The following transcript has been edited for length and readability. Listen to the entire discussion here on The Broadband Bunch.
Craig Corbin:
With the need for broadband connectivity at an all-time high, both existing and prospective service providers are looking for knowledgeable advice in navigating the ever-changing waters of the industry. For the past decade, Leverage Broadband Strategies has partnered with independent telecom companies to provide product strategy analysis, full-service video content management, as well as subscriber data analytics and strategy.
Craig Corbin:
Our guest today is Doug Maglothin, the Chief Strategy Officer of Leverage Broadband Strategies. Doug heads up Leverage’s Strategic Growth service consulting, working worldwide with clients on M&A Leadership, SubLogic Analytics, and Outsourced Management functions. He holds both an Executive MBA and Master of Information Systems from the Sam M. Walton College of Business at the University of Arkansas, and was a Beta Gamma Sigma Scholar Award recipient. While at the University of Arkansas, our guest also completed a Graduate Certification in Enterprise Analytics and holds a B.S. in Marketing Management from Western Governor’s University.
Craig Corbin:
Before we get into what’s happening currently in the world of broadband, give us a 30,000-foot overview of Leverage Broadcast Strategies and how it all came to be.
Doug Maglothin:
Leverage was founded in 2011 by my partner, Cheryl Summers, and our other partner, Linda Kondrick, both of whom hailed from the cable industry. There is lots and lots of video experience between the two of them. Leverage was founded in light of the complexity of managing programming and content relationships for independent providers. Cheryl and Linda both had fought those battles internally with some larger providers and saw a pretty immediate need in the market to help smaller providers out with navigating and negotiating those agreements. Over time, as our member companies have evolved past videos, its most strategic element, Leverage has evolved right alongside them.
Doug Maglothin:
Now, we have entered a new chapter in the existence of Leverage where we are now called Leverage Broadband Strategies (previously Leverage Cable Consulting). We work with providers both domestically and internationally on forming strategic growth plans that drive them towards subscriber growth, network growth, revenue growth, and hopefully growth in efficiency along the way. I used to be a Leverage customer. For the first several years of my career in managing cable products at my past employer, Leverage was one of the consultants that I relied on the most heavily in my day-to-day business. It’s interesting to have seen it from both sides now.
Doug Maglothin:
I joke with my partner now that I used to have internal discussions at my company whether or not we paid Leverage enough for the amount of support that they were able to give us. Now that I’m on the side of Leverage, my answer is clearly no, no, nobody pays enough for it.
Craig Corbin:
This has been a period of transition in the world of broadband. There has always been a tremendous need for connectivity nationwide, worldwide but the past year, due to the pandemic the need for everyone to have broadband access, be it for remote working, distance learning, telehealth etc. has really been highlighted. What are you seeing from your perspective?
Doug Maglothin:
For a guy who is a very data-centered person, a big-time data nerd, if you will, this has been an outlier of a year. From a growth perspective, from a traffic perspective, we’ve just seen things that I don’t think any predictive analytic model could have ever seen coming. Interestingly enough for Leverage, we are a remote workforce. We’re positioned in different cities and states around the country as a partnership. Our support staff exists in different cities within different states around the country. We have a cabinet of consultants that we even subcontract that exist all around the world. What we found ourselves doing a little bit this year that we certainly didn’t expect is actually mentoring a lot of our customers on best practices for operating remotely. Typically, we’re in business strategy and it just so happens that that’s become a lot more strategic this year as operating an efficient workforce globally and remotely.
Doug Maglothin:
Not only have we seen the traffic growth among our members, we’ve experienced that we’re more reliant on working from our homes and maybe not traveling as much as we normally do. It’s been an explosive year in subscriber growth. It’s been an explosive year for revenue growth by large in all of the datasets that we’ve been watching. While the pandemic itself has been a really terrible thing nationally, in the telecommunications industry, it’s been an oddly interesting boom in our numbers.
Craig Corbin:
Given what you just shared with regard to the explosive growth, would you say that most of the providers you work with have been able to handle the rapid increase in need for broadband access and services?
Doug Maglothin:
Our consumer companies have responded very, very well. Certainly, our mature companies all have, at least at points in their histories, experienced these rapid periods of growth. This is nothing new for our existing cable companies and telephone companies to see these periods of aggressive growth, whether it be in just marketing initiatives that they’re performing internally in their service areas or when they’ve entered new territories. I think scale of workforce has almost become easier as a by-product of so many resources being remote employees. People are starting to look beyond the borders of maybe their city, county or state for employees. They’re starting to look internationally, potentially to find the candidates that maybe some of their harder-to-fill positions.
Doug Maglothin:
As communications companies, this is the way we should be thinking. We shouldn’t necessarily be thinking locally all the time, especially when it comes to harder-to-fill positions. What’s interesting is for some of our newer entrance into telecom that have very, very aggressive build plans, human capital resources have not been the constraint. Obviously, materials are much, much more of a constraint with supply chains breaking down because of the pandemic. Those are probably the largest challenges we’ve seen.
