Let's Hear It for Business Services
Let's face it: The telcos aren't going away anytime soon. Yes, they're losing access lines, but they're more than making up for that with wireline IP data revenues driven by consumer and business demand. And it's not just transport sparking the growth: As telcos roll out next-generation services – those that rely on the IP network and combine wireline and wireless connectivity along with data applications – enterprises will increasingly turn to telcos for VPNs, managed Internet services, hosting, applications management, and content distribution.
Taken together, these wireline network services aimed at business customers are the engine powering the telco transition to next-generation service providers. Do telcos really care how customers get to the core network? Does it matter if it's a wireless or wired connection? No. What the telcos care about is making sure that access is capacious enough to support the application the customer wants to run, and that customers turn to them for applications support.
Look at the numbers AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) just turned in. The business-focused sides of the house are not only taking care of business, but they're clearly the growth foundation:
- At AT&T, which reported its 2Q08 numbers last week, its two business operations – wholesale and Global Business Services (GBS) – did pretty well. Wholesale revenues came in at $3.5 billion. Enterprise revenue in the quarter was $4.7 billion, and there was $3.2 billion in regional business revenues stemming from Ethernet, IP VPN, and hosting services. Altogether, that's about $11.4 billion; just a tad more than the $11 billion in wireless services the company reported. (See AT&T Reports 2Q08.)
- At Verizon, which reported its second quarter 2008 results on Monday, Verizon Business brought in $5.3 billion, and global enterprise revenue, which represents retail sales, accounted for $4 billion. Strategic services such as IP, managed services, Ethernet, and optical ring services drummed up an additional $1.5 billion (up 18.7 percent from second quarter 2007). All told, that's $10.8 billion in revenue. And, just like its competitor, that's just a smidgen more than its $10.5 billion in wireless revenue. (See Verizon Reports 2Q08.)
The good thing about business revenues is that they will keep growing as businesses become increasingly sophisticated users, and as they use telcos to outsource more services. Wireless revenue growth, however, is somewhat capped by "all you can eat" pricing packages aimed at consumers. Also, much of the growth in wireless comes from data transmission and applications. I'd be willing to bet that the bulk of data growth comes from customers whose employers have corporate wireless accounts with the carrier. Unfortunately, neither company splits its wireless revenues by business versus consumer. But when you take any percentage of the wireless revenues and attribute them to business sources, the relative importance of work-related communications increases dramatically.
Work-related applications are where the money is. And that's where the telcos will aim their next-generation services. With the line between personal and professional use blurring, customers will benefit from this trend, and so will the telcos.
— H. Paris Burstyn, Senior Analyst, Heavy Reading