Carrier Evolution

Telco and cable revenue trends in the U.S. market continue to illustrate a fundamental principle some of us believe is foundational for both telcos and cable companies working in developed markets.

And that fundamental reality is that any service provider in a developed market must plan for a business environment where half of all current revenue has to be replaced by new sources over about a 10-year period. The corollary is that that rate of adaptation might have to be conducted more than once.

That isn’t to say that both cable and telco service providers in developed markets will have to replace about half their current revenues every 10 or so years, but simply that they will have to do so for the next 10 or possibly 20 years.

You might wonder why I believe that to be the case. History, for starters. In 1977, U.S. telcos earned about half their revenue from long distance services. But as long distance revenues shriveled, mobile services arose to take the place of long distance revenue that was lost.

The most-recent quarterly earnings report from Comcast shows the same sort of trend in the U.S. cable industry, where video revenues have shrunk to about 52 percent of total Comcast revenue, while other services now contribute 48 percent, and are growing.

At some point, Comcast will earn less than half its revenue from its legacy video entertainment business. And that is to focus only on Comcast’s “local access” business.

In fact, including the NBC Universal contributions, it already is true that Comcast earns less than half its total revenue from cable TV distribution. In fact, cable TV video distribution operations now account for only 33 percent of total Comcast revenue.

Telcos already have been through one such transformation, as overall revenue now has shifted from “long distance” to wireless, at least for the tier one U.S. providers. The next set of transitions will see the revenue contributions from mobile voice and text messaging dwindle in favor of new sources.

But those transitions–either of Comcast, AT&T or Verizon–show how hard it will be for the much smaller providers to transform their business models. Many smaller providers will not be able to leverage either the mobile business or content plays such as NBC Universal to recreate the business they are in.

Put starkly, both U.S. cable and telco tier one service providers are moving away from primary reliance on fixed network access services.

That doesn’t mean they necessarily “get out of the access business.” It does mean that they add new lines of business to the existing access business. For many smaller service providers, that is not a viable strategy.

What the end game might be, aside from more mergers to create scale, is not so clear. The tier one service providers already have shown, by their actions, that growth has to come from outside the fixed network access business.

Comcast’s latest quarterly earnings report only reinforces that notion. That, in turn, reinforces my belief that a basic element of strategy, for any fixed network services provider, is the assumption that half of all current revenues must be replaced, over about a 10-year period.

For some time to come, you might argue that will be accomplished through acquisitions and mergers. Another key tactic is to shift the customer base from “primarily consumer” to “primarily business,” in terms of revenues.

The issue is how long those sorts of tactics will work.