"Back to the Future" for Lumen?

Lumen Technologies (and US West in an earlier period) always was “different” from the firms that became AT&T and Verizon: it had the lowest population density of all its “sister” firms across the rest of the United States; less-significant urban clusters; lower business revenue and higher network costs (per-location). 

Unlike the firms that became AT&T and Verizon, Lumen’s predecessors never got into the mobility business, a huge deal since mobility revenues account for as much as 60 percent of total revenues for those firms. 

So it is not too surprising that Lumen took a different tack, diversifying into capacity markets. 

Looking at data transport revenue for major U.S. fixed network providers in 2023, excluding mobile revenues, Lumen’s position is arguably quite different from that of AT&T and Verizon. Because both of the latter firms have such huge mobile services businesses, the data transport portion of total revenue is relatively smaller than at Lumen. 

Though business revenues represent about 30 percent of Verizon’s revenue, and about the same percentage at AT&T, business revenues are 45 percent of Lumen Technologies revenue. Data transport is a portion of total business revenue.

Company	Total Revenue (USD Billion)	Business Segment (USD Billion)	Consumer Segment (USD Billion)
Lumen Technologies	$14.56	$6.6 (Enterprise)	$3.1
AT&T	$120.7	$36.3 (Business Wireline)	$15.1
Verizon	$134.0	$39.6 (Business Solutions)	$21.8

With the caveat that it can be difficult to separate out data transport revenues, such revenues are likely in single-digit billions of dollars for leading transport providers in the U.S. market. 

Company	Core Network Data Transport Revenue
Lumen Technologies	~$4.7 billion (2023)
AT&T	~$9 billion (2023)
Verizon	~$7 billion (2023)
Charter (Spectrum Enterprise)	~$1.5 billion (2023)
Comcast (Comcast Business)	~$2 billion (2023)
Cox Communications	~$1 billion (2023)

The point is simply that Lumen Technologies is different from the other noted providers in having a relatively small consumer business to rely upon for revenue generation. And that consumer business relies principally on the local access facilities, not the wide area data transport network. The other providers have substantial consumer revenue operations in both mobility and fixed network realms. 

Lumen does not have mobile revenue exposure and has a relatively small consumer revenue footprint, as business segment revenues are routinely about 78 percent of total revenues. 

That is the result of a sort of “mashup” of data transport assets with a traditional telco base that always was the least-dense of all former Bell company geographies. That also means it is less feasible for Lumen to upgrade its fixed network for fiber services. 

For that reason, it always has seemed reasonable to assume that, at some point, the former U.S. West (Qwest) assets would be separated from the core data transport assets. 

Looking at the acquisitions and asset dispositions Lumen has made over the past couple of decades, you can see the logic. 

U.S. West, the former telco, was acquired by Qwest Communications--a long-haul data transport and metro fiber company, in (2000. That was the first mashup.

Then, in 2011, Qwest was acquired by CenturyLink, a Louisiana-based telecom provider with a largely rural and consumer footprint. That would seem to be a move back in the direction of local access operations. In fact, CenturyLink sought a bigger role in business and enterprise services, but the acquisition of Qwest also gave the new CenturyLink a greater consumer services footprint. 

The 2011 CenturyLink acquisition of Savvis gave CenturyLink a bigger footprint in data center, cloud computing, and managed hosting services, rebalancing a bit back to enterprise and business revenue.

But it was the acquisition of Level 3 Communications in 2017 that completed the mashup, given Level 3’s huge presence in long-haul data transport, metro fiber operations and international assets. Level 3 has solely focused on enterprise and wholesale capacity operations, not consumer local access.

The first step towards reconfiguring the asset base came as Lumen divested its local telephone business in 20 states in 2021, shrinking the company’s revenue and highlighting its debt profile. 

The next shoe to drop, some would argue, is a separation of the remaining former U.S. West local access assets from the assembled portfolio of global capacity assets. If Lumen retains the capacity portfolio, while shedding the local access assets, it would be a smaller, focused capacity business, as was Level 3 Communications. 

Back to the future, in other words. 

DIY and Licensed GenAI Patterns Will Continue

As always with software, firms are going to opt for a mix of "do it yourself" owned technology and licensed third party offerings. That might be especially be true for generative artificial intelligence apps that often work best when customized for particular firms, industries or functions.

Apple’s use of ChatGPT for iOS 18 was always expected, according to Apple executives, to be temporary. That would fit with Apple’s history, as the firm prefers to create and own its whole software stack. 

The agreement with OpenAI allowed Apple to integrate ChatGPT intoiPhones, iPads, and Macs. This partnership allows Apple to offer ChatGPT-powered capabilities through Siri and other iOS features. 

The obvious end user experience will happen when Siri cannot answer a question and will pass the user along to ChatGPT. 

But Apple also has been developing its own generative AI chatbot, and Apple Intelligence will ultimately use the homegrown technology, most would assume. The switch to Apple’s own chatbot is expected to appear with iOS 19 in 2026.  

That bifurcated approach might be used by other firms as well. Microsoft, for example, has a right to about 49 percent of the profits from OpenAI’s for-profit business.

But Microsoft also is developing its own generative AI systems, including Azure AI Studio, a platform for building, evaluating, and deploying generative AI solutions and custom copilots.

Azure Machine Learning and custom generative AI models also are in development, including a generative AI chatbot.

The point is that both “do it yourself” and “license the technology” approaches will be used by many entities. 

