Windstream Acquisition of EarthLink Fits

Windstream’s proposed acquisition of EarthLink is supposed to unlock about $125 million in annual synergies, including an additional $990 million of revenue. The deal also illustrates the importance of enterprise and mid-market customers in the core telecom market for service providers unable to grasp other opportunities.
Smaller service providers often do not have the options tier-one providers have available to them to diversify into new lines of business as older revenue sources decay.

CenturyLink, for example, does not own mobile assets. Neither do Windstream, Frontier Communications. None of those firms have the scale to move into content creation or mobile advertising, Internet of Things apps and connected cars.  

Still, there are some options. Not all segments of the core telecom market have the same revenue per account or margin per account profiles. Rural accounts generally come with lower average revenue per account than urban accounts; consumer accounts produce less revenue than business accounts.

So CenturyLink and Windstream and 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.

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 CenturyLink purchase of Level 3 Communications 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.

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