Wednesday, July 11, 2018

Can Most Telcos Replace 1/2 of Revenue in 10 Years?

AT&T first quarter revenue trends over the past three years have been worrisome. And that is why moves such as the Time Warner acquisition, and potentially the AppNexus buy, are so important.  

In the first quarter, over the last three years, revenue has fallen. And though free cash flow held up in 2016 and 2017, it dipped in the first quarter of 2018.

AT&T is not different from most other service providers in developed markets, in the sense that every legacy revenue stream is shrinking. With markets saturated (fixed and mobile services and customer segments), it is somewhat obvious that revenue growth has to be sought elsewhere.

So though debt levels are a clear issue, most tier-one service providers who hope to prosper over the next decade or two virtually must spend significant resources in the effort to create brand new revenue drivers, with scale.

Time Warner helps AT&T, in the near term, much as NBCUniversal has helped Comcast. The AppNexus acquisition is a more risky, but with outsized returns, if the AT&T strategy works. What AT&T says it wants to do is create a big ad exchange platform that can rival Google and Facebook.

So the potential upside is clear enough. The challenges arguably are even greater, but the need to replace as much as 50 percent of current revenues over the next decade are reason enough for bold moves. That might sound like hyperbole.

It actually is history. U.S. service providers, for example, have had to replace that much revenue at least once or twice over the last couple of decades. The first big change was the replacement of long distance revenues with mobile revenues. The second big change (and more recent) was the replacement of mobile voice and texting with mobile internet.

But there is little reason to believe the underlying trend will change. Many tier-one service providers will have to replace as much as half their present revenue with new sources in 10 years. One might argue they will have to do so every 10 years.

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