Bob Alton

September 1, 2001 Daniel Vance

The photo on Bob Alton’s wall for all eternity shows No. 9 Bill Mazeroski smacking a fastball off Yankee Bill Terry towards the cheap seats in the 1960 World Series. Maz’s homer will be enough for the Pittsburgh Pirates to win Game Seven 10-9.

Also hanging from Alton’s office wall are sketches from 1960s golf history: a hard-charging Arnold Palmer pumping his fist after draining a putt; a 54-year-old Ben Hogan launching a 3-wood on a Par 5 at Augusta National; a thin Jack Nicklaus walking up No. 18. Go Jack!

In Alton’s basement at home is a “Three Stooges” cut-out, an old-style pinball game, a jukebox downloaded with ’50s and ’60s tunes, and an antique phone booth. The flooring is 1950s-era checkered tile. Commingling with the nostalgia is a mini-studio where the musically inclined Alton likes to wa-wa on his Les Paul electric to ’60s oldies “Mustang Sally,” “Cripple Creek,” and “Brown-eyed Girl.”

All this makes his career choice all the more interesting.

He is the CEO of HickoryTech, the $100 million company that has evolved way beyond being “the phone company” in Mankato and North Mankato. Today it’s into digital TV, the Internet, billing software, equipment sales, wireless communi-cations – and being “the other local phone company” in cities like Waseca, St. Peter and Faribault.

He works in an industry that never has time to reminisce nor in the least bit feel sentimental. If he did, his competitors would eat his lunch.In telecommunications change happens today at two, again at four, and more change comes in the morning. Bob Alton does not have time at work to wax nostalgic about the way things were. In truth, he has just enough time to peer out the window at a changing world, and lead his forces to the next telecommunications battle. And then the next morning do it all over again.

CONNECT: Besides being a big baseball fan, I’ve heard you’re a pretty hot electric guitar player.

ALTON: (Laughter.) You did?

CONNECT: And that you jam with Lorin Krueger of Winland Electronics.

ALTON: Yeah, I do. I enjoy playing in a group that performs locally for fund-raising purposes — and for the fun of it. We play old rock, country, folk, but no polkas — an eclectic mix. I’ve played since I was 14, and was in and out of several bands through college to earn money.

CONNECT: What were the names of the bands?

ALTON: “Hobson’s Choice” was one. (Laughter.) “The Secants,” referring to a geometrical term, was another. Our bass player at the time thought he was really cool coming up with that name. Our current group is “Roses and Thorns.” We have two singers, Karen Wright and Ann Rosenquist Fee, from Minnesota State University, who are very good. Carl Rosendale plays bass, and Jerry Wilke, drums.

CONNECT: What brand of guitar do you own?

ALTON: I have two: a Les Paul Gibson electric, and an acoustic I really love, a Takamini. I play the acoustic more than the electric.

CONNECT: Bob, one interesting fact I found out about you: you testified at two Mankato School Board meetings a few years back in your role as an Educare Foundation board member. You asked the school board to expand the World Languages program into the district’s middle schools. Why was that so important to you?

ALTON: America is becoming more diverse, and so is Blue Earth County. I’ve read that 16-20 percent of the U.S. will soon be Spanish-speaking. Besides that, those of us in business also realize that we are in a global economy. The extent we all communicate better using each other’s languages will enhance business and personal relationships. And HickoryTech does business with overseas firms.

I’ve always admired the various education systems in Europe because children there learn two, three, even four languages. Communication skills are paramount to succeeding in any walk of life, whether in art, music or business.

HickoryTech doesn’t have a critical mass yet of Spanish-speaking customers to where we would need to offer ads and service information in Spanish. Before moving to Mankato, I worked at a California company whose workforce was 40 percent Latino. In that company’s New Mexico market, we hired Spanish-speaking office personnel to serve those customers better. I could see that happening here some day.

CONNECT: Aren’t you close to Dick Rush, former MSU President?

ALTON: Very. I was close to he and his wife, Jane, who worked here next door to me. When she died I felt the loss both personally and professionally. Jane and Dick were thought of here as friends. Jane was a public relations professional. I tell people that as odd as it sounds, when she left us the hallway here seemed a little darker. It never was quite the same after her death.

People loved her, and for good reason. She was one of those people you like to be around. Dick and I have remained close after Jane’s passing.

CONNECT: Now for some questions about your business. Larger telecommunications companies, namely Verizon and Quest, are focusing almost all their energy on urban areas, and have abandoned smaller, rural markets like yours. Why have they done that?

