Carrier Evolution

While the U.S. cable operators in 2012 may generate over $7 billion in annual revenues providing telecommunications services to businesses, they “will be chasing a declining business telecom services segment” and face fierce competition from entrenched telco providers with very deep pockets ready to staunchly defend their existing base, according to a study from The Insight Research Corporation.

Cable operators will gain some market share, but “they will remain small players in a big industry with low margins and little cash flow,” Insight Research argues.

That the small business market is fragmented is uncontestable. That the market is “declining” is more contestable.

By way of contrast, other analysts say services aimed at small and mid-sized businesses will be among the top-three fastest-growing communications services for fixed network providers, according to Atlantic-ACM.

Machine-to-machine services, business Internet access and business VoIP all have double digit growth rates, according to Douglas Barnett, Atlantic-ACM senior analyst.
Between 2011 and 2017, M2M will have a 28 percent compound annual growth rate, small business Internet access will have a 24 percent CAGR and Business VoIP will have an 18 percent CAGR, Atlantic-ACM says.

Of the 146 million U.S. wireline retail local telephone service connections in service in June 2011, about 38 percent were provided by incumbent local exchange carriers, about 26 percent were ILEC business customers, while 20 percent of lines were supplied by non-ILEC residential service providers, while 16 percent were supplied by non-ILEC business service providers.

In addition to the cable companies, local telcos also have emerged as significant suppliers in the CLEC business, especially in business customer segments.

Revenues for U.S. CLECs were forecast to grow at a compound annual growth rate of 26.9 percent to reach $61.1 billion by 2006, Atlantic-ACM forecast in 2001.

In 2003, The Brattle Group estimated that U.S. CLECs held more than seven percent of the U.S. business market, and nearly 10 percent of the U.S. consumer market.

Neither of those figures has proven incorrect. A substantial amount of market share and revenue has indeed shifted to new providers. The Federal Communications Commission reported there were more than 206 million broadband access connections in service in mid-2011.

Assume an average revenue for each of those connections of $40 each (a blended rate assuming $35 for a mobile connection and $50 for a fixed connection, and including both higher-priced business connections and consumer connections). About 81 percent of those connections were supplied by cable or wireless providers. For the sake of argument, assume that every wireless line is functionally a competitor to an incumbent broadband line.

So 81 percent of 206 million connections would be 166.86 million accounts. At $40 a month, each of those lines might represent $480 a year worth of revenue. That would represent about $80 billion in annual revenue.

To be more strict, assume only cable modem and a quarter of “ILEC” broadband accounts are counted as “CLEC” revenue, for purposes of estimating CLEC broadband access revenue, eliminating all wireless lines.

That implies 27 percent of all fixed network broadband lines were supplied by “CLECs.”

Of the 206 million broadband connections, 23 percent are supplied by cable operators and 18 percent are supplied using DSL or fiber to home technologies. That implies 37 million CLEC lines using telco platforms and 47.4 million cable high speed lines.

Assume 100 percent of the cable modem lines properly are counted as “CLEC” revenue, at an average of $50 a month. Assume that 20 percent of the DSL or FTTH lines are sold by CLECs at $80 a month.

That in turn suggests cable CLEC revenue of $28.4 billion and telco platform CLEC revenues of about $35.5 billion annually, for a total of about $35.5 billion in “CLEC” broadband access revenues.

Assume that the 36 percent of fixed voice lines represent $45 a month in revenue (a conservative estimate including both consumer and business lines). That implies $540 a year in revenue for each line in service.

The FCC says there were 146 million fixed voice lines in service in mid-2011. That would imply 52.6 million “CLEC” lines in service, or $28.4 billion in end user revenues, not including access or other carrier revenues.

So the “CLEC” revenue stream might be as little as $64 billion a year, or as much as $108.4 billion a year.