Telco Reinvention Trend Requires Enough Capital to Buy Way Into New Markets

Telco and cable revenue trends in the U.S. market continue to  illustrate a fundamental principle some of us believe is foundational for both telcos and cable companies working in developed markets.

And that fundamental reality is that any service provider in a developed market must plan for a business environment where perhaps half of all current revenue has to be replaced by new sources over about a 10-year period. The corollary is that that rate of adaptation might have to be conducted more than once.

That might sound like a radical assumption, but it is precisely what happened in the U.S. service provider market when long distance revenues, which had driven industry profit, began a long descent. In 1997, long distance still represented about half of all industry revenues. But a decade later, mobile revenue had taken the place once held by long distance, representing in 2007 nearly half of U.S. communications service provider revenues.

Keep in mind that this “rule” applies most directly to service providers in developed markets. In developing regions, where service uptake still is growing, those challenges will take longer to develop.

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

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.

That’s an example of the same process: the need for suppliers in competitive and mature markets to replace large amounts of revenue from lost legacy revenues.

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.

There is an important caveat: it is much easier for a large service provider to make these sorts of transitions, than for a small provider to make such a fundamental transition.

There are examples of former “rural” telcos repositioning them as business service providers. Windstream and Frontier Communications provide obvious examples.

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.

The point is that some service providers will be able to dramatically recast themselves by making strategic acquisitions.

Tier one service providers are moving away from primary reliance on voice services, towards wireless data, video and other services and products. Cable operators are shifting to business voice and data services, and away from entertainment video. And smaller rural telcos are becoming business services specialists.