ALTON: They had every incentive in the world to back away from rural markets. It doesn’t make sense for them to expend a great deal of capital to replace an aging plant in a rural area when they need that capital to compete in urban areas — and urban is where the growth is. There isn’t much growth in rural areas.

CONNECT: And also, until the Telecommunications Act of 1996, there wasn’t any competition for them in rural areas. Now those larger companies have to face rural competitors like HickoryTech.

ALTON: Exactly. What really created the opportunity for us to expand into all these rural markets was the fact that these larger companies had allowed their service levels to deteriorate. If they hadn’t allowed that, and instead improved service levels, companies like ours would have had a tougher time cracking these markets.

They sacrificed their rural customers to better compete in urban areas. They frankly will admit that to you.

CONNECT: Your company had a name change more than a year ago. Most people noticed just the name change, but your company also went through a major restructuring at the same time. Has that restructuring worked?

ALTON: Thank you for asking that. In my view the reorganization has worked amazingly well. We ended up organizing the company functionally, instead of by line of business. The line of business approach worked throughout most of the company’s history until we started cross-selling our products into the same markets. Then the old approach became difficult to manage — not from just a brand recognition standpoint, but from how we deliver service.

We had to realign the company. So now instead of having lines of business — like the telephone company, the long distance company, the Internet company, the wireless company — we are now organized around functions such as network operations and support, strategic market planning, and information solutions. We’re one company now, not many, with functional divisions.

CONNECT: I’d imagine this should help your long-term cohesiveness. Before, in a way, there may have been some sectors eyeing others within the company as competitors.

ALTON: We don’t like to think that sort of internal competitiveness occurred, but it did. Perhaps it was because of basic human nature. By functionalizing the company, we broke down walls.

The changing of all brands to one HickoryTech brand was significant. We were selling so many different brands, and it was confusing to both customers and employees. There is no doubt that within the last year the name recognition of HickoryTech has grown exponentially in southern Minnesota.

CONNECT: A hot sector of your business has been your CLECs. For the layman, could you explain CLEC and ILEC?

ALTON: ILEC stands for “Incumbent Local Exchange Company.” Incumbent just refers to a telephone company that had a franchise right at one point to serve a particular community as its monopoly telephone service provider. For example, we are the ILEC in Mankato. (It used to be known as Mankato Citizens’ Telephone Company.)

What changed the landscape was the Telecommunications Act of 1996, which by law opened all local exchanges for competition. Local telephone companies had to make their market open to competitors, which became known as CLECs (Competitive Local Exchange Companies).

Some CLECs rent ILEC wire and cable to deliver service. In the markets we’ve chosen to enter as CLECs we have decided not to rent, but to build everything new. The costs set by regulators to rent ILEC wires and cables are high. Those high costs don’t allow for much profit. Instead we decided to “overbuild,” which means physically plowing up a community’s alleys and streets to bury our own wire and cable. And we install brand new state-of-the-art switching equipment.

Profit margins are higher in overbuild communities, and the quality of service is usually much better than that offered by the incumbent’s antiquated equipment.

CONNECT: A company press release of yours in April said you would be cutting back on CLEC aggressiveness, in essence, to protect your company’s short-term dividends and earnings. Like any CEO with a public company, you have to deal with the tension of wanting to be aggressive, and grab market share, and on the other hand feeling an obligation to shareholders desiring a decent dividend.

ALTON: I’m not sure that tension will ever be resolved with us. What you are really talking about is the split personality our company often has. Are we a dividend and yield company? Or are we a growth company? Growth companies don’t usually pay dividends. We are schizophrenic about that now. It has been tough to come to grips with it, especially on the board level.

CLECs are so capital and marketing intensive up front that profitability isn’t achieved until at least the third year. Once the initial overbuild costs are paid, though, the profit margin can be high. Wall Street still expects earnings growth, even from companies as small as ours.

CONNECT: There are people in southern Minnesota who live off your dividends. And they want them to continue.

ALTON: You’re right, they need them to live on. We’re trying to be sensitive to that. Our way of dealing with this split personality, Dan, is not by reducing the dividend, but by simply not allowing it to grow. We’ve frozen it, and have no intention of raising it.

The truth is companies that pay out 75-80 percent or more of their net income in dividends are really saying to their shareholders that they have no better place for the money. We have many places to put that money to work, where long-term yield has the potential to beat a short-term dividend. We’re trying to build value.

CONNECT: Wouldn’t it be nice to be a private company?

