Verizon Wants to Sell Long Haul, Data Center Assets

Verizon Communications now is exploring a sale of its “global enterprise assets” built on the former MCI-Worldcom global network plus the data center business (Terremark).

Verizon Chief Financial Officer Fran Shammo said, during the company's third-quarter earnings call on Oct. 20, that it continues "to work through secular and economic challenges" with its global enterprise division, which posted a 4.9 percent decline in revenue in the quarter ended Sept. 30, 2015.

In many ways, that trend speaks to changes in the ways enterprises globally have changed “what” they buy in the connectivity arena, as well as “from whom.”

There is declining demand for legacy connectivity of every sort, and growing demand for IP connections and bandwidth. Need for data center support also is changing as cloud computing becomes mainstream and public computing resources from Amazon Web Services and others become viable options.

Verizon spent $8.4 billion to acquire MCI-Worldcom in 2006. Verizon bought Terremark Worldwide in 2011 for $1.4 billion. Altogether, that represented $9.8 billion in acquisition costs.

Some think the assets could be sold for $10 billion. Some estimate the assets produce about $2 billion in annual revenue, implying a sale price about five times annual revenue.

AT&T and CenturyLink also are trying to sell their data center businesses. One might therefore conclude that U.S. tier one service providers no longer believe ownership of data center assets provides as much business advantage as once believed.

Disruption of the legacy communications business continues.

Cable One Deploying Gigabit to 1.5 Million Homes in 2016

Cable One, a cable TV operator serving more than 200 cities and towns mostly in the western parts of the country, will launch gigabit Internet access services in 2016 to the “majority” of its customers, representing about 1.5 million locations.

The company will begin launching residential gigabit service in the first quarter of 2016 in Altus, Okla.; Duncan, Okla.; Borger, Texas; Emporia, Kan.; Bisbee, Ariz; Cottonwood, Ariz.; and McCall, Idaho.

CenturyLink Generates 58% of Revenue from Business Segment

In its third quarter of 2015, 58 percent of CenturyLink revenue was generated in business segments of its business, about 33 percent from consumer revenues.

Business contributed $2.6 billion of revenue, while the consumer segment contributed 33 percent.

That, in a nutshell, illustrates one problem tier one and tier two telcos face.

Even if one argues investment in the consumer portions of the network are necessary to support business customer operations, financial returns from the consumer segment are under pressure, compared to the business segments.

In other words, 58 percent of total revenue is generated by a relative fraction of the network.

That is the growing problem for fixed network providers in general.

Will Video Drive Fixed Network Adoption Towards 95% Levels?

Some might yet wonder what it will take to get adoption of high speed Internet access in the U.S. and other markets up to 90 percent or higher. The traditional answer has been “TV.” Eventually, consumers will shift to over the top TV and away from linear, making a high-capacity home Internet connection essential.

In other words, “use of computers” will not be the activity that drives the incremental adoption.

And substitution of smartphones for PCs or laptops might not change matters.

In fact, mobile phone ownership might now be cannibalizing some need to own a PC. Some 92 percent of U.S. residents own a mobile phone, 68 percent a smartphone and 73 percent a desktop PC or notebook PC.

The effect on demand for home Internet connections is clear. If perhaps seven to 10 percent of consumers say they rely exclusively on mobile for Internet access, then mobile access is a substitute for fixed network Internet access.

But it still is the case that video will drive incremental adoption of fixed network Internet access. The reason is that as entertainment video shifts to over the top delivery, a fixed network Internet access connection becomes a prerequisite.

At the same time, the fixed network allows offload of mobile data consumption to Wi-Fi.

The point is that video--one way or the other--will underpin incremental fixed network Internet access demand, even if primary demand is driven by Internet access itself.

At the same time, increasing ability to seamlessly switch access between mobile and fixed networks will complicate the matter.

Internet access already includes a mix of fixed and mobile access modes, but changes in video delivery might complicate usage patterns and therefore our sense of the extent of Internet access adoption and use.

In 2013, fixed network Internet access was purchased by about 74 percent of U.S. households.

In 2015, use of the Internet was higher than 86 percent, but that is not identical with the number of homes buying Internet access. If 92.5 million U.S. homes bought fixed Internet access, and if one assumes there are roughly 120 million occupied homes,  fixed Internet adoption might be 77 percent.

Some might argue that adoption already is at about the 90 percent level, but that an increasing percentage of consumers use mobile Internet access, and may not buy fixed access products.

About 10 percent of consumers say they rely exclusively on smartphones for Internet access.

The point is that use of television, not use of computers, might eventually drive fixed network Internet access adoption towards levels we used to expect of voice services, and more recently cable TV services (85 percent to 95 percent adoption).

