Wednesday, August 3, 2011

Windstream Purchase of PAETEC Has Broader Lessons

Windstream Corp.'s acquisition of PAETEC Holding Corp. illustrates one key element of business strategy for most service providers of any size in the U.S. and other global markets. The $2.3 billion deal gives Windstream a bigger profile in business customer services, arguably a more-important revenue source for any fixed-line service provider, given the cable industry's growing success in the consumer services market.

The acquisition also illustrates the generally paltry returns available to most service providers in their legacy geographic footprints. Generally speaking, the largest tier-one telcos, mobile service providers, small rural telcos and competitive local exchange carriers have been able to get significant growth in subscribers and revenue over the last decade largely by growing outside their original service territories. Read more here.

The need to go "out of region" is not just a strategic imperative for tier-one global providers. It applies to small telcos, competitive local exchange carriers and mobile service providers as well.

Few remember it, but Rochester Telephone, an independent telco operating in Rochester, N.Y., once wanted to get into the competitive long distance business badly enough to trade away its local access monopoly, breaking itself up into a "wholesale" infrastructure company and a separate retail entity that bought network service from the wholesale company just like any other competitor in the market.

More recently, SingTel decided to give up its local monopoly in the same way Rochester Tel did, in exchange for freedom to deploy its capital in other international markets. But note the business driver: SingTel cannot achieve the growth it expects and wants if it stays a provider of services in Singapore. Perhaps 90 percent of current revenue already comes from "out of region" operations.

Windstream says the deal provides more opportunity in strategic growth areas for Windstream, including IP-based services, data centers, cloud computing and managed services. A stronger presence in the important business market is key. But the acquisition also gets Windstream into new geographic markets as well.

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