ALTON: At times we’ve thought about that. If you read your Wall Street Journal you know more public companies are going private, especially small- to micro-cap companies. They’re doing it because they’re tired of playing the Wall Street dance. You cannot satisfy short-term earnings expectations and at the same time build long-term growth. The two philosophies are at odds with each other.

CONNECT: Western Wireless of Seattle, Washington, has accumulated eight percent of your stock. You could be bought. Will there even be a HickoryTech in five years?

ALTON: To be honest, I’m not sure. I’m answering as honestly as I can. I’ve answered this question at annual shareholders meetings. Nothing I’m saying with you in regard to this hasn’t been dealt with in public.

We put in place a shareholder’s rights plan a few years ago. Some shareholders thought we did that as a “management protection” device. That can’t be any further from the truth. If there was even a hint of a hostile takeover, we wanted our board in the position of being able to negotiate the best possible outcome for shareholders. Over the last ten years, companies with shareholder’s rights plans have obtained a higher share price in a merger or acquisition. It’s that simple.

I like to think that my management team and board are driven by shareholder value. That’s why we have jobs, and our bosses, the shareholders, expect that out of us. If there were an opportunity to stay the course and grow value higher than any offer, then of course we would stay independent.

But we would not stay independent for the sake of it. If there comes an opportunity to merge or sell whereby the share price is higher than anything we could have reasonably expected to attain on our own, we, as fiduciary stewards, would have to consider it. So far no one has come along with such an offer.

CONNECT: Would the board take $25 a share? $30?

ALTON: That’s a good question.

CONNECT: $20?

ALTON: I don’t think $20. We have achieved over $23 on our own. I don’t know what the number would be, but it would also depend on other conditions. In addition to our shareholders, we also have to be sensitive to the interests of our employees and the community.

CONNECT: More than 50 percent of your revenue comes from your traditional landline telephone business. Is that a strength or a weakness?

ALTON: It’s a strength. We have a strong position in the markets we serve as an ILEC. Our margins in that business are strong. That gives us the latitude to expand and diversify into other areas.

Within the past year quite a few CLECs have gone belly-up, in most cases because they lacked a stable cash flow and good systems. They jumped into the CLEC business thinking they knew it, and yet couldn’t even render a bill.

CONNECT: Your Information Solutions sector, which has had the responsibility of developing enhanced “billing” software, has had problems. Are the problems getting resolved?

ALTON: This sector used to be called ComputoService, and has been around in Mankato since the 1970s. We realized three years ago that unless we upgraded its software, we weren’t going to have anything to sell outside customers.

The problems were born out of our own growth and diversification. In the last few years we have acquired a wireless business, CLECs, an Internet business, long distance, etc. All these new sectors are growing. The growth has taxed our system.

Our Information Solutions group has a twofold mission: first, we have to learn how to service ourselves to accommodate our own growth first. Any day now we will launch this new software with our CLEC business. Secondly, where feasible economically, we will sell these services to outside telecommunications companies.

We will serve as our own beta test before launching it publicly. We see a great opportunity for selling this product outside HickoryTech.

CONNECT: What is the significance of buying PCS licenses from McLeod? How much did you pay for them?

ALTON: $11 million.

CONNECT: Could you explain PCS to the layman?

ALTON: It’s a digital, wireless service that competes directly with cellular. The only difference is that each tower covers a smaller area of service, which means more towers need to be built.

My personal view is that the average customer can’t tell the difference between a properly run PCS service and cellular. Many of the wireless handsets sold in the near future will be able to switch back and forth between cellular and PCS signals. So you’re going to be driving up US 169, switching back and forth, and never know it.

We bought the Mankato license, which roughly cost half the $11 million, because when our customers leave Mankato and make a cellular call in North Mankato, they’re roaming on Western Wireless’s network, not ours. (Western Wireless of Seattle, Washington.) Our border ends at the river. Each time one of our customers does that we have to pay Western Wireless for the privilege. And it’s expensive.

By virtue of owning the PCS license, we can now cover a much broader territory, even going west out as far as Sleepy Eye. We can offer seamless service, and get out from the roaming expense. The roaming expense savings alone in a few years almost buys the license.

The Rochester market was the second half of the $11 million. Our cellular stops just on the east side of I-35, but with the new PCS license we can extend past Rochester.

Having this license is labor intensive, though. It takes extra selling, point of sale, and customer service. We currently have a retail presence on Madison Avenue and River Hills Mall, and in Albert Lea, Owatonna, Faribault, Northfield, and Waseca. Wireless has been a good business, but it’s also hotly competitive. There used to be two wireless providers in town, but now there are five or more. There’s a chance we could have up to eight.