Craig Corbin:
That’s interesting what you mentioned with regard to looking beyond the typical boundaries for talent. That’s really a paradigm shift and I would assume that you would expect that to be something that continues to trend in the future.
Doug Maglothin:
It’s honestly a good thing for companies that are willing to look beyond their own borders. They will find better and better candidates as they do. It’s better for the workforce. If you’re an engineer who’s well-studied and maybe you’re struggling to find employment with a local company, your market may get a lot larger and possibly not require you to move across the country to go fill a position essentially.
Craig Corbin:
For service providers, the topic of video content has been at the forefront for a long time. Your organization’s video content management offerings are in need today with a constantly shifting scope of video content for providers.
Doug Maglothin:
I wish the news was as good on this front as it was on the broadband growth side. We’re just seeing the continuance of the programming industry to continue to capitalize on its intended outcome of forcing cable companies out of business on the programming side. We, a few years ago, even might have argued that the rules of pricing elasticity and supply and demand would at some point take precedent. We’d see some easing up on the year-over-year double-digit increases that we see routinely now in the industry. What’s really become more apparent over the last few years, you think about even as recently as the last few weeks of Disney putting out the edict that it’s reorganizing its entire company around its streaming services.
Doug Maglothin:
You look at the announcements earlier this week about ESPN laying off 10% of its workforce. The greatest area of impact is in the cable television segment, if not the only area of impact. We’re seeing this vision come to a head now. Disney is reporting over 100 million subscribers in its streaming direct-to-consumer services. It’s very apparent now that these revenues far exceed the revenues that they were once getting from the cable industry. We’ve come to a point now where there’s no longer this hope that the pricing and price increases will ease up and maybe come to an end, and there’ll be some kind of parity found between programmers and cable companies. What we’re starting to realize is that this is a means to an intended end for these guys, that streaming will eventually be the only way that they offer content to consumers and that, potentially, cable companies may be out of the mix altogether.
Craig Corbin:
To your point, I think you’re going to see streaming become the way of getting content.
Doug Maglothin:
That’s right. I certainly see Disney’s really spearheading the march here. It’s probably the easiest to find their numbers and compare them to where they’ve come from with cable. It’s very clear to see where they’re headed now. It still leaves room with discussions around retransmission consent and what’s going to happen there. We specialize obviously in mostly rural telecommunications companies. There are great challenges with lots of consumers and our focus markets in receiving over-the-air channels. Most in rural Northeast Arkansas, there are very many places where even the greatest of all antennas is not going to get you the channels that you’d like to see for local news and weather. There are some interesting conversations that will still play out over some time about retransmission and the rate increases that we’re seeing there. Honestly, the end game there is not quite as clear yet, but we’re leaning towards that many of these companies will follow suit towards streaming as their option.
Craig Corbin:
With the need for broadband growing explosively doesn’t this provide opportunities perhaps for acquisitions by mature companies looking to expand their footprint. What do you see on that front?
Doug Maglothin:
We work a lot in the valuation space. Part of the intended outcome that we pursue with helping our consumers is to drive a higher enterprise value. That may be by greenfield growth. That could be by inorganic growth or an acquisition. It could be just in trying to achieve some operational efficiency. We pay attention to valuation multiples from around not only the telecommunications industry but several others that compliment that as well. We have recently seen a good deal of interest and even managed an acquisition around a utility cooperative acquiring a cable company that was within its utility boards. The value proposition there was that in order for the utility company to overtake services and the cable company footprint, there was going to be a long-drawn-out bloodbath of sorts, waging a pricing war and trying to do aggressive marketing campaigning.
Doug Maglothin:
When we were called in to evaluate the opportunity, what became very apparent is that this really cashflow-positive cable company could really do a lot of damage even though maybe it was offering an inferior product to the fiber overbuilder that was coming after it. They had lots of good underground fiber access into neighborhoods that were of high value. In the long-term cost of trying to overtake that company, we’re probably going to outweigh the cost of just acquiring the company. What we saw that was probably the most interesting is that this electric cooperative utility company that was a relatively new entrance into the broadband space, probably the most valuable asset that they acquired was the experience of the employee base that came with the cable company, some real telecommunications perspective that they would have struggled to gain without years of operations.
Craig Corbin:
What’s interesting with regard to cooperatives and what they bring to the game is that in any footprint that they serve, they are going to have the infrastructure in place so that they know exactly where each potential customer is located. It certainly makes it easier from the standpoint of being able to potentially provide connectivity to everyone in their footprint.
Doug Maglothin:
You’re right on. Electric cooperatives are, in my opinion, a real paradigm shifter for telecommunications, especially in the rural spaces that they occupy. Not only do they have services with all customers in their footprint just about because of their presence on the electrical utility side, just what you mentioned by virtue of them having the infrastructure in the ground and in the air already, but they can also build network faster. They can build networks less expensively. Most often, they are the beneficiaries of significantly advantageous funding and financing structures.
