Regulators Should Not, or Can Not, Ignore Long, Slow Decline of the Landline Business
Telecom regulators always face the challenge of balancing policies to promote rapid investment and adequate competition, no easy challenge, but also complicated by industry dynamics that are anything but promising, especially in the fixed network segment. Virtually all observers would say they are in favor of much more investment in broadband internet access facilities, for example.
Over the last decade or so, with the exception of Verizon, relatively less investment has been made by telcos to match cable TV internet access speeds, for several reasons. AT&T and Verizon logically have invested most of their network capital in the mobile side of their businesses, a logical move since mobile drives half to 80 percent of total revenue.
But there are other competing uses of capital, such as acquisitions to grow the revenue base. And make no mistake, acquisitions--rather than organic growth--account for most of the revenue growth achieved by AT&T (about 26 percent of revenue growth between 1996 and 2008), and a substantial percentage of Verizon revenue growth (about 46 percent) between 1996 and 2008, for example.
In other words, those firms have to balance capital for acquisitions, dividends and network investment. It is not easy.
As a result, U.S. telcos have vastly lagged U.S. cable operators in upgrading internet access speeds, leading to cable operator dominance of that key product segment.
It might be easy to criticize the firms for ignoring their own long-term interests. But such behavior is rational if managements believe the long term prospect is for slow, steady decline.
The other institutional factor is that fixed network telcos are viewed by investors as dividend payers, not “growth” vehicles, which means telcos must make dividend payments a priority, even if that capital might be deployed into faster internet access networks.
The situation, though difficult, is not necessarily that dire for the a few of the tier-one integrated providers who own both mobile and fixed assets. Verizon made a decision to upgrade much of its access network to fiber-to-home within the past decade, though apparently concluding it did not make business sense, since about 2010. AT&T has made more controlled investments, focusing on fiber-to-neighborhood for most of the past decade, though recently switching to a more-targeted gigabit upgrade plan based on fiber to home platforms.
What comes next will be telling. A range of firms, including Google and Facebook, AT&T and Verizon, now are investigating whether new platforms might provide a better business case, including fixed wireless.
The coming 5G upgrades of the mobility networks will include lots of small cell deployment in denser areas, supporting new opportunities for gigabit upgrades without the full cost of fiber to home. That might be a game-changing development for at least some telcos.
The larger point to be made is that the fixed network business is a very-tough proposition for any telco, but especially for smaller providers without mobile assets. With the exception of growth provided by acquisitions, organic growth in the fixed network segment will be difficult, at best.