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Optical/IP

Consolidation Won't Save Small Telcos

8:00 AM -- Some feel Congress and the Federal Communications Commission (FCC) would like to see more consolidation in the rural telco space, to create greater efficiencies and economies of scale. But that is not the direction in which the industry seems to be moving.

There was a point at which larger telcos were snapping up smaller, rural companies -- Telephone & Data Systems Inc. (Amex: TDS), CenturyLink Inc. (NYSE: CTL) (back in the Century Tel days), Windstream Communications Inc. (Nasdaq: WIN) and Frontier Communications Corp. (NYSE: FTR), in particular, were actively expanding their footprint.

That trend has definitely slowed. It's not that these companies don't have money to spend or aren't spending it -- they just aren't spending it on rural expansion.

Both CenturyLink and Frontier are still absorbing what they've already bought -- Qwest Communications and a chunk of Verizon's rural territory, respectively. Windstream has shifted to acquiring CLECs that deliver business services rather than expanding its residential footprint. CenturyLink and Windstream also acquired IT and cloud expertise to build a portfolio of cloud offers. (See Windstream Completes Paetec Buy, Windstream Hosted Solutions Lands PMMC, CenturyLink Brings Savvis Cloud to SMBs and Savvis/CenturyLink Set for July 15.)

TDS is still on a buying binge, but it's now buying IT expertise, not rural telcos. The TDS focus is on adding services on top of its broadband pipes and improving those pipes across the footprint it already owns. (See TDS Buying IT Expertise, Not Burying It .)

This is not good news for the rural guys, some of whom would like nothing better than to sell their companies and avoid the heartburn of trying to survive the latest round of regulatory changes and uncertainty.

It should be a signal to the folks at the FCC, however. If anyone in Washington is expecting industry-led consolidation of smaller telcos to address perceived inefficiencies in rural telco operations, they are going to be disappointed. That is not the direction in which the market is moving, in fact, quite the opposite.

Both Jeff Gardner, CEO of Windstream, and Dave Wittwer, CEO of TDS Telecom , will be joining us next October at TelcoTV, to discuss their strategies, if you'd like to join us and hear them out.

— Carol Wilson, Chief Editor, Events, Light Reading

paolo.franzoi 12/5/2012 | 5:30:01 PM
re: Consolidation Won't Save Small Telcos

 


I wonder if there are real issues if the states will step in.  They have done things in the past (INS for example) to help the local IOCs.  Maybe they help/buy/facilitate consolidation?


seven


 

cnwedit 12/5/2012 | 5:30:01 PM
re: Consolidation Won't Save Small Telcos

Good question. I'm guessing things might have to get a whole lot worse, but I could be wrong. What are you thinking they might do?

paolo.franzoi 12/5/2012 | 5:30:00 PM
re: Consolidation Won't Save Small Telcos

 


Well, there are a number of states (primarily West of the Miss. River) that have a lot of small IOCs.  Many of those companies are actually owned by the local towns, some by actual independent corporations.


For the former, the States would want to manage the tax burden on the local communities.  They already provide some ISP help (I used INS as an example but Minn and other states are similar) and fiber backbones.  Those companies are not going to go out of business but might be a problem for local communities to support on their own.


The independent corporations basically need scale but could not afford to buy their way into consolidation.  Scale would allow them to lower costs (both Capex and Opex).  


There are a couple of thoughts there:


1 - Provide a buying consortium that gets better prices.


2 - Provide more services at a statewide level - especially those that are out of the technical reach of smaller companies.


3 - Consolidate on their own (buy some IOCs) and then create a company to be spun off after it is big enough (could be done with bonds).


This latter would start with the municipally owned IOCs and allow the independent ones to join at a given price.  The State could then have a big enough company to be meaningful.


seven


 

RBR 12/5/2012 | 5:29:48 PM
re: Consolidation Won't Save Small Telcos

Howdy Carol, seven.  I’d offer the roadblocks are basic.

Most LECs need more density to increase their operating cash flow, acquisition of similar or lower density RLECs doesn’t add to the bottom line regardless of the overall potential OPEX savings; these are RoR companies after all.

Old school Board of Directors or Owners, Cooperative Ownership rules and issuance of Capital Credits are legacies which all stand against mergers and they prevent hostile takeover.  By the time finances are too dire to proceed, most senior and midlevel management will have been let go with no one left to exclaim the cow has left the barn.

Poor business models still plague the industry.  Most are either moribund, locked into yesterday’s services or are sophomore Price CAP want-to-be’s chasing everything.  Much squandered opportunity and ill fated ventures.

Most will likely look to their State to backfill lost federal subsidies, and it is in the State’s interest to support them, if they can.  Many States are more focused on energy and water issues and simply shadow the FCC rulings for telecom.  At best, States can only prolong the dissolution without change in the RLEC business model.


It remains telling to see which companies simply seek to sustain themselves versus those in pursuit of financial independence.  Truth be told wireless is a viable alternative for rural phone service, albeit inferior to a good terrestrial access network for broadband.  To survive, the industry, small telco’s in particular, need to sever the Gordian knot that linked Internet (Type 1 Federal Jurisdiction) to Local Access (Type 2 and primarily State Jurisdiction) and monetize their Local access directly.  Too, if the telco and MSO world could trust one to own the access whilst the other provided the content, or own it jointly, it’d free a lot of capital to build FTTH.

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