Market Doesn't Like Bank Bailout, Apparently

Judging by the plunge on the markets as Treasury Secretary Geithner spoke...

Verizon FiOS Challenges DirecTV as HDTV Leader

DirecTV continues to offer the most high-definition channels of any pay TV provider, but Verizon is catching up quickly with its FiOS TV service, according to Pike & Fischer. The firm finds that as of January 2009, DirecTV was offering as many as 104 channels in high-definition format. But that only beats Verizon's HD menu by one channel.

Comcast, the largest cable operator in the United States, has one of the smallest selections of high-definition channels, Pike & Fischer says. Comcast in some markets is offering less than 40 HDTV channels, although the company's marketing focuses on its large selection of HD movies, TV shows and other content available on demand.

Most providers examined in the study charge a premium price for HDTV service, usually less than $10 per month. But some, including Cablevision and Time Warner Cable, offer a substantial number of HD channels for free.

Qwest: Enterprise and Wholesale Drive the Business

Some will look at Qwest Communications International Inc. fourth quarter and full-year results and see trouble; others will see improvement. Irrespective of those judgments, it should be noted that for Qwest, business markets and wholesale are the majority of the business. 

Mass markets, which includes both consumer and small business revenue, represented about $1.4 billion worth of fourth-quarter revenue (and some portion of that is small business). 

Wholesale markets contributed $789 million. Business markets represented $1.1 billion.  In other words, Qwest one of these days relatively soon will be earning more money from wholesale and business customers than from consumers, as important as consumer markets may remain.  

Furthermore, revenue in business markets grew year over year, while mass market and wholesale revenue declined, with those declines attributable to voice services. 

In the fourth quarter of 2008, net income was $185 million, or 11 cents per diluted share, compared to $366 million, or 20 cents per diluted share, for the fourth quarter of 2007. Bad, eh?

Not if one considers the adjustments. The results include severance charges of $19 million, or one cent per diluted share, in the fourth quarter of 2008. More important, though, the earnings per share calculations reflect higher pretax income compared to the fourth quarter of 2007, offset by increased tax expense as the company recorded normal effective tax rates beginning in 2008. 

Income before income taxes in the fourth quarter increased 17 percent compared to the fourth quarter of 2007.

Revenue in the quarter was $3.3 billion, a decline of three percent compared to $3.4 billion

in the fourth quarter of 2007 and a decline of two percent compared to the third quarter of

2008. 

Adjusted EBITDA for the quarter was $1.18 billion, a four percent increase compared to $1.14 billion in the year-ago period and a nine percent increase compared to $1.08 billion in the third quarter. Adjusted EBITDA margin was 35.6 percent compared to 33.1 percent in the fourth quarter of 2007 and 32.1 percent in the third quarter. 

For the full year, net income was $681 million, or 39 cents per diluted share, compared

to $2.9 billion, or $1.52 per diluted share, in 2007. Full-year results reflect the same normal effective tax rate dynamics as the fourth quarter. 

Earnings per share results include net special charges of three cents per diluted share in 2008 and 20 cents per diluted share in 2007. Income before income taxes was up 13 percent after adjusting for onetime

items.

Total revenue for the fourth quarter of $3.3 billion reflects an eight percent year-over-year growth in data, Internet and video revenues, which was offset by a decline of nine percent in voice revenue and a 33 percent decrease in wireless revenues.

As Qwest tells the story, income before income taxes increased 17 percent year over year while EBITDA increased four percent. Enterprise data and IP revenue was up nine percent year-over-year.

Data, Internet and video revenue now 25 percent of mass markets revenue, a key measure of how well Qwest is replacing declining landline voice revenues with new and alternative revenues. Qwest's consumer broadband subscriber base increased nine percent year over year. 

Brighter Prospects for SaaS?

Historically, the transmission belt for new applications and communications technology has been that university researchers would come up with something new, suppliers would sell those innovation into the enterprise market, and then at some point the tools move into the mid-market, then finally into the smaller business entities, finally winding up as consumer tools in the final stage.

These days, there are different avenues. In many cases, innovations come out of universities, then go straight to the consumer market and then fairly quickly into the small business market, with enterprises and mid-market customers becoming aware of the trends only as individual "lead users" start to make use of the tools in their work roles. 

Of late, in fact, it is hard to point to any significant innovations that went enterprise first, with the exception of mobile email, which was driven by enterprise users. Everything else pretty much developed first in a consumer context, including instant messaging, text messaging, any-to-any email, social networking, blogging and wikis. One might get an argument about wikis, but some of us would consider wikis to have been popularized in the consumer space. 

So it is with software as a service, which most observers will say has gotten most traction in the small business and consumer spaces, and only now is being considered in the enterprise and mid-market spaces.

One has to assume the opportunities for such changes are enhanced by the challenges businesses and organizations now face, as potential buyers now are facing new questions about how they ought to be doing things. 

Are Telcos Toast?

There is a sentiment in some quarters that the telecommunications industry is too inflexible, slow moving and unimaginative to transform itself. Those criticisms are well taken. They could be right. But look at matters a different way. If executives know what business they really are in, they won't make the proverbial mistake the railroad industry made: thinking it was in the "railroad" business instead of the "transportation" business. 