CONNECT: And when there are many competitors, and all with comparable technology, doesn’t wireless become a commodity?

ALTON: Very much so if you can’t distinguish yourself in terms of quality service. Companies now are distinguishing themselves by offering a larger roaming-free area or free long distance.

CONNECT: Digital television? The telephone company is doing digital TV?

ALTON: It is both a technical and a marketing trial in St. Peter. I don’t have many qualms about our ability to compete with the cable TV company there. I am proud of our technical workforce. They are skilled, motivated, and good people. They’ve lived here their whole lives, and know the customers. In terms of providing good quality service, we can compete with anyone on that basis.

There are two issues to our being in digital TV. The first: Will the technology really deliver what it says it can deliver? We’re using brand new technology, delivering a video signal over twisted copper pair wires. Not many companies in this country have done that, let alone here in Minnesota.

The other issue is whether the public will be accepting of a telephone company delivering digital TV service. Will they buy voice, Internet access, and video from the same company? So far, in St. Peter the early returns are very good.

Just like in the CLEC business, with cable (digital) TV you have to pick your fights. The key to any entry into a market is not whether we can do it — of course we can do it, we’ve proven that — but learning through front-end market research whether we can succeed. We will not enter a market we cannot dominate — and dominate translates to a 50-60 percent market share.

We felt by offering quality video services we could be competitive in St. Peter. In Nicollet, with our CLEC, the competitive differentiation was toll-free voice calling to Mankato. (USWest wasn’t doing it.) Today we have a 95 percent share in Nicollet. In Owatonna, perhaps, the key might be good digital subscriber line (DSL) service. The only way to understand any market is to send in good marketing people to talk with everybody and anybody to gather information.

CONNECT: Will you ever run voice over HickoryTech Internet?

ALTON: Yes.

CONNECT: And won’t that hurt your long distance business?

ALTON: Your question is a bit like, Why be in wireless and wireline in the same market? GM puts Pontiac next to Buick dealers because they would rather have the customer go to them than somebody else. If we don’t offer voice, the customer will go somewhere else for it.

CONNECT: Change in telecommunications has been difficult for the average person to understand. A press release of yours earlier this year had this as a headline: “HickoryTech deploys Integral Access PurePacket platform in real-world test environment.”

ALTON: (Laughter.) We actually wrote that?

CONNECT: An outsider wrote that for you. Is there a concern that you could spend millions rolling out a new technology — one that could have many wonderful applications — but one that wouldn’t connect with potential customers because of its complexity?

ALTON: We had a service called “ISDN,” a high-speed data transmission protocol. That was a perfect example of a technology racing ten years ahead of the market. The market didn’t have a clue what it was. We invested capital into making that available, and it took us years to sell the service.

We’ve had similar challenges with DSL, which has had a surprisingly slow “take” rate in Mankato. The good news is DSL is beginning to pick up steam, with well over 1,000 customers now. Twenty months ago there were only about 200.

Telephony could become an engineering sandbox if we let it. Our technical experts love to play around, experiment, and derive new technology. But the market doesn’t always “get” new derivations. And you can’t always advertise your way into customer acceptance, either. The best way to penetrate any market is through word of mouth over time.

CONNECT: You’ve been a proponent of Technology Plus, the $9 million high-tech incubator.

ALTON: I think Mankato has a niche with technology. We have a lot of technical talent in this town. It’s at Winland Electronics, HickoryTech, Midwest Wireless, FirePond, Thin Film, and many other companies. We formed the Global Wireless Education Consortium with universities around the country. We have something going here. Even our neighbor to the east, Waseca, has several high-tech companies.

With Technology Plus, we now have a hub to encourage start-up businesses and even second-stage businesses. It has attracted new businesses. One business does Internet reservations for Northwest Airlines. And Dayport has been a success story.

I can’t imagine that a community wanting to grow wouldn’t love to have a facility like that.

Robert Dean Alton, Jr. Biography

Born: September 8, 1948.
Personal: Wife, Carol; Children are Jocelyn, Lindy, Nicky and Robby.
H.S.: New London High School (New London, IA) 1966.
College: Iowa State University, B.S., 1970; Lindenwood College (St. Charles, MO), M.B.A., Finance, 1979.
Community and Professional Involvement:
Dayport (Board of Directors), Southern Minnesota Advocates (Board of Directors), Valley Industrial Development Corporation (Board of Directors), Educare Foundation (former Co-Chair), Christ the King Church (former Chair of Worship Committee), Mankato YMCA (former Board of Directors).