Lumen Technologies (formerly CenturyLink) has unusual constraints on its deployment of optical fiber access facilities. It has the most-rural serving areas of any of the major telco fixed network providers. In a sense, Lumen is similar to Charter Communications, the second-largest cable company. Charter also has a largely-rural customer base.
Lumen also is an amalgam of a global capacity business with a largely-rural customer base, serving only a relative handful of tier-two U.S. metro areas such as Seattle, Portland, Denver, Salt Lake City, Omaha and Phoenix, for example. But most of Lumen’s revenue, and arguably most of its profit, come from the global enterprise business.
source: Denver Business Journal
Lumen makes about 72 percent of total revenue from enterprise customers, including its wholesale capacity customers, and about 28 percent of total revenue from mass markets, which include consumers and small businesses. Small business accounts for about three percent of revenue.
Born of a merger between Qwest, the least dense of all the former Regional Bell Operating Companies, with CenturyLink in 2011, the combination created a firm with a significant rural and low-density service territory spread across 37 U.S. states, with a very-different global capacity business.
That profile explains the Lumen Technology strategy and capital investment profile. Simply put, Lumen’s consumer business consists of rural and small town markets that are high cost, but produce relatively little revenue.
Nor is Lumen exempt from the challenges other fixed network operators face from cable competition, which limit its ability to deploy optical access facilities and still make an adequate profit.
All that means Lumen is rather more challenged than firms such as Verizon, with a mostly-dense territory. AT&T has a mix of rural and lower-density serving areas, plus some tier-one metro areas.
Those realities shape the expected cost and return profiles those firms can expect from FTTH investments, especially when AT&T and Verizon also might use wireless access as an alternative.
Lumen’s growth strategy relies on edge cloud infrastructure, fiber services for enterprises and gigabit-enabled consumer customers, according to Jeff Storey, Lumen Technologies CEO. That means micro-targeting areas where demand for gigabit services is strongest and where an adequate financial return can be earned as well.
The corollary is that Lumen does not believe its best use of access network capital for broadband access is in a relatively smaller subset of total consumer access locations. As Lumen reports, of $1.4 billion in total revenue in the fourth quarter of 2020, about eight percent came from federal subsidies for high-cost rural areas.
Lumen in fact made a decision not to accept most such funds in 2022. “Our subsidy revenue will step down from about $500 million a year to roughly $26 million in 2022,” said Neel Dev, Lumen CFO.
If Lumen spends roughly $300 million of its own capital, in addition to $500 million of subsidy funds, it gives you some idea of the cost of building rural broadband facilities. Over a three-year period, Lumen added 1.1 million new housing units.
That suggests $800 million of capital adds 330,000 new passed homes, or roughly a cost of $2424 per location. Other recipients might spend as much as $5,000 per location.
Those subsidies help defray the cost of rural service, and also suggest the relatively-small expected returns from expanding rural broadband, in Lumen’s view. Lumen’s average revenue for a fiber-to-home connection is $56 a month, while the average take rate in any area where FTTH is available is just 28 percent. In other words, about 72 percent of the FTTH investment is stranded, generating no incremental revenue.
FTTH-served homes are about 15 percent of the consumer footprint.
The point is that the clear strategy is to harvest revenues from the consumer access business, with targeting FTTH upgrades for gigabit service in some neighborhoods.
Most of the enterprise or global capacity assets were contributed by Qwest, while most of the then CenturyTel customers were rural consumer or smaller business accounts.
The combined firm had at that point about five million broadband (more likely 12 million), 17 million voice and 1.4 million video accounts, as well as 0.85 million wireless units, according to one news report that appears to have undercounted broadband accounts.
At the time of the merger, CenturyLink had about 6.9 million voice lines and 2.3 million broadband accounts in service. Qwest reported about 9.7 million voice lines and 2.85 million broadband lines in service.
Today, Lumen makes the bulk of its revenue--about 72 percent of total--from enterprise and wholesale customers.
About 25 percent of revenue comes from consumer services, while about three percent of total comes from small business, now known--as most large telcos report--mass market.
source: Lumen Technologies
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