Summary
The big independent telcos, especially the Tier 2s, such as CenturyLink, Frontier Communications, and Windstream, are heading into a conundrum. They have to be aggressive in replacing revenue losses on the wireline side with new ventures. The Tier 3s appear to be doing reasonably well.
Analysis
In those areas in which the IOCs directly take on the cable companies without fiber, the RLECs have at least the potential to get beat up significantly. It is not unusual for these ILECs to only have half of the broadband business in a community. In some cases, the cable operator can get up to 70 or 80 percent of the market. The cable guys frequently clean up in both business and consumer VoIP. They have been offering a superior video service for as long as 25 years.
The independents can talk about positive free cash flow all they want and continue to mainly sit back and run the services. However, if they are losing market share on four fronts, the cash flow is not going to be sustainable. It is even more difficult as CenturyLink and the rest of the upper crust independents continue to position themselves as dividend versus growth stocks. How do they keep their shareholders happy and still invest in the network? These carriers do not have a wireless infrastructure to generate cash and justify a big outlay of capital.
The larger IOCs need to fundamentally change their businesses and become more creative or the cable companies will increasingly crush them. Instead of triple play, they need to focus strategically and financially on being a certain type of player – from being a broad telecom provider to fighting the battle on a single service – maybe web hosting. As we have written recently, perhaps it is getting known for providing small business services, such as business VoIP, which allows the IOCs to build in an area of current strength. Maybe, it is just focusing on consumer (over-the-top) video. Still, this last idea hardly seems attractive, as monetization of this service is still an open issue. In one case, 90% of the telco’s video revenue was going to programming. Head-end costs are not cheap, but are decreasing. Also, there are limited margins in reselling satellite services.
The telephone company, CornerStone, may have the right idea. While there is a big push there to buy up independents, including consumer lines, it lets the cable companies have the residential business. CornerStone’s focus is on promoting business SaaS and providing a network to support these hosted services with monthly recurring fees. In many ways, hosted PBX is a SaaS – getting services comparable to those received by large corporations. These types of offerings are completely unhinged to whatever access technology is being used. It can be run over DSL without having to worry about loop lengths.
The risk for the IOCs is getting lulled into just living in the past as the state of decline will be slow – as they continue to spin stories to Wall Street on capital requirements dropping on existing products. They need to start thinking ahead now because the stakes and the pain in transitioning will only get more intense in the future.
Samuel Greenholtz consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
