If Low Cost Provider Wins, Cable TV Beats Telcos
In any competitive market, including consumer, small and medium business and parts of the enterprise communications markets, the low-cost provider tends to win.
Telcos are anything but the low cost providers.
Consider free cash flow margin of telcos and cable TV companies in the U.S. market, for example. Where Verizon fixed network margins are about eight percent, and AT&T margins about 12 percent, Level 3 Communications gets 16 percent, Cogent Communications 20 percent and Zayo about 22 percent cash flow margins.
Charter Communications has cash flow margins of about 13 percent, Cablevision Systems Corp. and Time Warner Cable get 18 percent, while Comcast earns 27 percent.
You might argue that Level 3, Cogent and Zayo have an advantage, and they do. They can pick and choose their markets and serve enterprises and other carriers, rather than consumers. That tends to contain cost and boost gross revenue per account.
It also seems to lead to higher cash flow margins, though not as high as the cable TV providers are able to produce.
The issue is how market dynamics change over time. A safe prediction is that cable TV operators, now turning their attention to the enterprise customer segment, will gain share, likely at the expense of telcos.
That should, all other things being equal, lead to even more pressure on AT&T and Verizon fixed network profit margins.