Telcos Losing Ability to Compete in Consumer Fixed Network Segment?

Though every market will be different, some important trends can be seen in firm strategies related to the business customer segment. In the U.S. market, an argument can be made that cable TV companies are, and will be, the leaders in consumer services, though such firms also will gain business segment revenues.

The largest U.S. firms--with the exception of AT&T--are moving towards greater reliance on business customer revenues, though all of the three largest firms have a major reliance on business accounts.

Potentially, the most reliant on business customers will be CenturyLink, formerly a rural telco whose revenues were driven by consumers.

If the CenturyLink acquisition of Level 3 Communications is approved by shareholders and regulators, its revenue will be 76 percent derived from business customers. Prior to the deal, CenturyLink already was earning 64 percent of total revenues from business customers.

Verizon earns about 66 percent of total revenue from business customers, while AT&T earns about half its revenue from business customers.

Other firms that formerly were rural telcos, with revenue driven primarily by consumer accounts, also now derive at least half of total revenue from business customers. Frontier Communications earns more than half its revenue from the business customer segment, while Windstream earns about 78 percent from business customers.

That “business segment” strategy now emerges as the key business model for virtually all of the largest U.S. fixed network providers. It also the strategy followed by metro fiber specialists and competitive local exchange carriers. Small independent suppliers of fixed network services are not going to be able to replicate that strategy, as there are too few business customers in most rural areas to underpin the approach.

Eventually, all the leaders of the U.S. market will be integrated carriers with both fixed and mobile assets, even if half the U.S. mobile leaders are “mobile only.” In the fixed network segment, though, cable is likely to emerge as the clear leader, as it will be tougher every year for a fixed telco to maintain a business model based on consumer services.

Consider CenturyLink, the third-largest U.S. telco, with 11.2 million total access lines at September 30, 2016. At September 30, 2016, CenturyLink had six million broadband subscribers and approximately 318,000 Prism TV subscribers, implying some 4.88 million voice lines and no mobile operations.

But most of the actual revenue is generated by business customer services (about 64 percent in 2016).

Also, CenturyLink revenue growth has been basically flat since 2012, which explains the importance of the Level 3 Communications acquisition, which will add about $8 billion or so of additional revenue to the $18 billion or so CenturyLink has been earning in recent years.

The problem is that revenue is expected to decline at CenturyLink, absent this or other acquisitions.

Taking an average of four research analyst forecasts, CenturyLink annual revenue will dip to about $17.4 billion from 2017 to 2020.

CenturyLink Revenue Forecast Without Level 3 Acquisition
	2017(E)		2018(E)		2019(E)		2020(E)
	(In $ millions)
Revenue	$	17,381	$	17,358	$	17,390	$	17,490
EBITDA	$	6,450	$	6,424	$	6,396	$	6,391
Capital Expenditures	$	2,965	$	2,900	$	2,874	$	2,838

For the medium term, telcos are going to continue to lead in business and mobile revenues, but will continue to lose leadership in all fixed network consumer services. That explains the extraordinary challenge telcos face in the consumer segment. It is difficult to maintain high levels of investment in a segment of the business that is steadily declining.