How Can Cable and Telcos Replace 1/2 of Current Revenues in 10 Years?

One fundamental assumption I make about cable and telco service provider revenues in developed markets is that such firms must plan on replacing about half their current revenues over the next decade or so. The reason is simply historical observatiion.

In developed markets, that already has happened at least once in the telco business as well as the cable TV business. And it seems likely a second wave of revenue source replacement is underway.

That isn’t to say that both cable and telco service providers in developed markets will have to replace about half their current revenues every 10 or so years, “forever.” I just can’t see that far. But it might be reasonable to assume both telcos and cable will have to do so at least once over the next decade.

In 1977, U.S. telcos earned about half their revenue from long distance services. But as long distance revenues shriveled, mobile services arose to take the place of long distance revenue that was lost.

The most-recent quarterly earnings report from Comcast shows the same sort of trend in the U.S. cable industry, where Comcast video revenues have shrunk to about 52 percent of total Comcast revenue, while other access network services now contribute 48 percent, and are growing.

At some point, Comcast will earn less than half its revenue from its legacy video entertainment business. And that is to focus only on Comcast’s “local access” business.

In fact, including the NBC Universal contributions, it already is true that Comcast earns less than half its total revenue from cable TV distribution. In fact, cable TV video distribution operations now account for only 33 percent of total Comcast revenue.

Telcos already have been through one such transformation, as overall revenue now has shifted from “long distance” to wireless, at least for the tier one U.S. providers. The next set of transitions will see the revenue contributions from mobile voice and text messaging dwindle in favor of new sources.

One might also note that, of Comcast’s total access operations revenue, “dumb pipe” high speed Internet access now accounts for 24 percent of total revenue.

Assume for the sake of argument that half of the business revenues also are derived from dumb pipe high speed access. That would imply a total of about 27 percent of Comcast revenue earned from dumb pipe services.

That also illustrates another facet of cable operator strategy: dumb pipe services are a crucial foundation for 48 percent of Comcast’s total revenues.
Comcast’s second quarter 2012 financial results show revenue growth in the video segment, but also lost customer share. Though revenue was up 2.8 percent, Comcast lost 176,000 video accounts.

Overall revenue of $9.9 billion included growth of total revenue per video customer of eight percent, to $149 a month. But most of that increase was from services provided by voice, broadband access and business services.

Since Comcast lost 176,000 video units, the overall growth of revenue generating units of 138,000 came from broadband and voice additions.

To be sure, video revenue remains crucial, at $5.1 billion in quartterly revenue. But high-speed broadband access now contributes $2.4 billion in quarterly revenue, and revenue from that segment grew 8.9 percent.

Comcast added 156,000 net high-speed access  customers in the quarter, for penetration of 36 percent. Consider what that statistic means, though. In the past, a telco or cable services provider would build a network that would have, as customers, perhaps 75 percent to 98 percent of all households passed by the network.

These days, no service provider gets more than a fraction of that, from any single service. That is why the triple play has become so important. The only way to earn enough revenue from a much smaller base of customers is to sell each remaining customer a wider range of services.

At the moment, it also is correct to note that, although revenue from voice and business services is growing, broadband remains the driver for most of Comcast’s revenue. Together, high speed access and video account for 76 percent of Comcast’s revenue in the quarter.

Voice revenue contributed $889 million in revenue, and Comcast added a net 158,000 accounts, to reach 18 percent penetration.

Business revenue increased 34.2 percent to $582 million, while advertising generated $552 million, Comcast reported.

But you might say the specific revenue components are fairly close to “noise,” in the broader strategic picture. The big challenge is the need to replace half of current revenues in a decade or so.

As Comcast already has shown, the way forward likely depends on “getting into new lines of business” might be the only viable strategy.