Sunday, October 12, 2014

Verizon Gets 69% of Revenue from Mobile; So What About Fixed Network?

In the second quarter of 2014, Verizon generated $31.5 billion in sales. About 69 percent of that was earned by the mobile segment of the business. Fixed network operations now account for 31 percent of revenue.

Verizon had operating income profit margin was 32.5 percent in its mobile segment. In the fixed network segment,  Verizon profit margin on an operating basis was less than three percent, for an overall blended margin of about 14 percent.

Moreover, revenue growth now is driven by the mobile segment of the business, which grew 7.5 percent year over year, even if fixed network revenues grew four percent, year over year, while consumer revenues grew 5.3 percent.

That should raise some obvious--if difficult--questions.

One might argue that since Verizon’s overall results clearly are driven by the mobile segment, which is nearly 70 percent of the whole business, what happens in the fixed segment of the business is important, but not the driver of revenues and profit.

Another thought might occur: why shouldn’t Verizon exit the fixed segment and simply concentrate on the mobile segment?

Some might say that is not a realistic option, since Verizon likely could not find a buyer for all of its fixed network business, even if some parts conceivably could be sold.

The other constraint is that Verizon earns a disproportionate portion of is fixed network earnings from services provided over the fixed network to business customers.

Some $5.9 billion of $9.8 billion in fixed network revenues were earned by sales to business customers, while some $3.9 billion was earned by sales of consumer services.

So even if Verizon was able to sell its fixed network business, to exit the consumer fixed network business, doing so might endanger the nearly $6 billion Verizon earns from business customers.

So aside from the fact that Verizon in all likelihood might not be able to sell its fixed network business, even if it wanted to, doing so would forfeit nearly $6 billion of important business customer revenues as well.

At the same time, there arguably are important strategic advantages for Verizon as an owner of fixed assets. To some extent, Verizon benefits in the area of backhaul, where it can rely on its own network, rather than leasing such access.

Verizon also can offload some amount of mobile traffic to its own fixed network. To be sure, Verizon does not benefit as much as AT&T might, given the relatively smaller fixed network footprint Verizon enjoys.

Beyond that, if the fundamental product sold by many telcos is the quadruple play, then the fixed network is necessary because it suppliers two or more of the components of the bundle.

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