“Creative Destruction” is the way economists sometimes characterize what happens to companies and industries when economies change. Many would argue such creative destruction presently is at work in many industries susceptible to disruption from the Internet and Web channels. You might point to voice services, music, retailing, advertising, newspapers and magazines as examples, with video entertainment and messaging likely future candidates.

After changing hands three times in six troubled years, the Philadelphia Inquirer, for example, was was sold for a tenth of the half-billion dollar price they fetched as recently as 2006, according to consultant Allen Mutter.

A decade or so ago, the Inky and the Philadelphia Daily News, its feisty tabloid sibling, would have been worth the batter part of a billion dollars in the unlikely event that their then-owner, Knight Ridder Inc., were willing to part with them. That’s a destruction of 90 percent of enterprise value in a decade. The issue is whether anything similar could happen to telcos or cable companies.

Advertisement

The sale values the properties, including the companion website Philly.Com, at $55 million, according to the Inky.

The economy arguably played a part, but that is an issue for most businesses and industries in the United States. Declining ad revenues are the long-term issue for the newspapers. But telcos have faced similar issues in the past, notably the severe decline of international long distance prices starting in the late 1970s and early 1980s.

The broader implications, for any business facing disintermediation from Internet and Web alternatives, would seem to be clear enough. If a business, or an industry, faces sure decline of its primary revenue source, that business or industry has to find a replacement.

You might argue the telecom industry is in that situation. The difference is that the telecom industry already, at least once, has shown an ability to replace a key source of revenue and profits. In 1977 about half of U.S. telco revenue came from long distance services. By 2007, mobile services had replaced long distance, which has become a relatively minor element of revenues.

Globally, earnings growth at the largest public telecom companies over the last three years trailed revenue growth by an average of 50 percent, according to AlixPartners. This is especially the case in North America, where earnings before interest, taxes, depreciation and amortization trails revenue growth by a factor of ten, AlixPartners argues.

Overhead costs (sales, general and administrative) also are outstripping both earnings and revenue increases. And though carriers have pared capital investment where they can, postpoining projects that will need to be undertaken at some point, such restraint never can last indefinitely. The common pattern is three lean years followed by three to four where spending ramps up again, one might note.

Those findings are consistent with virtually all other studies of global telecom provider financial performance, and simply point out the structural changes occurring in the telecom business. Basically, older legacy products that underpin the bulk of total revenue are in a declining phase.

Until quite recently, robust growth of mobile services has compensated for the weaker fixed-line performance. But the wireless revenue growth engine now is peaking as well, at least in developed markets.

That means the largest global operators are entering a period of heightened danger and opportunity. The way some of us might describe the challenge is that carriers essentially must replace “half of all existing revenue within about 10 years.”

And there are good reasons for making those sorts of predictions: it has happened at least twice in the past couple of decades. Most cannot now remember a time when “long distance” represented nearly half of all revenue for a large U.S. telco. But that once was the case.

And where local telcos once had nearly 100 percent of the market for fixed line voice, the only question now is whether the large providers will stabilize somewhere around 50 percent of the total market, or drop lower.

To be sure, mobile service revenue has been the run-away killer revenue source for most tier-one providers.

Broadband has helped a lot, and video helps a little. But mobile and broadband are mature, and video, though it will help, is a relatively lower-penetration, lower-margin service for most telcos.

Though it is likely mobile broadband will help preserve roughly the existing revenue contribution from mobile services, it is starting to appear as though even mobile broadband will fall short of fully replacing declining mobile voice revenues. So far, there is no clear industry consensus on what the new revenue “killer app” might be.

That suggests a period of continued experimentation with multiple new potential revenue sources, until something clearly emerges.

Of course, carriers can work at cutting operating costs. But it is the “revenue enhancement” part of the strategy that is the toughest, as carriers have been cutting costs for nearly a decade already. And part of the problem is that it takes a fairly good-sized new revenue stream to make a difference for a tier-one telco or cable company. It isn’t an easy thing to identify any new market, and execute well enough, to capture $1 billion in new revenue over a five-year period, for example.

The point is that a case might be made for either telcos or cable companies losing 90 percent of their equity value in 10 years, if they are unable to replace a huge change in revenue sources. The difference is that telcos, at least, already have replaced half their revenue in 10 years. Cable companies have relied on broadband access and voice, and now are gearing up to use business customer revenue, to offset declining video services revenues.

Join the Conversation

Leave a Reply

Your email address will not be published. Required fields are marked *

Don’t Miss Any of Our Content

What’s happening with broadband and why is it important? Find out by subscribing to Telecompetitor’s newsletter today.

You have Successfully Subscribed!