The following chart is based on a June 15, 1994 meeting I had with Dick Jalkut, then president of NYNEX Telecommunications. Dick said that his biggest problem was his outside plant. “It is too expensive to maintain,” he told me, “and there isn’t enough capital in world markets to replace it.”
Before long Jalkut was on a mission to goose earnings by slashing costs. This gained NYNEX a 21 p/e from Bell Atlantic, well above the 17 p/e that Pacific Telesis got from SBC, to the everlasting gratitude of NYNEX shareholders.
I took a different take from Jalkut’s comment. My conclusion was that if outside plant is the problem, it is also the solution, and sketched out the progenitor of this chart, The Big Iron Free Network.
A network with no big iron has high a Velocity of Capital and a high Velocity Cash. It scales like Wal-Mart. In fact, it was in trying to figure out how Verizon could scale quickly and profitably that I created my North River Soccer Ball System — a high velocity operation with all assets and operations on the “surface” where they touch customers — based on Wal-Mart.