As with any other legacy service, the rate of decline and possible stabilization of demand are key issues for retail service providers. Long distance revenue provided an early example of fundamental decay of a key legacy service that required “harvesting.”
The former AT&T, for example, faced one fundamental problem between 1983 and 2005: gross revenue and profit margins for long distance services steadily dropped.
That meant an immediate strategy of harvesting existing revenues, while searching for replacement revenue sources, largely considered to be local telecom service. That lead both AT&T and MCI--the dominant long distance providers--to be huge and dominant forces in the early days of the post-Telecom Act of 1996 era, when many service providers tried to build sustainable local telecom businesses initially based on wholesale mechanisms.
source: U.S. Department of Justice
The search for a higher-margin facilities-based strategy drove AT&T to acquire cable TV assets, then considered a platform for broadband and voice services. For a time, AT&T was the largest cable TV provider in the United States.
The unwinding of that strategy was caused by the high debt load AT&T took on to make the acquisitions as well as inability to make the cable platform perform as reliably as hoped.
AT&T discovered it would take too much time and capital to upgrade the cable assets sufficiently to provide reliable broadband internet access and voice services. The other issue was that the revenue growth model had shifted to mobile services.
AT&T bought into the mobile business in 1992 when it acquired a minority stake in McCaw Cellular. By 1994 AT&T had acquired the whole company, only to spin it off in 2000. In 2004 the whole unit was sold to SBC and BellSouth. In principle, buying into the mobility and cable TV operator businesses made strategic sense, even if the execution was not optimal.
The foundational issue is the rate of decline, which determines how much time and resources AT&T or any other firm would have to transition to a new business model. One might argue the long distance business simply eroded too quickly to allow a graceful transition.
One might argue AT&T encountered the same issue in the aftermath of its purchase of DirecTV, which executives inside and outside of AT&T believed would see revenue declines more gradually than ultimately happened.
Take rates for fixed network voice provided another early example of the process. Perhaps quite unexpectedly, demand for fixed network voice peaked about 2002, entering a period of sustained decline that added voice revenues to long distance and video revenues as causes for concern.
Linear video is the current worry, as both long distance revenue and fixed network voice have long since declined so substantially they no longer are capable of driving supplier revenue to any significant extent.
Homes paying for traditional linear video subscriptions will have fallen from over 90 percent in 2010 to 53 percent in 2026.
You know the next set of questions: what happens as mobile subscription growth slows? What happens when broadband growth rates slow? The early interim answers for mobile operators are to shift growth to mobile internet services. The early interim answers for broadband providers are to increase revenues by boosting speeds and other features.
None of those interim steps will suffice long term. Some new revenue growth engine will have to be found, simply because customer willingness to pay ever-higher fees either for mobile services or broadband is sharply limited.
Up to a point, retail service provider strategy over the past couple of decades has been premised on taking existing market share from other suppliers. Telcos have gotten into video services; cable operators have gotten into voice and mobile services.
Business specialists have taken share from incumbent telcos. Global bandwidth suppliers have supplanted telcos as the drivers of capacity expansion. Mobile operators have grown at the expense of fixed network voice suppliers. Application providers have essentially destroyed much of the mobile text messaging revenue stream and demand for voice revenues and conferencing.
The issue for AT&T with DirecTV is simply that the rate of revenue decline was faster than most observers expected. The gradual attrition of the asset always was expected. We saw that with long distance, fixed network voice and mobile messaging.
Faster attrition means the search for alternative revenue sources does not produce results fast enough to compensate for legacy revenue decline.
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