Alteva, Frontier, Windstream Show Transformation Success, and Limits of the Strategy

Alteva is not alone among rural telcos by embracing a growth strategy built on business customers, rather than consumers. Windstream and Frontier also have chosen to do so. And you might well be surprised at the degree of success each of those firms has achieved, at least on the revenue sources front.

“UC revenues increased 21 percent over the last 12 months and now contributes 53 percent of consolidated revenues,”, said David Cuthbert, Alteva CEO. “Users or seats on Alteva's hosted platform at the end of the second quarter increased by over 15 percent from the installed base at the end of the first quarter.”

In other words, revenue growth now is driven by the hosted voice communications business, not the traditional telephone business.

Consolidated revenue was $7.4 million for the second quarter of 2013, an increase of over eight percent  from $6.9 million in the same period of the prior year. UC revenues, net of eliminations, were $3.9 million in the second quarter of 2013. In other words, the new revenue sources provide 53 percent of total revenues.

Telephone revenues, net of eliminations, were $3.5 million in the second quarter of 2013, down from $3.6 million for the same period of the prior year and down from $3.8 million in the first quarter of this year.

Alteva, a provider of hosted or cloud-based unified communications or hosted PBX service (depending on your preferred terminology) in 2011 was bought by Warwick Valley Telephone Co. for $17 million.

Gross margin also has changed because of the weight of UC application revenue. In the first six months of 2013, Alteva says it added over 30 percent of the installed UC base of users that had been accumulated for the past eight years. As a result, the UCaaS (unified communications as a service) recurring revenue from seats in service has driven consolidated gross margin to 57 percent of revenues, said Cuthbert.

Warwick Valley, based in Warwick, N.Y., provides telecommunications services in southern Orange County, N.Y. and part of central New York and northwestern New Jersey, as well as a competitive local exchange carrier business, USA Datanet.

There are a couple of lessons here. Sometimes a business is in secular decline because demand for its product is declining, much as any product you might think of also has a product life cycle.

That will have uncomfortable and nevertheless real implications for rural telco business strategy. There simply are times when a business is destined to decline, if it sticks to its current product line.

Sometimes that business is destined to decline, if more slowly, even when it adds major new product lines. Think of the transition from selling voice only, to selling triple-play packages.

And one traditional problem for rural telcos is that there simply aren’t that many potential customers in a service territory, even if a provider gets almost all the potential customers as actual customers.

Warwick essentially made a choice to harvest its original business--being a rural telco--and recreate itself--through acquisition--as a hosted communications provider.

One might be tempted to suggest that this is a growth strategy for all or most or many other rural telcos. And there lies the other lesson. What works for a few firms will not work for most firms, because the new markets are not big enough to support hundreds to thousands of suppliers on a sustainable basis.

So one other lesson is that transformative measures must be taken early, before the opportunity is foreclosed or made hugely more risky because one is entering a crowded or saturated market.

In other words, what a few might succeed in doing to transform their businesses cannot work for all members of the same class.

Still, the uncomfortable reality is that, for nearly all rural telcos, sooner or later, a business exit is necessary, either by sale or transformation. Sale will be the most common outcome.