnection?



          1. State Regulatory Agencies;


          2. Federal Regulatory Agencies;


          3. Local Regulatory Agencies.


      2. Partnering:


        1. Contractual Issues;


          1. Least contractually invasive type of expansion;


          2. Partnering is more than interconnection but less than merging;


          3. Provides more of a hands off approach for the venture.


        2. Operational Issues;


          1. Many of the same operational issues arising from interconnection will likewise arise from any partnering agreement:


            1. Control;


            2. Operational Responsibility;


            3. Cost/Profits.


        3. Legal and Regulatory Issues.


        4. What regulatory filings must be made and certifications received to effect partnering.



          1. State Regulatory Agencies;


          2. Federal Regulatory Agencies;


          3. Local Regulatory Agencies.


      3. Merging:


        1. Contractual Issues;


          1. Examine current contractual obligations (i.e.: Are such arrangements allowed in the terms of current service agreements and other contracts?).


        2. Operational Issues;


          1. Determination must be made as to how the newly merged company is to be operated:


            1. Control;


            2. Operational Responsibility;


            3. Cost/Profits.


          2. Ultimately goes back to the first two questions: Who are we now? Where do we want to go?


        3. Legal and Regulatory Issues


        4. What regulatory filings must be made and certifications received to effect a merger?



          1. State Regulatory Agencies;


          2. Federal Regulatory Agencies;


          3. Local Regulatory Agencies.


  5. ORGANIZATIONAL AND OPERATIONAL ISSUES.


    1. Organizational Issues To Be Addressed:


      1. Typical Shared Interests of Organizers:


        1. Limited Liability;


        2. Administrative/Operational ease and flexibility;


        3. No Income Taxes;


        4. Participation in Decision Making.


      2. Choice of Entity:


        1. LLC meets Section 4(a)(i) of this outline. A few states tax an LLC as a corporation;


        2. Corporation does not meet Section 4(a)(i)(2) or (3) of this outline;


        3. General Partnership and Joint Venture do not meet Section 4(a)(i)(1) of this outline;


        4. Limited Partnership does not meet Section 4(a)(i)(4) of this outline;


        5. LLC or Corporation. Decision may depend upon whether organization wants to "go public," whether the state in which the LLC is organized or operates taxes an LLC like a corporation, and/or whether the state in which the LLC is organized permits single person LLCs.


    2. Management (Operating Company Wants Control)


      1. Own majority of the equity;


      2. Appoint majority to the Board of Directors (if Corporation);


      3. Serve as Manager of a "manager-managed" LLC;


      4. No more than majority vote needed on any issue requiring approval of the owners (shareholders, members) or fiduciaries (directors, managers);


      5. Maximum flexibility in implementing business plan/budget or deviating from plan/budget;


      6. Contract with affiliates to provide services to the new company on any terms deemed necessary.


    3. Management (Non-Operating Company Wants Limits)


      1. "Member-managed" LLC;


      2. Appoint equal number of members to the Board of Directors;


      3. Veto power or super-majority vote needed on any issue requiring approval of the owners or fiduciaries;


      4. Clear, written limits on manager's authority and right to terminate manager in manager-managed LLC;


      5. Reasonably defined business plan. Evolutionary and incremental modifications by Operating Company that are inconsistent with the business plan require consent;


      6. Contracts with affiliates of Operating Company require consent;


      7. Regulatory authority obtained and maintained in the new company's name except in unique circumstances.


    4. Financial Issues


      1. Initial Capital Contributions:


        1. Form (cash, tangible/intangible assets, services);


        2. Equity percentages;


        3. Owner Debt financing.


      2. Additional Capital Contributions:


        1. Form (cash, tangible/intangible assets, services);


        2. Equity percentages;


        3. Owner Debt financing. Third Party financing;


        4. Mandatory or voluntary;


        5. Failure to contribute (monetary penalty, dilution, redemption);


        6. Operating Company wants to control calling, timing and amount of additional capital call, Non-Operating wants to avoid being "capital called to death" or capital calls merely for the purpose of paving management fees or fees to affiliates of Operating Company;


        7. Equity partner sells interest to a disinterested party or competing/hostile entity.


      3. Taxes


        1. Double tax problem for corporations. Corporations taxed on net income. Any after-tax income distributed to shareholders potentially taxable as dividends;


        2. LLC is not tax paying entity. Members are taxed on their allocable share of net income whether or not the LLC distributes the income.


      4. Distribution of Earnings


        1. In Corporations, Board controls distributions and if Operating Company controls Board it controls timing and amount of distribution;


        2. In LLC, Manager controls distributions and if Operating Company is Manager it controls timing and amount of distribution;


        3. Non-Operating Company wants some criteria (pay taxes, achieve a cash flow or profitability milestone, in excess of reasonable needs of business) that if met, requires and sets distribution.


      5. Management Fees; Contracts with Affiliates


        1. In LLC, Non-Operating Company wants Operating Company's fees tied to defined performance;


        2. Non-Operating Company wants contracts with affiliates of Operating Company on terms that are not more favorable than would be given to an unaffiliated vendor.


  6. CONCLUSION.


  7. The telecommunications industry has the potential to provide extensive business opportunities for various organizations and businesses. While many such organizations may not be interested in pursuing such a venture, many more may simply not realize that such an opportunity exists. This outline will provide a framework for assessing how any interested organization may enter this lucrative market.

Authored by David I. Readerwho can be contacted at (202) 434-4187 or reader@khlaw.com,with thanks to C. Douglas Jarrett and Kevin G. Rupy ofKeller and Heckman LLP, and Jerry Neal.