Saturday, January 30, 2016

What Happens When Telcos Start Going Bankrupt?

One has to wonder what happens if many fixed network telcos essentially go out of business, even if that has not yet happened on a significant scale. That might have been unthinkable decades ago.

After all, one might have argued, people and businesses still will need to communicate, even if telcos go bankrupt. And, others might argue, assets do not evaporate, even in a bankruptcy.

So reformed providers would emerge from any bankruptcies of today’s telcos. In large part, that is what already happened with the former “long distance” giants, whose assets now are part of former Regional Bell Operating Companies.

It might be worth noting how wrong prognosticators can be, in that regard. At the time of the Bell system breakup, it was widely believed that the fast-growing, interesting parts of the former Bell system would reside in the separated long distance business, not the local communications business.

In other words, AT&T, freed to grow in the unregulated long distance business, would outshine the regulated “Bably Bell” local access companies (Bell Atlantic, NYNEX, Pacific Telesis, US West, BellSouth, Ameritech and Southwestern Bell).

Most will not recall such times. It was before the Internet, the personal computer, widespread and affordable mobile services.

Notably, the prognosticators were quite wrong. AT&T was absorbed by SBC, which earlier had gobbled up Ameritech, BellSouth and Pacific Telesis; before NYNEX, Bell Atlantic and GTE were merged to create Verizon; before US West was acquired by former rural telco CenturyLink.

MCI was acquired by Verizon. Bell Laboratories and Western Electric, which had been renamed Lucent, also was acquired by Alcatel, which in turn now is owned by Nokia.

Voice no longer drives revenue or business strategy for any of the surviving players. Apps are almost completely created by independent providers and accessed using the Internet.

Worse, the fate of many fixed network telcos is dire.

“Slow yet steady decline” is the fate that awaits CenturyLink, Frontier Communications and Windstream Services, according to ratings agency Moody’s.

“Constraints such as capital allocation practices that favor shareholder returns, lagging infrastructure relative to cable companies and high cost of capital will prevent wireline telecommunications companies (telcos) from taking the necessary steps to fuel growth, resulting in their slow yet steady decline,” says Moody's Investors Service.

Essentially, the telcos are caught in a death spiral.

As they are owned by dividend-seeking investors, the firms cannot shrink or cancel their dividends without causing massive investor flight, with few “growth” investors available to replace those fleeing equity owners, since virtually nobody believes those firms can become “growth” properties.

Their ultimate fate is the issue. Some would argue those firms have high cost structures only formal bankruptcy can cure. The firms could, after radical restructuring, reemerge with cost structures suited to the market opportunities available to them.

That is the optimistic forecast. The pessimistic forecast might be that, even after bankruptcy, the fundamental business model might be unattractive, as costs might still not be low enough, nor revenue opportunity high enough, to sustain long-term operations on a profitable basis.

At the same time, cable TV companies have emerged as key, and ultimately, perhaps, the dominant providers of communications services.

At the same time, other providers are emerging. Google, for example, might be preparing to add voice service to its Google Fiber and video service. That would make it a full triple play competitor to cable TV and telco providers.

AT&T and Verizon, meanwhile, have become mobile service providers with significant fixed network assets, and might not face collapse even if the fixed network business continues to shrink.

Moore’s Law “changes everything,” one might say. More accurately, Moore’s Law means we can create new products, applications and networks using resources that previously were not commercially sustainable, from devices to apps to Internet access to whole networks.

You might argue that is a very good thing, as we might very well need new devices, apps, access and networks as major portions of the legacy communications and application ecosystem become unsustainable.

In a worst case scenario, where major former telcos literally are unable to keep their assets in operation sustainably, the successor companies might already be coming into view. Cable TV companies would be the dominant providers, but major firms such as Google, and likely others, also would have stepped in to replace former fixed network telcos.

In other words, complete business collapse of some traditional fixed network telcos would not be a complete disaster for end users. Other providers would have emerged. And technology will enable many others to contemplate providing service..

The end of an age where communications were dominated by fixed telecom networks therefore would not be a crisis. Those functions are likely to have been replaced by newer generations of competitors.

A previously-unthinkable “soft landing” would then be possible, rather than a “hard landing” where alternative suppliers had not already established themselves in the market.

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