Monday, June 22, 2015

Verizon Might Have Zero Copper Network Revenue in a Decade

Once upon a time, most telcos had similar strategies.

Verizon might have operations spanning 150 countries, but its revenue is highly concentrated in the U.S. mobile business. By 2016, the mobile business is likely to account for 85 percent of Verizon earnings (EBITDA).

In 2014, mobile contributed 70 percent of revenue, so that expectation is not out of line. In the first quarter of 2015, mobility contributed $22.3 billion in revenue and $10 billion in earnings. The fixed segment generated $9.5 billion in revenue and $2.2 billion in earnings (EBITDA).

Most observers might say future growth almost certainly  has to come from mobile services, given Verizon’s present revenue profile and company strategy. The bigger issue is whether international expansion might one day be necessary.

Right now, that might be unappetizing, for a number of reasons, including the need to pay down debt incurred when Verizon Communications acquired the Vodafone stake in Verizon Wireless.

The other issue is the sheer importance of Verizon maintaining or even increasing its market share and profits in the U.S. mobile business (including moves into mobile entertainment video).

In that respect, Verizon’s strategy contrasts with AT&T and CenturyLink, the second and third largest legacy telecom providers. AT&T already has committed to an international growth strategy, while CenturyLink has a U.S. wireline focus.

One might argue there are no strategies without risk. Verizon’s principal risk is that it is focusing on the U.S. mobile market.

The extent to which that affects the performance of the fixed network operations is unclear. The domestic portion of fixed network revenues grew more than 10 percent, but global enterprise dropped six percent and global wholesale dipped nearly four percent.

That might not be out of line with many peers, which also are seeing declining revenues from legacy services.  

In the past, Verizon executives have attributed such declines to slower public segment spending and cost optimization in the private sector. But new services related to cloud computing and IP communications are growing.

Verizon’s strategy is a bit unusual in a broader market that is moving to reliance on a mix of fixed and mobile assets in the consumer segment. When only 15 percent of earnings are derived from all fixed network operations, a reasonable executive will look for ways to build on mobile, especially if the fixed network cost per passing and stranded asset problems continue to grow.

In its key U.S. business, Verizon’s revenue from fixed network operations is declining.

Increases or declines of any quantity at a 10-percent rate are serious matters. If anything grows at 10 percent annually, it doubles in 10 years. If something declines at a 10-percent annual rate, it disappears in 10 years.

It’s something to ponder seriously: Sowmyanarayan Sampath, Verizon Communications SVP of transformation says Verizon’s copper-based revenue is declining eight percent to 10 percent a year.

At that rate, the revenue stream disappears in a decade.

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