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“Reinvention” As Practiced by Tier One and Rural Telcos, Cable Companies

Sometimes the process of “reinvention” as practiced by telcos and cable companies is so gradual it is hard to see. But slow quantitative changes now are showing as qualitative changes as well.

The most-recent second quarter 2012 earnings report from Comcast shows that legacy video revenues, for example, have shrunk to about 52 percent of total Comcast “cable operations” revenue, while other services now contribute 48 percent, and are growing as a percentage of total revenue.

But that understates the degree of transformation. In fact, including the NBC Universal contributions, Comcast earns just 33 percent of total revenue from its legacy entertainment TV business. We still refer to Comcast as a “cable company,” though.

At Verizon, some 65 percent of second quarter 2012 revenue was generated by wireless services.

Some 35 percent of Verizon revenue was generated by fixed network services. But only 12 percent of fixed network revenue was supplied by consumer customers, for services of all types.

You might therefore argue that Verizon also has made a historic shift, to wireless and business revenues.

Beyond that, it is becoming difficult to determine what value is contributed by “voice” services. FiOS now 65 percent of consumer revenue, Verizon argues. But precisely what that means, in terms of “legacy voice” services, is tough to untangle.

Verizon says it has 4.47 million FiOS video subscribers, 5.14 million FiOS Internet subscribers and 2.65 million FiOS voice customers, for a total of 12.27 million FiOS “units” sold. You might note that FiOS voice constitutes 22 percent of total FiOS units sold.

Verizon also sells 3.6 million DSL connections and 8.8 million “primary residence switched access connections and about 11 million business voice lines. So Verizon has some 35.67 million units of services sold, both analog and digital, voice, video and data subscriptions.

So voice units of all types constitute 63 percent of fixed network units sold (though the revenue contribution and profit contribution are the issue).

Nor is it entirely clear what it means that Verizon has any given level of voice unit sales. Since May 2012, Verizon has required a bundled local voice service with all new subscriptions to the company’s DSL high speed Internet service, for example, including even changes to high speed plans.

If a subscriber calls Verizon to upgrade or downgrade the speed of the Internet connection on their current plan, a voice subscription now is required to buy Verizon DSL. As with the new Share Everything service plans, a voice subscription is becoming a “network access fee” of sorts.

Compared with AT&T, Verizon’s wireline operations arguably contribute very little to its operating income, as well as income before taxes, some would argue.

“On a national basis, wireline voice revenues are expected to continue their long-term decline, while the mobile market could grow to over $200 billion by 2015,” Verizon says.

The point is that both Comcast and Verizon have made huge strides in terms of remaking their former businesses.

There also are examples of former “rural” telcos repositioning them as business service providers. Windstream and Frontier Communications provide obvious examples. Both Windstream and Frontier now make a majority of their revenues from business services. That is a big change from their roots as rural telcos mostly selling services to consumer customers.

Windstream Corp. defines itself as “a leading provider of advanced network communications, including cloud computing and managed services, to businesses nationwide.

Frontier Communications says it is “a provider of  voice, broadband, satellite video, wireless Internet data access, data security solutions, bundled offerings, specialized bundles for small businesses and home offices, and advanced business communications for medium and large businesses in 27 states.”

What you might say about those statements is that they are as much “aspirational” as a description of where each firm gets most of its revenue right now.

At December 31, 2011, Frontier had 3,103,800 residential customers and 309,900 business customers.

Business revenue tells the story, though. For the six-month period ending Dec. 31, 2011, Frontier earned $692 million in business customer revenue, and $544 million in consumer revenue.

For Windstream, results were even more pronounced. Business revenue in the fourth quarter of 2011 were $888 million, while consumer revenues were $118 million.

That is not to say a “typical” independent or rural telco will have an opportunity to create that sort of revenue distribution. Both Frontier and Windstream benefit from a presence in some mid-sized markets as well as rural areas, so the opportunity to sell services to businesses is greater.

But results at both firms show a strategy that will work for the larger independents, namely an out-of-region emphasis on business customers and revenue, compared to in-region customers.

Warwick Valley Telephone Company, for example, calls itself a “cloud communications” company.  It might be more accurate to say “unified communications” revenues, but cloud or unified communications revenues were $3.3 million in the second quarter of 2012, an increase of 169 percent from $1.2 million in prior year period, against total revenues of $6.9 million, WVT says. In other words, “cloud computing” revenues now were about 47 percent of total revenues, in the second quarter.

The increase in revenues of over $1 million is primarily attributable to the consolidation of financial results for the acquisition of Alteva and organic unified communications services revenue growth, partially offset by a decline of nearly $1 million in “telephone segment” revenues, the company says.

That’s important because the results were achieved by a major acquisition. “As a percentage of consolidated revenue, the UC segment contributed 47 percent of revenues in the second quarter as compared with 21 percent in the same period of the prior year and 46 percent in the first quarter of 2012,” WVT says.

The “Telephone” segment contributed 53 percent of revenues in the second quarter of 2012 as compared with 79 percent in the second quarter of 2011 and 54 percent in the first quarter of 2012.

Not every service provider will have the resources to acquire or grow themselves into a new set of revenue sources. But it is possible.

By Gary Kim

Gary Kim is an active industry writer and analyst, editor of Mobile Marketing & Technology,  Content Marketing News and Carrier Evolution. He is a frequent contributor to IP Carrier and TMCnet, and a good friend of Razorsight. Keep up with all his industry insight — follow him on Twitter @garykim.

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