Doug Maglothin:
They have access to all of the rights of way that it might ordinarily take a for-profit company lots of time and effort to secure. The other side of the coin with electric cooperatives that makes them very interesting entities to watch competitively is that their rate of return requirements is not in the same echelon as, say, your venture capital-owned telecommunications competitors right now.
Doug Maglothin:
We see historical multiples being paid for companies year-over-year. By virtue of the prices being paid for these companies, the rates of return requirements are very, very high. It’s historically been the model of electric cooperatives to make very high initial investments and to then earn those investments back over very long periods of time that would never satisfy venture capital or for-profit model of any kind. We’ve got a number of cooperative customers that we work strategically for, that we’re helping to position for long-term success right along those lines.
Craig Corbin:
Everyone is inundated with 5G. That will obviously play a role in infrastructure investment. You mentioned network expansion, a literal blanket of many cell towers required for connectivity in most settings, along with that, then obviously the fiber backbone to connect all of those. How do you see 5G and the tower industry factoring into the future of broadband?
Doug Maglothin:
In the wholesale spaces, it’s going to be an immense driver of growth. Even in the densest metropolitan areas, you’re going to see a need for significant amounts of infrastructure investment. The ability of telecommunications companies to go out and win lots of revenue in very short spans, especially in metropolitan areas, is going to go up tremendously. If you turn from the metropolitan areas into your more rural segments, I think this is where it gets interesting. The costs to build are very hot. The amount of tower infrastructure that’s going to be required for the same level of service that Verizon or AT&T might expect is going to be significant. I think with CAF funding, with RDOF funding that’s being worked through the process right now, I think you’ll see that rural provider and probably specifically the electric cooperative industry is going to have an immense amount of opportunity ahead of them to either work directly with 5G providers or to work with companies that are looking for connectivity on behalf of 5G providers. So, it’s in a type two capacity.
Craig Corbin:
You may have mentioned RDOF. The first phase of that just wrapping up – $20.4 billion over the next decade. When you look at the need nationwide, many would consider that a drop in the bucket. How do you foresee funding opportunities growing in the coming five years?
Doug Maglothin:
I think that every time in telecommunications over the last 20 years that I’ve thought a funding program was about as large as it was going to get, they’ve always seemed to put up the next one an order of magnitude of the last one.
Doug Maglothin:
The wonderful thing about rural broadband, and especially this week makes it even nicer, is that it has always had tremendous bipartisan support. Even in the face of potential regime change here, I think the support for rural broadband will continue on at the same level, if not greater than before. It’s more of a time factor than a party factor. 20 billion is a great start. There are going to be dozens to hundreds of new entrants into broadband domestically as a result of this. That will result in millions of new broadband opportunities in consumer homes. We’re on the right track. I do agree with you that if you really look at the magnitude of all of it, it’s still a drop in the bucket.
Doug Maglothin:
What we are doing a good job of pursuing the mid-range of high-cost-to-reach opportunities. When you stamp those opportunities out with these funding programs and you get to the extreme cases where the cost of reach is such a formidable issue, it’s going to be interesting to see where potentially 5G and potentially companies like Starlink come out to help us to answer some of those problems where build costs will probably never be justifiable.
Craig Corbin:
You’ve obviously spent a tremendous amount of time working with a number of folks over the years. As you look at your opportunities to interact with those in the industry, what’s been the most rewarding thing for you in your time with Leverage.
Doug Maglothin:
I’ve really appreciated working in the cooperative telecom model. Having a 100% for-profit background up until a couple of years ago, I had always fantasized about this idea of nonprofit broadband and how that might look and how it might work. Of course, keeping it funded and evolving over time seems to be the greatest challenge. The cooperative model is very different in that, for one, the electric cooperatives that own the subsidiary telecoms, are non-profit. Historically, any investment that they’re able to make a return on that’s not forwarded into new investment is returned back to the membership. To some extent, this is the exact same model they’re using in their telecommunications companies. These are companies that didn’t start off as for-profit companies. They started off as service companies. All the way down to their Facebook pages, you can tell that they are considered to be a different type of entity by the members that consume their services. They’re very appreciative. They realize that it’s a tremendous life advantage to have them where they are. That perspective is not always readily apparent in the for-profit competitive telecommunications environment.
Doug Maglothin:
That’s definitely one of the things I’ve found to be the most rewarding. Other than that, I think the willingness of our customers across the board, this is not just locally or in the co-op space but of all of our telecommunications companies, to become very prominent members that support initiatives within their community. You mentioned my background in nonprofit support and being very active in the support of local arts education here in my hometown. I have never once had a telecommunications customer that did not very willingly come to support initiatives either that I was participating in or that were very similar type initiatives in their communities. So by and large, those are the most rewarding moments for me.
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