Non-regulated services represented 35.2% of rural telecom revenue in 2017, according to this year’s Telergee Alliance Benchmarking Report. While a notable increase from 20.5% in 2006, that growth is relatively flat from 2016’s non-regulated revenue benchmark of 35.5%.
The Telergee Alliance is a group of accounting firms specializing in rural telecom that has produced a report on rural telecom economics for over a decade and has been sharing that information with Telecompetitor for several years.
The report is based on aggregate information gathered from Telergee client companies for 2017. This year’s report had 150 respondents – a substantial portion of the estimated 800 or so incumbent rural telecom providers nationwide.
Rural Telecom Revenue
Rural telecom providers have been emphasizing the non-regulated side of their operations in recent years as their traditional business of providing landline phone services declines. Non-regulated services include broadband internet, video, wireless and others. (story continues below)
Chris Skidmore, senior manager for Telergee Alliance firm Moss Adams, said the most surprising finding in this year’s report was that “for the median telco, the portion of total operating margins that is coming from the nonregulated side of the business continues to grow as the portion of total operating margins that is coming from the traditional wireline side of the business continues to decrease.”
This shift is occurring, in part, because margins on nonregulated services are increasing while margins on regulated services are decreasing and, in part, because of the shift in revenue mix.
Regulated services, which represented 79.5% of carrier revenues in 2006, now represent only 64.8% of rural telecom revenue.
Overall margins, however, have remained essentially flat – in the range of 10% — for the last seven years.
Broadband internet is the largest component of rural telcos’ nonregulated revenues, representing 16.1% of the median company’s revenues for 2017. The median rural telco saw internet revenues increase 8.1%.
Rural telcos’ future success will depend, in large part, on internet revenue growth – but just how strong that growth will be could be difficult to predict. Skidmore noted that the median company saw broadband customer growth of 2.7% in 2017 and the median company had a 57.9% take rate on broadband services, raising the question “Do we have any more room to grow in broadband market penetration and growth or have we reached a saturation point?”
Future broadband success may depend, in large part, on the extent to which customers upgrade to higher-speed broadband tiers. But as of now, the median company reported that 40.8% of customers take the lowest speed available and only 1.8% take the highest speed, which as Skidmore noted, “seems to suggest that the ILECs could do more to move customers into higher-speed products.”
A Video Decision Point
One way to do that might be to encourage more customers to use over the top video, perhaps by selling OTT services. This strategy also could help address profitability concerns that increasingly have plagued rural telco video offerings.
According to this year’s Telergee report, video programming costs increased 6.8% over the previous year and a whopping 58.5% in the last five years. Programming now represents 71.8% of the median company’s video expenses and the median company’s video margin was actually negative.
In this environment, Skidmore noted, “I see companies keeping an eye on the contribution margin of this business (revenue minus cost of content per customer). There is more willingness to raise rates as costs increase . . . I see companies encouraging customers to use OTT products, which requires more bandwidth, resulting in customers increasing the broadband capacity they buy.”
One other key metric that Telergee tracks is capex. This year’s report measured that at 20% of operating revenues, which is consistent with the past two years. Skidmore noted, though, that this is lower than it used to be. In 2008, capex was 24.3% of operating revenue for the median company.
Skidmore noted that recent changes to the Universal Service Fund program imposed two construction limitations – one on total construction costs and one per project – and those limits could be impacting capex. He also noted that “the FCC has broadband buildout requirements that will be kicking in soon.
“Companies could be delaying construction until they better understand the measurement requirements,” which were only recently released by the FCC, Skidmore said.