Tuesday, May 31, 2016

Verizon Will Not Wring Blood from a Stone

You cannot, as the aphorism suggests, wring blood from a stone. Neither, history suggests, can an industry in fundamental decline afford to boost its own costs of operation. To have any hope of maintaining cash flow as long as possible while the business declines, firms have to control costs.

And, as always within any ecosystem, one segment’s “costs” are another segment’s “revenue.” That is rarely pleasant, for workers, suppliers, collaborators, investors or managers, in a declining business or industry.

The new Verizon contract that ended a strike might provide an example. The new contract adds 1,400 jobs and provides a 11-percent wage increase. Union officials argue that Verizon has been understaffing fixed network workforces, a charge that resonates.

Verizon has been moving spending towards mobile, and away from fixed network operations, to match its revenue generation.

And wages for U.S. workers have been depressed for quite some time. Workers think they deserve more of the surplus. Verizon management knows it has to "harvest" the business. Both have a point.

Only in context do those developments make sense.

If you wanted a one-sentence description of how the U.S. fixed network business has been transformed over the last 15 years, here it is: “Wireline now accounts for less than 30 percent of Verizon’s total operating revenues, down from 60 percent in 2000, and less than seven percent of our operating income,” noted Verizon Communications CEO Lowell McAdam.

In other words, from 2000 to 2014, revenue from fixed networks was cut in half, while profit dropped more than that. At a very high level, that means any business in a similar situation would have to chop at least half its costs. And, unfortunately, enterprise cost includes employee headcount,  wages and benefits.

In the first quarter of 2016, Verizon fixed network revenue was down, while earnings were flat. To be sure, weakness in wholesale and global enterprise were bigger problems than the mass market segment, lead by FiOS revenue.

The point is simply that fixed network operations are generating a small, and likely ever-smaller, portion of Verizon revenue and profits. Under such conditions, harvesting is a rational strategy.

There is nothing nefarious about this. It is simply what a business must do when it is in decline.

In that light, a 10 percent or 11 percent hike in wages and benefits, plus the addition of more employees, will create greater pressure in the fixed networks business.

Indeed, some might speculate that selling or spinning off most of the fixed network business might make sense, if willing and able buyers can be found, and if regulators allow such dispositions.

Verizon would be better off as a smaller, mobile-focused entity, the logic suggests.

Some entities can operate FiOS or fixed networks more efficiently than Verizon can. Some entities might have different business models as well, allowing them to wring more value out of assets such as Verizon's, if they are free to tweak the cost model.

Unfortunately, employee prospects in a declining industry are a zero sum game, at best. Most often, negative growth is the requirement. If one accepts that Verizon's fixed network business is in decline, then more employees and higher wage bills are not sustainable.

It will not be pleasant. It never is.

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