2009 Was Tough for Cable and Telcos, 2010 Will Be a Bit Better

Fitch Ratings analysts say 2010 will be a better year for telcos and cable providers. There are challenges, to be sure. But the biggest question is whether cable and telco companies will be able to keep finding new revenue sources to replace those being lost.

European telcos face further stagnation of top-line revenues and likely have further to go in the process of cutting operating expenses, say analysts at Fitch Ratings.

The weak economic recovery, continued regulatory pressures, maturing service penetration and strong competition, are some of the key forces putting pressure on cash flow and profit margins.

At the same time, service providers are forced to continually invest in mobile and fixed network upgrades  to keep abreast of burgeoning data traffic demands, Fitch says.

To be sure, operators are introducing new services to replace declining revenue sources. But it "looks unlikely that the network operators will benefit from new service revenues in the way they did from SMS data," Fitch says.

Incumbent cable and telco providers in the United States will face many of the same pressures, including increased amounts of competition, wireless substitution and a sluggish economy.
Traditionally, U.S. telecommunications and cable service demand has lagged economic recoveries, and high unemployment, despite the recovery, as well as pressure in the housing sector will put pressure on 2010 financial results.

Fitch expects this lagging trend to continue and any U.S. economic improvement in 2010 will likely not be reflected in telecommunications and cable results until 2011.

"Although the telecom and cable industry has maintained strong liquidity and free cash flow, macroeconomic woes including unemployment rates and a struggling housing market will continue to limit financial growth for the sector," says Michael Weaver, Managing Director at Fitch.

Fitch estimates that aggregate access line losses for 2009 will be approximately 10.5 percent for retail local telecommunications providers. There was a bit of a change in 2009 as slower losses to cable voice providers was offset by higher business access line losses.
Business and residential access line losses should stabilize in 2010 and continue in the range of 3 million to 3.2 million each quarter, which would represent a yearly loss of approximately 12 percent, says Fitch. There is a statistical artifact here.

As the base of voice lines declines, a fixed number of lost lines represents a larger percentage change than it used to. So although it appears at first glance that line loss is accelerating, that is not the case. The decline is steady, but larger in percentage terms.

The loss of legacy revenue of course heightens the importance of new revenue sources for fixed network operators. Broadband access had been such a driver in the 1990s and early 2000s, but is less significant now that the market is saturated or nearly saturated. Fitch estimates that high-speed access subscriber growth slowed in 2009 to 1.7 million net subscriber additions.

In 2010, net new additions should slow further to 1.4 million accounts. But make note: Fitch believes wireless broadband substitution now is poised to become a material factor in line growth.
Multi-channel video likewise has been a growth driver for Verizon and AT&T, but also is slowing. Fitch estimates that net new video customers will grow by two million subscribers in 2009, slowing in 2010 to approximately 1.5 million.
Commercial service revenue will face a roughly flat situation in 2010 after 2009 declines over six percent for wireline companies. In 2010, commercial revenue will grow about one percent.

In total, Fitch estimates that aggregate wireline revenues will decline in 2010 near the mid-single-digit range, a modest improvement over 2009. EBITDA will similarly fall in aggregate by a low- to mid-single-digit range for the industry as benefits from headcount reductions offset losses of high-margin legacy services.

Cable operators also saw accelerating video subscriber losses in 2009 with a reduction of approximately 2.75 percent. Subscriber losses are the result of weak new home growth, but more important, they are the result of competitive erosion from direct broadcast satellite and telco video offerings.

The cable basic subscriber erosion rate will accelerate in 2010 as competitive pressure remains fairly constant, but there will not be the lift from digital television conversion that boosted cable performance in the first and second quarter of 2009.

Fitch estimates that basic subscriber erosion will increase to approximately 3.5 percent in 2010. High=speed access additions also slowed materially for cable  operators in 2009, and Fitch expects subscriber growth of approximately 1.7 million in 2010.
New DOCSIS 3.0 services should help cable operators in the commercial space, though.

Cable telephony subscriber growth rates fell rapidly in 2009 with a reduction of over 40 percent, but with operators still adding two million net subscribers. Fitch estimates that cable telephony net additions will fall to 1.4 million in 2010 as wireless substitution and weak housing-starts affect results.

Cable operators successfully increased their share of the small business and home office market in 2009. Fitch estimates that commercial service revenue increased by approximately 25 percent for cable companies in 2009.

In 2010, operators will start to move up to the mid-size business customer segment in 2010. Fitch estimates that cable revenues will increase in the three percent to five percent range in 2010 and that firm margins will lead to a similar level of EBITDA growth.

Fitch estimates that the total wireless subscriber base grew by about five percent in 2009 andwill slow to four percent in 2010.

