Saturday, September 17, 2016

CenturyLink Faces a Key Strategic Problem

In some ways, it should come as no surprise that CenturyLink plans to lay off seven percent to eight percent of its fixed network workforce by the end of 2016. Revenue is falling and new revenue sources are not big enough, nor feature high enough profit margins, to offset the legacy losses.

It is not the only firm to face those problems. Virtually all U.S. fixed network operations face the same fundamental problems.

CenturyLink revenue fell 0.7 percent in 2015 to $17.9 billion. Analysts project revenue will decline two percent in 2016, according to Bloomberg. So revenue is shrinking.

“We all understand the pressure caused by the decline in our legacy revenues; it creates a $600 million negative impact on our business each year,” said Glen Post, CenturyLink CEO.

“While we continue to see positive growth in our strategic products, the profit margins of these strategic products and services are considerably lower than those associated with the legacy revenue we are losing,” Post added.

CenturyLink faces some of the same issues Frontier Communications an Windstream face. All are former rural fixed network telcos that grew and repositioned, in major ways, as business specialists.

But all three firms are fixed network only operators, in a market where mobile drives revenue growth in the broader market. None of the three firms own mobile revenue streams.

AT&T has become one of the biggest linear video providers in the U.S. market by virtue of its acquisition of DirecTV, and many believe the company will deemphasize fixed network linear video services in favor of satellite delivery.

So the big challenges include how to restructure their businesses for potentially-smaller gross revenues and lower profit margins in the mass market portions of their businesses.

Stranded asset issues are going to grow, as well, as fewer customers deliver revenue to support fixed costs.

So it is not a surprise that CenturyLink is trying to reduce its operating costs. It has to do so.

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