Are rural and independent telcos exempt from the “laws of economics?” If you think they are exempt, then consolidation, mergers and even bankruptcies will not happen in the U.S. independent telco business.
If, on the other hand, you believe economics and markets do matter, then it is inevitable that the structure of the U.S. rural and independent telecom business must eventually change. Some, including CHR Solutions SVP Kent Larsen, think that consolidation process will begin by 2014 or 2015.
Here’s the argument, in a nutshell. For starters, “wireless now is the preferred consumer choice” for voice and messaging, and might begin to be a more-logical choice even for broadband access. If nothing else were happening, that would put fixed network service providers at a disadvantage.
One immediate consequence is that there is less demand for fixed network voice lines and usage. The corollary is that it is hard to “grow revenues.” Simply, the historic revenue sources are dwindling and the new services (video entertainment and high-speed access) arguably are modestly profitable.
So cash flow is diminishing. That doesn’t mean many rural telcos do not have cash available. They do, says Larsen. But they can’t find suitable places to invest that cash, in the business.
source: CHR
Some will argue they should invest in upgraded networks. But the payback from such initiatives is questionable. The basic problem is that it is hard to make the case that network upgrades generate enough incremental revenue to pay for the investments.
If you wonder why AT&T and Verizon Wireless have concluded that Long Term Evolution makes sense everywhere they cannot afford to invest in fiber to the home, that’s your answer. There simply are places where fiber to the home provides a negative rate of return.
Under the best of circumstances, most rural or independent fixed network service providers would not be able to survive without government subsidies of one sort or another.
But circumstances are far from optimal.
Demography is in many ways destiny. And it simply is a fact that rural areas are losing population, says Larsen. That means fewer future customers. The customers that do remain are older than the U.S. average. That means, sooner or later, those people stop being customers.
And communications remains a highly capital intensive business. That means scale matters, since the lowest-cost provider in the market tends to win, in the end, Larsen notes.
It isn’t that smaller telcos are inefficient. In fact, they probably operate about as efficiently as they can, in terms of operating cost. But that’s part of the problem. “A 3,000-customer company can’t take out much cost,” Larsen adds.
But that is why mergers will have to happen. Unless a firm wants to go bankrupt, sooner or later, firms must combine, which will produce the operating cost advantages combinations of similar firms always provide. Overhead can be cut.
And it even is possible to predict where such mergers will happen: between companies that are in close proximity. The reason also is driven by economics: combining nearby firms will allow elimination of redundant resources. Acquisitions of far-away firms do not provide significant similar advantages.
Historically, a few firms in the independent telco industry have been acquirers. Windstream and Frontier Communications, or Fairpoint, come to mind. But those firms now are concentrating on rationalizing what they already have, so are essentially out of the market for further significant acquisitions.
That leaves only “merger of equals” opportunities on a smaller and local scale.
Nor is consolidation an issue only for rural telcos. Most independent competitive local exchange carriers and wireless ISPs sooner or later will face the same fundamental issues. It’s just the economics of a mature scale business at a time when revenue and cost pressures are rising.
Big or small, consolidation always happens in the communications business, sooner or later.
If, on the other hand, you believe economics and markets do matter, then it is inevitable that the structure of the U.S. rural and independent telecom business must eventually change. Some, including CHR Solutions SVP Kent Larsen, think that consolidation process will begin by 2014 or 2015.
Here’s the argument, in a nutshell. For starters, “wireless now is the preferred consumer choice” for voice and messaging, and might begin to be a more-logical choice even for broadband access. If nothing else were happening, that would put fixed network service providers at a disadvantage.
One immediate consequence is that there is less demand for fixed network voice lines and usage. The corollary is that it is hard to “grow revenues.” Simply, the historic revenue sources are dwindling and the new services (video entertainment and high-speed access) arguably are modestly profitable.
So cash flow is diminishing. That doesn’t mean many rural telcos do not have cash available. They do, says Larsen. But they can’t find suitable places to invest that cash, in the business.
source: CHR
Some will argue they should invest in upgraded networks. But the payback from such initiatives is questionable. The basic problem is that it is hard to make the case that network upgrades generate enough incremental revenue to pay for the investments.
If you wonder why AT&T and Verizon Wireless have concluded that Long Term Evolution makes sense everywhere they cannot afford to invest in fiber to the home, that’s your answer. There simply are places where fiber to the home provides a negative rate of return.
Under the best of circumstances, most rural or independent fixed network service providers would not be able to survive without government subsidies of one sort or another.
But circumstances are far from optimal.
Demography is in many ways destiny. And it simply is a fact that rural areas are losing population, says Larsen. That means fewer future customers. The customers that do remain are older than the U.S. average. That means, sooner or later, those people stop being customers.
And communications remains a highly capital intensive business. That means scale matters, since the lowest-cost provider in the market tends to win, in the end, Larsen notes.
It isn’t that smaller telcos are inefficient. In fact, they probably operate about as efficiently as they can, in terms of operating cost. But that’s part of the problem. “A 3,000-customer company can’t take out much cost,” Larsen adds.
But that is why mergers will have to happen. Unless a firm wants to go bankrupt, sooner or later, firms must combine, which will produce the operating cost advantages combinations of similar firms always provide. Overhead can be cut.
And it even is possible to predict where such mergers will happen: between companies that are in close proximity. The reason also is driven by economics: combining nearby firms will allow elimination of redundant resources. Acquisitions of far-away firms do not provide significant similar advantages.
Historically, a few firms in the independent telco industry have been acquirers. Windstream and Frontier Communications, or Fairpoint, come to mind. But those firms now are concentrating on rationalizing what they already have, so are essentially out of the market for further significant acquisitions.
That leaves only “merger of equals” opportunities on a smaller and local scale.
Nor is consolidation an issue only for rural telcos. Most independent competitive local exchange carriers and wireless ISPs sooner or later will face the same fundamental issues. It’s just the economics of a mature scale business at a time when revenue and cost pressures are rising.
Big or small, consolidation always happens in the communications business, sooner or later.
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