Cincinnati Bell Eyes Expansion

Cincinnati Bell is looking at out-of-territory expansion, possibly in Indiana and likely in Indianapolis, should that prove to be the case. The possible expansion mirrors a trend most incumbent telephone companies now face: growth is a tall order in their traditional service areas, and most are seeing out-of-territory moves as the surest way to gain new customers and revenues.

The implication is that, over time, the percentage of revenue from business customers will increase, as a percentage of total, as such expansions almost always are aimed at business customers.

CEO Jack Cassidy says that while Cincinnati Bell’s incumbent local exchange carrier operations are showing flat revenue and falling voice line counts, the picture was different in its out-of-region operations.

That operation, which now includes the northeastern suburbs of Cincinnati as well as parts of Dayton and eastern Indiana, saw revenue jump 45 percent year-over-year from $6.6 million in the fourth quarter 2006 to $9.6 million. And access lines actually grew, from 50,000 lines in the fourth quarter 2006 to 62,000 at the end of the fourth quarter 2007.

Likewise, the DSL customer base grew from 4,000 at the end of 2006 to 9,000 at the end of 2007. Inside its tradtional territory, Cincinnati Bell lost 7.7 percent of its access lines and also sees slowing DSL growth.

That strategy holds for larger service providers as well, ranging from European telcos and wireless providers to smaller U.S. telcos such as SureWest Communications, to independent U.S. CLECs such as Paetec and metro access providers such as Zayo Bandwidth that continue to amass bigger footprints.

Teens Abanding CD Format

The amount of music that consumers acquired in the U.S. increased by six percent in 2007, say researchers at the NPD Group. But there are key format changes. Legal downloads now account for 10 percent of the music acquired in the US. market.

At the same time, there was a continued decline in CD sales, which resulted in a net 10 percent decline in music spending from $44 to $40 per capita among Internet users.

NPD estimates that one million consumers dropped out of the CD buyer market in 2007, a flight led by younger consumers. In fact, 48 percent of U.S. teens did not purchase a single CD in 2007, compared to 38 percent in 2006.

The percent of the Internet population in the U.S. who engaged in peer-to-peer file sharing reached a plateau of 19 percent last year; however the number of files each user downloaded increased, and P2P music sharing continued to grow aggressively among teens.

Twenty-nine million consumers acquired digital music legally using pay-to-download sites last year, an increase of five million over the previous year.

But note: sales growth was driven by consumers between the ages of 36 and 50, reflecting an aggressive adoption rate of digital music-players by users in this age bracket in 2007.

Reflecting the growth in that sector of the market, Apple’s iTunes Music Store became the second-largest music retailer in the U.S. after Wal-Mart, based on the amount of music sold during 2007 (based on a 12-track CD equivalency for music track downloads).

Consumer Spending Still Dropping

ChangeWave's latest consumer survey shows a continued deterioration in U.S. consumer spending trends with no signs yet of any bottom.

The February 18-25 survey of 3,773 consumers focused on spending patterns going forward.

Nearly 39 percent say they'll spend less over the next 90 days than they did a year ago.

Sprint to Spin off Nextel?

The Notable Calls blog reports a "curious" rumor that Sprint Nextel Corp. has hired Morgan Stanley and initiated director Ralph V. Whitworth's plan to spin-off Nextel, with a formal announcement possibly coming in two to four weeks. Some undoubtedly will say this is a mistake.

Others, including me, will argue that if the choice is to ditch Nextel or the Xohm WiMAX network, Nextel has to go. Sprint already has taken the hit and essentially written off the entire value of the Nextel acquisition.

If it spins off Nextel, Sprint reduces the complexity of running two separate networks, with two sets of consumer devices and support operations to support, as it builds yet a third network.

Once upon a time Nextel boasted the highed average revenue per user in the business. That isn't much of an argument these days as the ARPU difference now has narrowed almost to the point of insignificance.

True, Nextel's customer base always was weighted more heavily towards business users, which is valuable, but Sprint's churn problems are disproportionately related to Nextel, these days. In the right hands, with a management unburdened by the other distractions Sprint has, something can be done about Nextel.

But it won't be easy. Nextel is the only carrier running the iDEN air interface, and Motorola is a key handset supplier. The former issue means handset scale isn't going to be there, so device costs won't be easy to manage. And Motorola itself wants to get out of the handset business, but so far seems to be finding few takers.

Potential WiMAX suppliers, on the other hand, are potentially much larger, and Google is among the firms active in supporting Sprint's Xohm initiative. Sprint already has taken the accounting charge related to the Nextel acquisition.

Spinning Nextel off also will simplify the previously-announced plan to finally consolidate headquarters operations in Kansas City, instead of maintaining two separate headquarters operations, one in Reston, Va. and one in Kansas City.

