How a Business Loses 90% of its Value in 5 Years: Could it Happen to Telcos or Cable?

"Avoid zero" is a paramount bit of advice I recall hearing often at a streaming media start-up. That can be difficult.

After changing hands three times in six troubled years, the Philadelphia Inquirer was was sold for a tenth of the half-billion dollar price they fetched as recently as 2006, according to consultant Allen Mutter.

A decade or so ago, the Inky and the Philadelphia Daily News would have been worth the batter part of a billion dollars. The assets have sold for $55 million.

The broader implications, for any business facing disintermediation from Internet and Web alternatives, would seem to be clear enough. If a business, or an industry, faces sure decline of its primary revenue source, that business or industry has to find a replacement.

You might argue the telecom industry is in that situation. The difference is that the telecom industry already, at least once, has shown an ability to replace a key source of revenue and profits.

Globally, earnings growth at the largest public telecom companies over the last three years trailed revenue growth by an average of 50 percent over the last year, according to AlixPartners. This is especially the case in North America, where earnings before interest, taxes, depreciation and amortization trails revenue growth by a factor of ten, AlixPartners argues.

Overhead costs (sales, general and administrative) also are outstripping both earnings and revenue increases. And though carriers have pared capital investment where they can, postpoining projects that will need to be undertaken at some point, such restraint never can last indefinitely. The common pattern is three lean years followed by three to four where spending ramps up again, one might note.

Those findings are consistent with virtually all other studies of global telecom provider financial performance, and simply point out the structural changes occurring in the telecom business. Basically, older legacy products that underpin the bulk of total revenue are in a declining phase.

Until quite recently, robust growth of mobile services has compensated for the weaker fixed-line performance. But the wireless revenue growth engine now is peaking as well, at least in developed markets.

That means the largest global operators are entering a period of heightened danger and opportunity. The way some of us might describe the challenge is that carriers essentially must replace "half of all existing revenue within about 10 years."

And there are good reasons for making those sorts of predictions: it has happened at least twice in the past couple of decades. Most cannot now remember a time when "long distance" represented nearly half of all revenue for a large U.S. telco. But that once was the case.

And where local telcos once had nearly 100 percent of the market for fixed line voice, the only question now is whether the large providers will stabilize somewhere around 50 percent of the total market, or drop lower.

To be sure, mobile service revenue has been the run-away killer revenue source for most tier-one providers.

Broadband has helped a lot, and video helps a little. But mobile and broadband are mature, and video, though it will help, is a relatively lower-penetration, lower-margin service for most telcos.


Though it is likely mobile broadband will help preserve roughly the existing revenue contribution from mobile services, it is starting to appear as though even mobile broadband will fall short of fully replacing declining mobile voice revenues. So far, there is no clear industry consensus on what the new revenue "killer app" might be.

That suggests a period of continued experimentation with multiple new potential revenue sources, until something clearly emerges.

Of course, carriers can work at cutting  operating costs. But it is the "revenue enhancement" part of the strategy that is the toughest, as carriers have been cutting costs for nearly a decade already. 


And part of the problem is that it takes a fairly good-sized new revenue stream to make a difference for a tier-one telco or cable company. It isn't an easy thing to identify any new market, and execute well enough, to capture $1 billion in new revenue over a five-year period, for example.