The other possibility is that fixed access adoption never actually reaches those levels, since mobile-only is proving to be a viable form of Internet access for an arguably-growing number of consumers.

Whether that remains the case when a major shift to over the top video, and away from linear video, is the question.

Given the higher cost per bit of mobile Internet access, compared to fixed access, it would be difficult for mobile operators to supply, or consumers to afford, enough capacity to support a full shift of most TV consumption to mobile networks and devices.

At present retail tariffs and linear video consumption patterns, a full shift to consumption of TV on an on-demand, mobile basis would not be possible, one might argue.  

The networks could not handle the load, nor would consumers be willing to pay.

But it is hard to say how supply will change in the future. If one assumes a robust and seamless ability to offload heavy video consumption to Wi-Fi, a larger percentage of consumers might well conclude they can live without a fixed Internet connection, if they are willing to work around it.

The big issue is that the greatest volume of video consumption happens at home, the location where a fixed access service is essential for Wi-Fi access.

And that suggests incremental demand for fixed Internet access will grow, despite mobile consumption.  

Windstream Offers 100 Mbps to 1 Million Consumers

Windstream now offers consumers and small businesses in 600 markets across 12 states faster Internet speeds of up to 100 Mbps.

Altogether, nearly one million households and small businesses now have access to premium speeds up to 100 Mbps in Windstream communities.

Those moves are in large part enabled by the sale of Windstream’s data center business.

In the third quarter of 2015, Windstream earned nearly 62 percent of total revenue from business customers, however.

Total revenue was $1.5 billion in the third quarter, up $80 million sequentially due to organic growth of $7 million and incremental “Connect America Fund” (universal service) revenue of $73 million.  

Consumer service revenue was up on a sequential basis with continued growth in high-speed Internet bundled revenue, Windstream said.

ILEC small business revenues were $107 million in the third quarter; carrier service revenues were $169 million; enterprise service revenues were $501 million and out of region small business service revenues were $146 million.

Telco Data Center Strategies Diverge

One example of the growing variety of business strategies embraced by tier-one telcos is the matter of data center “colocation” assets. 

One argument, and one strategy, is that ownership of such facilities creates an access and transport opportunity for the carriers, irrespective of direct revenues earned by supplying real estate and services.

The other argument is that transport and access revenue can be earned without the necessity of owning data centers.

And growing pressure on operating margins can tip the balance, even if data center ownership is generally thought to be a positive. That appears to the case for Cincinnati Bell, which is selling ownership shares of its CyrusOne data center business, raising cash to reduce debt.

CenturyLink appears to be thinking along the same lines regarding its own colocation business. CenturyLink appeared to believe colocation center hosting would provide a boost several years ago when it bought Savvis.

While it plans to continue offering colocation services, CenturyLink says it is looking for alternatives to owning nearly 60 data centers around the world that support colocation, managed hosting, and cloud services.

As in the case of Cincinnati Bell, CenturyLink might now be more concerned about debt reduction than revenue upside from owning the data center business.

CenturyLink business segment revenues might be “driven principally by increased market penetration of our network, hosting, cloud, and IT solution service offerings,” as CEO Glen Post said.

But capital might be better deployed elsewhere, CenturyLink suggests. “We expect colocation services will continue to be a service our customers will look for us for, but we do not necessarily believe we have to own the data center assets to be effective in delivery of those services,” said Post.

CenturyLink’s revenue for the cloud and hosting  business is about $600 million annually, and the company says it seeks to sell or otherwise restructure the data center operations, not the cloud and hosting businesses that use data center real estate.

In fact, most of CenturyLink’s cloud and hosting operations are run out of leased data center space, at the moment.

And CenturyLink executives are not willing to commit the new capital they estimate is required to grow the business. They also believe cash generated by an asset sale would earn a higher return in other lines of business.

Windstream is selling its data center business as well. As often is the case, it appears specialists are better positioned in the data center and colocation business than some telcos might be.

On the other hand, other telcos seem to believe they must take a bigger position in data center business. Reliance Communications is among those firms increasing investment in the data center business.

Orange Spain Fiber to Home Network to Cover 14 Million Homes by 2020

Orange’s fiber access network  in Spain reaches 5.2 million households and will reach 10 million in 2016 and 14 million by the end of 2020, the company says.

Orange’s fiber-to-home network will by 2020 cover more than 80 percent of all Spanish cities with more than 20,000 inhabitants, allowing Orange to claim the title of “Europe’s leading alternative operator” providing fiber to premises coverage.

Orange also says it will invest is 1.5 billion euro in its Spain 4G network, reaching 95 percent of the Spanish population in 2017.

Orange aims to reach four million additional fiber-to-home households by the end of 2020, on top of the 10 million households that the company has already announced for the end of 2016.