CenturyLink's "Problem" is a Problem for Regulators as Well

CenturyLink’s proposed acquisition of Level 3 Communications illustrates as well as any recent development how much high-level strategy requires that tier-one service providers dramatically outgrow their legacy revenue streams and lines of business.

For an industry as highly regulated as local telecommunications is, that eventually will have--or should have--key regulatory consequences as well.

Consider that CenturyLink has fixed network operations across 33 U.S. states, a footprint that arguably is more extensive than the footprint of AT&T, which operates a fixed network across 18 states.

Founded in 1968 and headquartered in Monroe, Louisiana, CenturyLink has 11 million fixed network voice accounts, six million Internet access accounts and 285,000 linear TV accounts, in 37 states.

The problem is that its consumer business is bleeding away.

Some will argue, increasingly persuasively, that “CenturyLink's legacy landline phone business is beyond saving.” Keep in mind, voice accounts are nearly twice as numerous as Internet access lines. In principle, CenturyLink eventually could lose half its current access lines.

That would pose enormous, possibly fatal problems for the consumer portion of the fixed network business that already contributes most of the connections, but relatively little of the revenue.

Even as it invests in gigabit and faster speeds to serve consumers, CenturyLink is exposed to huge account losses that will strand most of the assets being deployed. In other words, of 100 percent of upgraded next-generation network facilities, perhaps 66 percent could eventually be stranded, meaning there is no revenue generated by the assets.

You might argue the problem is “copper access lines.” The real problem is “access lines,” namely the growing likelihood that too few customers will be served by the new networks.

The big regulatory problem then becomes universal service on a wide scale, not confined to rural areas. It might increasingly become impossible for CenturyLink to operate fixed access lines of any type for many consumers.

Nor can CenturyLink simply decide to stop serving consumers. Landline phone service remains a regulated utility--even if that whole industry is disappearing--and requires states to change laws before CenturyLink could discontinue voice services.

There is clear risk that CenturyLink will be forced to continue offering an obsolete service producing almost no revenue and stranding assets on a massive level.

LIke many smaller service providers, CenturyLink has made a pivot to becoming primarily a business services provider, though it is saddled with huge regulated service operations that are a huge drag on the business.

Prior to the acquisition of Level 3 Communications, CenturyLink earned 64 percent of its revenue from business customers, an astoundingly-high percentage for a firm that once was a rural service provider.

After the acquisition of Level 3 Communications (if approved), CenturyLink would generated 76 percent of its total revenue from business customers, certainly the highest percentage for any tier-one service provider in the U.S. market, and second only to AT&T in that regard.

AT&T, by way of comparison, generates about 17 percent of total revenue from business customers (enterprise, medium and small business), while Verizon earns about 13 percent of total revenue from business customers, according to CenturyLink.

The larger point is that many service providers--tier one and smaller service providers--have concluded that the way forward is as specialists serving the business customer. What is new, in this case, is the size of the required pivot by a tier-one service provider.

One might argue it makes little sense for CenturyLink to serve most consumer accounts at all, but it is a highly-regulated firm that has no choice to easily stop doing so. Like a crab molting its former, too-small shell, CenturyLink essentially is shedding its former identity and business model, under conditions where regulators might attempt to prevent that molting.

This is eventually going to have huge implications for regulators. What if the whole fixed networks business becomes unsustainable, across most of the country? CenturyLink might be the best example, but hardly the only example, of the problem. Old rules are not going to work.