February 18, 2008
Coming soon! Telcos face troubling times or how the suits shot themselves in foot!
Reading David Berninger’s piece titled “Here comes trouble, saving big iron in telecom” today served as a reminder that all is not not well in the land of bell. Sure, regulations demand that PSTN networks contune to be maintained and that there is a cost that we’ll all hear the telcos whine about until after the last POTS circuit is decommissioned. Reality is that virtually all investments in PSTN infrastructure were capitalized eons ago and that POTS remains the single largest profit engine for telcos. It is also a fact that this steady, reliable profit engine is dying. Bearing that in mind consider this excerpt from David’s post:
The most recent quarterly results from the telcos starkly demonstrate this reality, with year-over-year declines in access lines of roughly 10 percent. Displacement by cell phones, cable VoIP, and the waning need for second lines (e.g. fax, dialup Internet, etc.) are driving this decline — in other words, a collapse in usage. It should come as no surprise to anyone paying attention to how many times they pick up a telephone that the FCC’s annual trends in telephony service statistics show a 40 percent drop in telephone network minutes since 2000.
Telecom represents an anomaly among technology-driven industries. There exists no equivalent to Moore’s Law. The quality of a telephone call between neighbors in 2008 differs very little from the same call in 1958. Reliability, audio quality, and even the telephone itself remain largely unchanged. This makes the industry even more vulnerable than the computing time-share business, where companies like Digital Equipment delivered annual cost performance improvements when the PC arrived on the scene.
If the telcos are to survive, they need to to change their business models quickly. Out of the big 3, Qwest seems to be on the right track having been forced to change, mostly because of lack of capital. The telco business model has always been about finding ways to deliver the same services at a lower cost while charging subscribers more every year for the same service. This has been SOP since the days that automated switching replaced the lady who connected calls for you, and is permanently programmed into the minds of telco management today. In recent times, the profit engine from POTS enabled AT&T and Verizon to buy up most of their potential competitors, temporarily delaying the need to upgrade their data networks. The last blip in wireless revenue before the market reached saturation only extended that illusion that Telco managements had their acts together.
While Verizon has been making excellent progress with FIOS deployments they have a dual problem of unsustainable per subscriber revenue forecasts, with new deployments coming online too slowly to replace the declining POTS revenues. Then there is pay TV that has been sold to stockholders as the future to replace POTS profits. The fact is that it will soon peak just like wireless did, and that spells big trouble for the telco’s rosy forecasts. With pay TV peaking soon and and no fat “FIOS” pipe to fill the void AT&T’s triple play is a trainwreck waiting to happen . Customers who have DOCSIS 3 available from the cable guy will flee AT&T like a tidal wave.
Serves them right. I’d wager both AT&T and Verizon could have built FTTH to 80% of their original market with the money spent on their first single acquisition of another telco. Sadly, there are hundreds of thousands of people with a big chunk of their life savings invested in these companies. They need to demand better management or sell out before the current management dilutes the value of their shares any further.
Filed under AT&T, Garry's Rants, Qwest, Verizon by Garry King
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Comments on Coming soon! Telcos face troubling times or how the suits shot themselves in foot! »
Having lived in the belly of the beast so to speak for quite a long time I can tell you what happened to the Telco industry and its written in pictures.
Back in the day of all the regional bells, GTE and larger COOP’s it was tradition that the president have his/her portrait done and hung on the executive row wall leading into the ‘inner sanctum’. The plaques not only had the persons name but the schools attended. So from the 40’s onward it was names like MIT, Drexel, Cal Tech, Ga Tech and Vanderbilt on those tags. By the 70’s however those same placards now had Sloan, Harvard, Wharton and Northwestern — biz schools.
The engineering mindsets that had driven companies like GTE and AT&T of yore were displaced by bean counters in the executive board rooms of these companies. The mindset became one of how efficient you can collect that nickel a call? Engineering took a back seat at the Telcos. The last truly momentous engineering to come out of the Telcos was SS7 and ISDN. Both technologies that were birthed in the 70’s, the last heydays of Telco engineering.
FIOS barely qualifies having been birthed by 2 Telcos but the engineering is not far removed from the developments established by Corning/3Com/IBM nonTelco companies. FIOS goes so far as to bypass the POTS physical plant. Its just coresident with the POTS infrastructure at the CO.
But you know, the biggest danger for most of these POTS companies is the fact that they have NOT paid off the CO infrastructure. CO engineering is a long term proposition — 20-30 years in most cases. These very same departments look at growth patterns to know where to plant the next CO, even if its scrub land today. Fact is, most of the debt that POTS Telcos have is bond debt used to buy the infrastructure. So for many their biggest problem is dwindling use on debt that has probably another 5-6 years to be paid off. I know of at least 1 Telco who has told their Network Ops VP to run his organization on 60% of previous budgets. So they are now in stasis mode only for POTS.
The only way out for the Telcos is to pressure the Congress for changes in FASB/GAAP so they can do an accelerated writedown on POTS. If not it will delay the roll out of 700mhz if a Telco is the winner.
My time in the belly was shorter lived, but I spent my time under the thumbs of the business school geniuses. I remember when engineering rolled out voice mail (AKA “Call Notes”)and pronounced that the service would only cost pennies a month per subscriber if they could get 100,000 subscribers on the system. It was immediately released to the public for around $20/month. the profits were huge, but they wrote the systems down over an 18 year period. If someone is so stupid to capitalize a computer based system that will be obsolete in a couple of years over such a long period of time, I do not feel sorry for them when their company tanks under the weight of managements incompetence. If you have adequate profits to keep upgrading your core business, that is where you invest if you have real competition. Telcos have not had to compete. Without the guaranteed profits from regulated rate service, they would have tanked decades ago because they have not been successful at making money on much of anything else they get involved in.
Just my take, your milage may vary.
The irony is that the engineers ran these companies better as a financial basis than the Suits. I based that on the fact that knew intrinsically when a technology had outlived its usefulness. Which was usually before the cash flow does. Suits on the other hand don’t act till the spreadsheet tells them too. But its too late then.
Agreed.