In fact, a quick review of technology underpinnings of the communication industry should tell the story. AT&T once meant "American Telephone & Telegraph."

The telegraph, and the business it created was an 1840s invention. The telephone was a 1870s invention. AT&T made the transition. Wireless was invented in the 1890s. And though they were slow to enter the business, large "landline" providers now lead the wireless business. 

Radio broadcasting was invented in the 1920s, television in the 1950s. Telcos and cable companies now are distributors of audio and television programming, on both a "tethered" and "mobile" basis, and this role will grow. The geostationary satellite industry was created in the 1960s. AT&T remains a big player in the satellite communications busines.s 

Computer communications began in the 1970s. Large telcos pretty much failed at their first efforts to enter the "computing" industry. But in different ways, they now are re-entering the computing services market, as integrators, content delivery networks and, someday, players in "cloud computing" infrastructure.

Optical communications began in the 1980s and telcos and cable companies are major end users of optical communications.

The Internet originated in the 1990s and now Internet access is almost a "legacy" product for telcos and cable companies. The next wave of IP-enabled next generation networks has barely begun. But I am hard pressed, looking at history, to worry too much about ability to finesse the latest waves of technology advance. 

Is Content Really King?

There continues to be talk in the communications business about network infrastructure providers as "dumb pipes." That's a bit of an analogy to the "content is king" discussions that the video business periodically revisits. Put simply, there is a tension, in either communications or media businesses, between the value added by network services and applications, and the debate never seems definitively solved.

Consider the case of Time Warner, which is in both the "content creation" and "network delivery" businesses. Some financial analysts say the content assets are overvalued, compared to the cable assets.  Time Warner Cable trades at a discount to Comcast on price-to-earnings multiple, some note. 

To be sure, some analysts worry about increasingly effective competition from Verizon and AT&T. But Time Warner Cable still is adding net subscribers in a recessionary environment. Of course, these debates tend to run in cycles. 

Distribution was the focus of the entertainment industry for much of the past 15 years. The large entertainment conglomerates took advantage of looser ownership regulations and technological advances to acquire more television and radio stations, cable and satellite subscribers, and internet portals. Basically, that's an argument for the importance of distribution. 

Some think there will be a swing in the other direction, as content owners increasingly focus on distribution across all platforms. News Corp. and Time Warner now are now sellers of distribution assets, for example. 

That doesn't necessarily speak directly to the relative importance of distribution compared to content ownership, though. It might be closer to the truth to say that in a climate where capital is scarce, and viewership is changing rapidly, content companies need to stick to their knitting. 

Conversely, some of us make the argument that distribution remains vital, and in any case is a far-bigger business than content. In 2003, for example, Hollywood box office revenues were $11 billion in the United States and $25 billion to $30 billion globally. The global music industry earned $35 billion. Videogaming, consoles and all software represented $40 billion worth of revenue.

In contrast, U.S.telecom revenues pulled in $348 billion.

Content is sticky, content is a fairly large business, content is part of the business the telecom industry now is part of. But that's not the same thing as arguing "pipes" are commodity items with no ability to differentiate. In fact, those pipes remain highly-valuable, very-scarce assets supporting a huge applications business. Voice is declining in value, to be sure. But broadband and mobility apps have arisen to replace those lost revenues. And the new frontier is all sorts of other business models, ecosystem relationships and values. That isn't to say the transformation will be easy, or steady in its progress. 

So make no mistake: transparent optical transport and access are, in some ways, undifferentiated at the moment. But that does not mean the values, features and applications delivered over those pipes are undifferentiated or commodities. 

It may never be possible to determine, once and for all, whether "content" or "distribution" are "the" king of the ecosystem. One thing is clear, though. Distribution is a far bigger business, because it includes the large person-to-person, machine-to-machine and one-to-many and many-to-one communications functions. 

Will Recession Lead to Permanent Behavior Changes?

Nobody yet knows when the current recession will end, or what will happen to various industry segments during the recession. What is even less known is how consumer and business behavior during the recession might carry on in the form of new trends once the recession is but a memory.

Recessions can cause people to think more about the effective use of their assets. In bad times, users are forced to see if there are substitute ways of doing things that save money right now. But if the substitutes are good enough, people might not go back to their former preferred ways of doing things.

At a practical level, business buyers in many cases are taking longer to make decisions, so the time lag from proposal to acceptance is stretching out.

But there still is little, if any, concrete evidence that business or consumer users are abandoning key services ranging from broadband access to wireless to multi-channel video. In fact, the evidence so far indicates they are behaving as they have in the past: keeping services but delaying upgrades and adoption of new enhanced services.

What bears watching are signs some customers are behaving in new ways, such as canceling multi-channel video subscriptions in favor of Internet alternatives. A recent poll by researchers at the Yankee Group suggest that one percent of respondents actually have done so.

Then there is the impact of users dropping landline services in favor of mobility, or using Skype instead of their landlines or mobiles, switching to prepaid from postpaid mobile plans, buying hosted business voice in place of new phone switches or buying some forms of broadband access instead of others.

The point is that tougher economic conditions will lead some consumers to experiment with new behaviors that might become permanent changes.