Scale Does Matter

The Windstream acquisition of Broadview Networks illustrates a few important points about the fixed networks business in the U.S. market. Scale does matter. The largest tier-one providers have strategic options not available to service providers without scale. Few U.S. telcos could become important players in the content networks business, as Comcast and AT&T have done.

One tier down, some former independent telcos mostly operating in rural markets amassed enough scale to reposition themselves as business customer specialists. The smallest operators have very few good choices at all.

Windstream, for example, has shifted its revenue in the direction of business customers, especially small and mid-sized firms, and the latest deal only reinforces that strategy. Recall that Windstream, like Frontier and CenturyLink, once were known as “rural telcos” serving not only small markets but also mostly consumer accounts.

These days, CenturyLink has been transformed, earning more than 88 percent of revenue from business customers. Frontier had been earning nearly half its revenue from business customers until its acquisition of former Verizon accounts, which has tipped the company back into being a firm driven by consumer accounts.

That is not necessarily to say consumer revenue is unimportant. Consumer revenue still drives mobile operator revenue. Video entertainment--mostly a consumer service--now anchors AT&T’s fixed network revenue.

In the fixed networks business, it might be argued that, for some, strategy is to somehow reduce consumer segment exposure, since growth is gone. If that is the case, some might argue Frontier made a strategic mistake in making a bigger push in the consumer segment.

On the other hand, AT&T has gotten bigger in consumer media services, but not by using the fixed network, at least as a transitional step. Firm strategy, in other words, suggests tier one providers have a range of options not available to smaller providers without scale.

As CenturyLink and Windstream have tended to show, a shift towards business revenues is possible, for the largest rural telcos. That likely is not conceivable for most small rural telcos or cable operators, though.

In the competitive local exchange carrier segment, once dominated by many independent firms, cable TV firms have emerged as the leaders, while independents gradually are being absorbed. That is not unusual, as niches often are cultivated by specialist firms until the larger providers conclude they need more exposure in the niches and acquire the smaller firms.

One might also conclude that Broadview had reached a point where growth in its existing markets was exhausted, with revenues flat over the last three years.

That might lead one to conclude that, in the fixed networks business, for at least the larger remaining providers, revenues will shift to the business segment, after scale is achieved and accretive acquisitions are made.

The biggest single lesson is that scale really does matter. With scale, many growth paths exist (mobile services, media content, video services, business services, international expansion). Without scale, options are limited, and more limited the smaller the size of any firm’s operations.