Is CenturyLink Acquisition of Level 3 a Mistake, or Sound Strategy?
There is no shortage of critics of AT&T’s bid to buy Time Warner, no shortage of those who also think CenturyLink’s effort to buy Level 3 Communications is a mistake. Many in the policy community likewise considered the Comcast acquisition of Time Warner, the AT&T acquisition of T-Mobile US and the merger of Sprint with T-Mobile US profound mistakes.
One might even find a few who think, well after the Comcast acquisition of NBCUniversal, that deal was a mistake.
Perhaps even some who doubt Windstream’s acquisition of EarthLink will make much sense. Windstream reportedly is in talks to buy EarthLInk. Windstream, based in Little Rock, Arkansas, had a market capitalization of about $653 million, while Atlanta-based EarthLink was valued at about $572 million.
To be sure, there are antitrust concerns at the heart of many of the proposed acquisitions. But even when antitrust is not a key issue, many believe some of the proposed deals are unwise.
Lack of synergy, lack of value creation or execution risk are common complaints. CenturyLink plus Level 3 Communications only makes a bigger company losing money, some argue. AT&T does not need to own Time Warner to reap the benefits of content acquisition, others argue.
Execution risk is an issue; always is. But an argument can be made that accepting even moderately-high levels of risk is a necessity for all tier-one service providers, for structural reasons.
In monopoly days, service providers owned 100 percent of the applications they sold. In the internet era, service providers own some of the apps customers use. Strategy in the internet era is to capture at least some of the value of the applications business, as total ecosystem revenue is moving to apps, and away from access.
And that is the key to understanding some of the mega-mergers. Smaller service providers often do not have the options tier-one providers have available to them. CenturyLink, for example, does not own mobile assets. Neither does Windstream.
Also, both CenturyLink and Windstream, plus Frontier Communications have followed similar strategies. All originally were rural service providers and all three have pushed to become providers of services sold to business customers. None arguably have the scale to become major players in digital advertising, mobile advertising or mobile content.
With that option off the table, the former rural carriers have taken a path that is open to them, namely shifting the center of gravity of their operations from lower-revenue-per-account consumers to more-lucrative business customers.
If the transaction clears, CenturyLink will earn 88 percent of revenues from business customer services.
Since about 2010, both Windstream and Frontier have earned most of their money in the business segment, despite the continuing preponderance of consumer accounts.
In its second quarter of 2015, Windstream had revenues of $1.4 billion. Consumer revenues represented just $314 million--about 22 percent--of total revenues.
Frontier Communications total revenue of about $1.4 billion as well, with consumer revenue of about Total residential revenue was stable at $615 million for the second quarter of 2015, while total business revenue was $621 million. So a bit more than half of revenue was generated by business customers.
You might argue that moving into brand new lines of business is better, if it can be done. But where it cannot be done, then shifting operations to higher-revenue customers makes sense, where it can be done.
The telecommunications business is harder than it used to be, but not only because competition now is the rule. The emergence of the Internet means the access and transport functions are only a part of a bigger ecosystem.
As consultants at PwC point out, telcos and access providers operate in the “network” part of the full value chain. But most of the value will come elsewhere, from services and apps able to provide the intelligence and control for processes that modify real-world activities.