Sunday, August 9, 2015

Two Polar Opposite Views of Incumbent Market Power

There arguably are two polar opposite views about large incumbent service providers of all types. One view is that they are unrepentant monopolists retaining their market power.

The other view: maturation or decline of every key revenue segment, plus growing competition and new digital product substitutes, are hollowing out many, if not most of the leading contenders.

The proper approach to policy obviously hinges on which general view one holds. Some argue the major telco business model, for example, is under high stress.

The truth is probably someplace in between. The old model is slipping away. Large incumbents still have lots of market power, because they lead their markets. But challenges have emerged at every turn.

“The large incumbent telephone companies do not earn attractive returns in their wireline businesses,” said Craig Moffett Partner and Senior Analyst, MoffettNathanson. “For example, a decade after first undertaking their FiOS fiber-to-the-home buildout to eighteen million homes, Verizon has not yet come close to earning a return in excess of their cost of capital.”

In other words, Verizon FiOS has actually lost money.

AT&T also has earned poor returns on its fixed network.  AT&T return on invested capital has been declining for a decade and is, like Verizon’s, well below the cost of capital, Moffett said.

In 2014  aggregate fixed network telecommunications businesses earned a paltry 1.2 percent return, against a cost of capital of roughly five percent, Moffett argues.

“For the non-financial types in the room, that’s the equivalent of borrowing money at five-percent interest in order to earn interest of one percent,” said Moffett.

“That’s a good way to go bankrupt,” Moffett said.

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