It's only a rumor at this point. But Sprint has to take drastic steps. It cannot incrementally creep back to health.

Blockbuster, Netflix, Movie Gallery: Diverging Paths

On-demand video will be a bigger part of overall television and movie viewing, no doubt. But that hasn't--so far--prevented Netflix from growing. In fact, Netflix recently raised its guidance for 2008 sales. The same can't be said for the retail store format, a business that awaits either reinvention or extinction.

For the first quarter, Netflix now sees revenues of $324 million to $328 million, up from $323 million to $328 million, with net income of $10 million to $14 million, up from $9 million to $14 million and ending subscribers of 8.16 million to 8.26 million, up from 7.85 million to 8.05 million.

For the full year, the company now sees revenues of $1.345 billion to $1.385 billion, up from $1.3 billion to $1.35 billion.

Netflix also sees year subs of 8.9 million to 9.5 million, up from 8.4 million to 8.9 million.

Blockbuster and Movie Gallery, it almost goes without saying, still face issues with their retail store formats. In its most recent quarter, Blockbuster DVD rentals continued to grow in global markets, though domestic U.S. sales fell slightly. Movie Gallery is operating under Chapter 11 bankruptcy protection.

Blockbuster worldwide same-store and by-mail revenues increased 7.4 percent from the same period last year. Domestic same-store revenues, excluding by-mail subscription revenues, decreased 0.9 percent, an improvement from fourth quarter 2006 performance, but not keeping pace with Netflix.

Movie Gallery, which owns the Hollywood Video chain, also is shuttering some 920 stores our of 4,491 existing stores located in all 50 U.S. states and Canada. Movie Gallery's May 2007 quarterly report, the most recent, showed declining sales.

Ultimately, the video distribution business will learn what other retailers have learned. There still is some element of "physical browsing" that provides value to consumer. If not, nobody would go to shopping malls or other retail outlets.

What requires some thought is whether a physical browsing capability still adds value, beyond the value of online recommendations and order fulfillment. Retail kiosks are a partial answer to distribution. So far, kiosks don't seem to replace the retail browsing experience.

T-Mobile Handles Churn

Though it doesn't appear T-Mobile USA will be changing its market share position in the near term, it appears to be doing a good job on the churn front.

It added 951,000 net new customers added in the fourth quarter of 2007, up from 901,000 in the fourth quarter of 2006. That's important because "net" adds are what one has left after deducting the customers who churned away in any given time period. The other data point is that, in its most-recent quarter, T-Mobile's churn dropped to 1.8 percent, down from 2.1 percent in the fourth quarter of 2006.'

That is notable because T-Mobile has a large percentage of contracts that are of the one-year variey, not the the two-year contracts that increasingly are the norm in the postpaid segment of the market. It also is notable because there is some evidence T-Mobile customers are more active than customers of some of the other leading mobile carriers in investigating alternatives.

"T-Mobile customers are the most active in checking out competitive products and services," says Compete.com analyst Jeff Hull.

"This is partly because they are a younger, more active subscriber base, and partly because of the legacy of one-year contracts at T-Mobile," says Hull.

"If you look at an upstart like Helio, four percent of their site traffic is from existing T-Mobile customers, with two percent from both AT&T and Verizon Wireless, and Sprint/Nextel customers seemingly uninterested in checking out the MVNO."

T-Mobile customers also are over-represented at the Boost Mobile site, another youth oriented brand that is successfully attracting T-Mobile user interest. At the margin, and it might only be at the margin, there does seem to be a difference between customer bases at T-Mobile and Sprint or Nextel, for example.

Given the apparent high "shopping" and "comparison" behavior, the lower churn is an accomplishment.

Senate Bill Mandates VoIP E911

Several years ago some VoIP proponents argued that regulators should not impose "legacy" emergency calling rules on new VoIP providers. That was back when some providers were aiming to replace legacy calling services with a variety of new applications or services, not all of which logically seemed to be "like" public network services. That largely remains true for services that remain in the PC-to-PC domain. But it appears the battle to avoid emergency calling regulations for all "replacement" services is moving inexorably to a conclusion.

Though similar legislation will have to be passed by the U.S. House of Representatives, the Senate has passed the IP-Enabled Voice Communications and Public Safety Act, a bill proposed by Senator Ted Stevens (R-AK). The legislation now moves to the House of Representatives for further consideration.

The bill requires all VoIP companies to provide enhanced 911 (E911) services to all subscribers. The bill gives the Federal Communications Commission authority to add 911 requirements into all new phone services as they evolve, without needing Congress' involvement. Elemental fairness, some would say.

For providers who once hoped relaxed regulatory oversight would provide a price advantage in the market, that hope increasingly is dashed. VoIP services that are effective replacements for public network calling will carry the same tax, safety and regulatory burdens legacy services do. And some would say that's just fair.