Company	Own Generative AI Development	Licensed Third-Party AI Solutions
Microsoft	Azure AI Studio, Azure Machine Learning	OpenAI's GPT models
Adobe	Adobe Firefly, Generative AI tools in Creative Cloud	Unknown third-party partnerships
Salesforce	Einstein GPT	OpenAI's language models
Goldman Sachs	Internal coding tool, documentation automation platform	Unknown third-party partnerships
BMW	Enterprise data analysis AI, customer service AI	Unknown third-party partnerships
Google	Google AI (including PaLM 2)	Anthropic (for Claude)
Meta	LLaMA (large language model)	Hugging Face
IBM	Watsonx (AI platform)	Various third-party models

Directv-Dish Merger Fails

Directv’’s termination of its deal to merge with EchoStar, apparently because EchoStar bondholders did not approve, means EchoStar continues to face key questions about its future.

Of course, so do most “cable TV” networks, as Comcast plans to spin off most of its “cable networks” while Warner Brothers Discovery also has said it is studying the issue. And while Disney has said it is not considering such a move, the logic of consolidating assets in a declining industry is fairly clear. 

Observers might note that Disney’s cable network revenue (based in part on ESPN)  is arguably stronger than Warner Brothers Discovery and Comcast cable networks. The point is that both subscription TV content networks and distribution companies (satellite, cable, telco) are under pressure. 

A new financing deal means EchoStar will be able to make a roughly $2 billion worth of  debt payments in November 2024.

The longer-term issue is what the company can do to create a plan for growth,  as the firm is squeezed between a declining satellite TV business and big capital investments required for its mobile network, not to mention operational execution of the mobile business. 

In the first nine months of 2024, for example, more than 65 percent of total revenue was generated by the satellite TV business, while operating income was generated only by TV and satellite services. 

Segment	Revenue (in thousands)
Pay-TV	$8,020,893
Retail Mobility Services	$2,693,330
Broadband and Satellite Services	$1,163,306
5G Network Deployment	$108,245

It is worth noting that CEO Charlie Ergen has led his companies through a variety of pivots. In the 1980s, EchoStar transitioned from a small retail store selling “television receive only” satellite TV systems to become a leading manufacturer and distributor of such hardware.

In 1996, EchoStar launched Dish Network, its direct broadcast by satellite system, which quickly became the fastest-growing satellite TV service in the United States.

The company developed related business units providing satellite services including satellite uplink and transponder usage for television and other satellite users.

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EchoStar established EchoStar International Corporation to provide satellite-related services throughout Europe, Africa, the Middle East, Australia, and Asia.

In recent years, EchoStar has pivoted towards building a nationwide 5G network as the long-term growth engine, replacing the subscription TV business. 

EchoStar's wireless spectrum assets are valuable and potentially undervalued, though the ability of the most-likely buyers to acquire it anytime soon is in question. Some have valued Dish spectrum at as much as $58 billion, for example. 

EchoStar owns Hughes Network Systems, which provides broadband and satellite services to businesses and consumers, and might be sold.

EchoStar owns satellite infrastructure that possibly could be monetized as well.

The merger would have allowed EchoStar to offload approximately $9.75 billion of its roughly $20 billion in debt.  

The deal failure does not affect TPG's acquisition of the remaining 70-percent stake in Directv from AT&T, which is expected to close in the second half of 2025.

Will AI Fuel a Huge "Services into Products" Shift?

As content streaming has disrupted music, is disrupting video and television, so might AI potentially disrupt industry leaders ranging from Alphabet to Meta, just as search and social media were unimagined substitutes for advertising venues of all types. 

It is one thing to predict that artificial intelligence will  automate many--if not most--complex cognitive tasks. It is another matter to predict what entirely-new value propositions could be created, some of which pose the possibility of disruption of firm and industry market positions, unit economics, competitive dynamics, and business strategies. 

In other words, search and social media disrupted revenue models for newspapers, magazines, broadcast TV, broadcast radio, video on demand and linear multichannel video because search and social media became substitute venues for advertising. 

Media Type	Percentage of Total U.S. Advertising
Digital (Total)	65%
- Search	21%
- Social Media	29%
- Other Digital	15%
TV (Total)	19%
- Multichannel Video	10%
- Broadcast TV	9%
Radio	6%
Out-of-Home (OOH)	4%
Newspapers	2%
Magazines	3%

And perhaps one big change will be a shift of “services” turning into “products,” the inverse of the prior trend whereby products became services. 

What, after all, is a bot or agent that provides what a human professional used to supply? Will “customer service” or any sort of “advice” morph from human-provided expert “service” to an AI-provided product or function?

Content producers worry about this a lot, and should. AI threatens to displace acting, writing, composing or editing (professional services) with AI substitutes that are “products” rather than “services.”

It’s the mirror image of the prior process whereby software and other content “products” became “services” (shrink-wrapped software became cloud-based subscriptions; television shifted from over-the-air broadcast to subscription video). In fact, the list of former products that became services is quite extensive:

• Software (Software-as-a-Service)

• Computing power (Cloud computing)

• Music (Streaming services)

• Movies and TV shows (Video streaming platforms)

• Books and magazines (E-book subscriptions and digital content platforms)

• Car ownership (Car-sharing and ride-hailing services)

• Office productivity tools (Cloud-based collaboration suites)

• Data storage (Cloud storage services)

• Photography (Photo storage and editing services)

• Gaming (Cloud gaming and game subscription services)

• Home security systems (Smart home monitoring services)

• Lighting (Lighting-as-a-Service)

• Manufacturing equipment (Equipment-as-a-Service)

• Transportation (Mobility-as-a-Service)

• Communication tools (Unified Communications-as-a-Service)