Post-paid net additions declining by 42 percent for 2009 compared to a 36 percent decline in 2008. However, data services and advanced devices such as smartphones, netbooks and aircards kept post-paid gross additions relatively flat in 2009. That might not be too comforting, as it shows churn rates are greater than new customer acquisition.
Fitch estimates that prepaid net additions will increase by nearly nine million in 2009 compared to approximately five million for post-paid. Fitch expects that pre-paid additions will again achieve in 2010 a level similar to 2009.

Voice average revenue per user (ARPU) continues to erode at a growing pace approaching double digits in 2009 in part due to lower roaming revenue. This trend will continue in 2010 and at a level equal to or even higher than 2009.

Data ARPU growth has limited the impact of voice ARPU erosion on total ARPU, which has remained relatively steady. Fitch continues to believe that strong data growth will again be achieved in 2010.

In aggregate, Fitch forecasts that wireless revenue will increase in the mid- to high-single-digit range in 2010 and that margins may erode slightly because of higher marketing and retention costs and the success of unlimited prepaid plans.

Fitch expects that capital expenditure will be flat in 2010. Free cash flow increased by 20 percent in 2009 as companies materially reduced capital expenditures.

Fitch believes that FCF will again increase in 2010 by approximately 10 percent due to modestly higher aggregate EBITDA and continued low levels of capital expenditure.


Fitch Ratings

Telecom in Uncertain Times, Multi-Part Video

Click the "related article " link below to get the video, in 7 parts on YouTube.

Today's telecom and cable companies face an increasingly complex and uncertain world in which continual and rapid change is the norm. But different providers face distinctly unique challenges. This panel will evaluate the ways contestants operating in different geographies and customer segments; with distinct business models and products; diverse regulatory and technology environments, evaluate where they are, and where they want to go.

We'll take a look at:

Which challenges contestants believe are most crucial
Which opportunities are most relevant
Which customer behaviors and desires offer the greatest upside
How contestants respond to the competitive environment
Where unique value can be created in their chosen markets
How core competencies can be leveraged to create more growth

Recorded at Voice Peering Forum (c) 2008 Stealth Communications

Cable Squeezed on Both Ends

Most observers expect telco-delivered video to gradually take market share from cable operators, though modestly over the next couple of years. Most observers also think satellite-delivered services have crested, and will be lucky to hold onto their current market shares.

But one suspects there will be more change, longer term, than most observers now expect. For starters, video demand itself could shift to other IP formats, including at least some forms of Web video. So far, there isn't all that much evidence of shift. Consumers haven't embraced any of the devices and services that port video over to TV screens, though there continues to be evidence of a lessening of interest in linear television on the part of younger consumers.

Nearer term, satellite providers remain aggressive about high-definition TV services and pricing, and most consumers seem pleased with their satellite service.

And as compelling as many consumers find triple-play or quadruple-play services, not all buyers will find the pricing the most-compelling attraction. Some services, networks or suppliers are going to be picked as "best of breed" by some portion of the market, despite the fact that a bundle can be purchased from two providers in a market.

That will continue to put some incremental pressure on cable providers, who are using bundling, as telcos are, to lock in and protect the current customer base.

Which Future for Telcos?

What name would you choose to describe "who you are" if you were an executive at any leading incumbent telecom company? Sure, you might come up with "converged communications and entertainment provider" or something like that, but the term is unsatisfying and probably will confuse most mass market customers in any case. BT already is trying the "information and communications" company tagline. The problem with such efforts as it isn't so clear how the tags differentiate "telcos" from large system integrators, large software houses offering hosted services, cable companies and possibly others.

"Experience provider" is a buzzword some toss around, but it lacks much descriptive power, beyond suggesting an approach to creating services and features. "Application provider" likewise hints at something important, but again is rather too broad to be useful.

But no matter how the nomenclature efforts finally resolve themselves, it seems clear enough that something important is changing. Even if the unique, irreplaceable assets any "telco" owns are the actual pipes and software used to create communications capabilities over those pipes, that will not be a key part of the future identity.

One way or the other, "applications" are going to figure into the description in some key way. Which is odd, in a way. To a very large degree, telcos have always been "application" providers, in the sense that voice is an application running on a network optimized to provide it.

The big change now is the sheer range of applications providers create or deliver.

The big conundrum is that the irreplaceable and unique assets "telcos" possess, aside from their regulatory prowess, is the pipes and associated software that makes those pipes useful. And yet it seems inevitable that "telcos" want to be known as something else more directly associated with "apps."

If you can configure this out, please, make sure all the rest of us know. Maybe somebody can capture the multiple values in one easy to remember phrase.