With Fixed Network Revenues Cut in Half, U.S. Service Provider Strategies are Diverging

In 2002, the U.S. telecommunications industry’s gross revenues were $385 billion (including cable and satellite TV), and its net revenues (after interconnection costs, program content, and handset subsidies) were $315 billion.

By 2013, wireline gross and net revenue both had fallen by more than 50 percent compared to 2002.

Disruption of that magnitude is bound to affect core business strategy in ways that likely will lead to firms taking disparate paths forward. Vodafone started out as a “mobile-only” company that now operates both fixed and mobile networks.

Verizon started out as a fixed line provider that by 2016 should generate 85 percent of Verizon earnings (EBITDA).

In 2014, mobile contributed 70 percent of Verizon 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).

AT&T had a similar profile as Verizon, originally, as both began life as “Regional Bell Operating Companies” that provided voice and other services on local networks, but no long distance services.

AT&T has greater exposure to fixed network revenue. AT&T earned 54 percent of total revenue from mobile services and got 60 percent of its 2013 earnings from mobile services.

Mobility represented 67 percent of earnings after subtracting required capex. The percentage of revenue earned from other sources has changed, however.

On an annualized basis, AT&T will earn about 46 percent of its revenue from business sources and about 54 percent from consumer services in 2015.

That is a big change from the prior year, when AT&T earned about 54 percent of revenue from its business solutions category.

The perhaps-shocking change is that AT&T, on an annualized basis, will earn just 22 percent of revenue from consumer mobile services, making AT&T almost a mirror image of Verizon, which earns about 85 percent of total revenue from mobile services.

Altogether, about 41 percent of AT&T’s total revenue is earned from mobility services (business and consumer). About 38 percent of business solutions revenue was generated by business customer mobile services.

In the third quarter of 2015, AT&T earned about 45 percent of total revenue from business solutions, 28 percent from entertainment and Internet services and 24 percent from consumer mobility.

The operating income story is more skewed, at least before the impact of DirecTV’s video business is fully reflected in full-year results.

Business solutions represented 66 percent of total operating income in the third quarter of 2015.  

Consumer mobility represented 38 percent of operating income. Entertainment and Internet Services had negative operating income, as did the International segment.

In terms of operating income, it all came from business solutions and consumer mobility. That will change in 2016. Stil, AT&T is likely to earn a disproportionate share of operating income from business services, compared to Verizon.

AT&T’s markedly higher profile in linear video should be reflected in 2016 results. Where Verizon has a bit more than five million linear video subscribers, AT&T now has more than 25 million.

Verizon’s strategy also 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.

The point is the differentiation of business strategy. Companies increasingly are taking different strategic approaches to growth.
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