People ask me about the CenturyLink-Qwest merger. I'm still trying to get over the CTEL-Embarq merger. And wrapping my head around bigger is better when that has been proven to be a hoax recently (Too Big to Fail?) is causing a headache.
Rich Tehrani sent me an article from Barrons, CenturyLink's POTS of Gold. He asked what I thought. Grab a cup of joe and take a seat.
This was the most telling statement from the Barron's article, "In a shrinking, very fragmented industry long ripe for serious consolidation, CenturyLink has become a textbook consolidator. Its management team, considered one of the strongest in the telecom industry, has been buying rivals, cutting their costs and pumping out strong profits from them." This is the EarthLink strategy for dial-up. Ride it out.
Cost cutting to make the balance sheet look good - and so you can pay down some debt - does not make for a good long term company. CenturyTel, Embarq and Qwest are all missing the same three puzzle pieces: lack of a wireless strategy, a cellular play, and a fiber-to-the-X project. Couple that with a declining wireline customer base and huge debt. What a great pie!
I look at rural IOC player, ITS, who has rolled out innovative landline products, as a shining example of what these 3 ILECs are not. (Hint: Innovative).
I know everyone is excited about 80 Mbps DSL over copper but that is for a short loop run. Much of the base of these ILEC's are further than 10 kilofeet. So you are looking at 6 Mbps at best. Hopefully, there aren't many cablecos competing in this new region.
Barron's does mention the $7.2B Broadband Stimulus money. I guess they didn't know that round 1 is over and the 2nd and last round of applications have been submitted. So the new ILEC, CenturyQwest, probably won't get a multi-billion dollar windfall. And as long as we are talking about government monies, let's talk about Universal Service. The USF is a boon to these 3 ILECs. However, the USF program is under a Notice of Inquiry as the FCC decides how to divvy up that multi-billion dollar pie to pay for rural broadband, voice, rural healthcare and internet access for schools and libraries. It looks like they will have to do more with the same largesse.
Cost cutting for Qwest meant cutting all its out-of-region sales force and slicing CAPEX spending. Analysts have this fantasy that Qwest is going to help CenturyLink grab federal government contracts and Fortune 5000 accounts. That's another lottery ticket type thought. Most of the federal contracts were handed out in 2008-2009 for 5-year periods to AT&T, VZ, Qwest, Sprint and Level3. I don't know how much more fed money Qwest can expect. Plus those same players are fighting for every dollar of the telecom services pie of the Fortune 5000.
Qwest numbers looked like this: Its 2009 Net income was $662 million and Q1 2010 net income was $38 million (so maybe $120M). That's a drop. If these markets are so profitable, why is VZ giving them away? I get that there is some economies of scale. It does not fix the big 2 issues: Rural Broadband penetration and the Wireless issue.
Rural Broadband. Stimulus money aside, how does CenturyQwest deliver high-speed broadband to its rural market in a profitable manner? Unlike Ma and Pa Bell, Qwest didn't have an FTTX project going. The analysts are betting on data revenue to replace voice revenue, but you have to offer more than 3 MB, which is all that Frontier is promising to the FCC. 3 MB?! Really?
Without fiber, you are just a sales force for a DBS outfit (DISH or DirecTV). How profitable can that be?
Wireless (or lack there of). CenturyLink would have been better served buying MetroPCS, Leap or even Sprint. The FCC feels that wireless is the future. So does Ma and Pa Bell. More than 15% of households do not have a landline. ILEC's don't exactly market Naked DSL because they still want the voice lines (for ARPU, Inter-Carrier Comp, and subscriber numbers for Wall St.). The Millenials don't even use voice on their cell phones. So how do you replace all that voice revenue?
Let's take one former Embarq county in Florida. The stimulus grant to deliver broadband went to one of my clients. Rapid Systems will blanket the county with WiMax from Motorola. Embarq has never known competition in this county - no cableco. Embarq was not improving the DSL penetration or speed to this county. Now they are about to get slapped. Monopoly thinking doesn't work in this new economy. What if that happens in 50 more counties? What does that do to the analysts dreams?
Analysts are writing about what a great stock deal this is. I'm writing about whether these types of mergers will ultimately end up looking like Fairpoint. That doesn't help the economy or the consumer.