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Should Telcos Abandon Consumer Market; Focus on Business Customers?

Should Telcos Abandon Consumer Market; Focus on Business Customers?

October 23, 2009
By Gary Kim, Contributing Editor

The big independent telcos, especially the tier two providers, such as CenturyLink, Frontier Communications and Windstream (News - Alert), face a serious conundrum that essentially threatens their historic role as providers of communications services for customers in rural areas, said Samuel Greenholtz, principal at Telecom Pragmatics.

The challenges suggest a bit more caution about any new rules that make it harder for these providers to raise capital or run their businesses, since Greenholtz argued they are exposed to losing at least half and possibly most of their core business over time.
Those possible share losses also might raise new issues about the proper regulatory role for cable companies that might well become the voice and data providers many or most rural residents come to depend on.
Greenholtz argued that tier two providers are more exposed than small "tier three" rural providers, which typically face less competition and generally have more-generous government support for their high-cost operations.
Put simply, Greenholtz said there is a tension between the strength of cable competition and the capital constraints tier two providers face.
"In those areas in which the independent operating companies directly take on the cable companies, without fiber, the RLECs have at least the potential to get beat up significantly," he said.  "It is not unusual for these ILECs to only have half of the broadband business in a community," and "in some cases, the cable operator can get up to 70 or 80 percent of the market."
 "The independents can talk about positive free cash flow all they want and continue to mainly sit back and run the services," Greenholtz said. "However, if they are losing market share on four fronts, the cash flow is not going to be sustainable."
The capital markets issue is fairly simple. The tier-two providers position themselves in financial markets as dividend plays, not growth vehicles. The problem is that investment in new broadband facilities might require diverting those shareholder payments into capital investment.
The challenges is stark, Greenholtz said: "These carriers do not have a wireless infrastructure to generate cash and justify a big outlay of capital."
So what can be done? Greenholtz said that the larger IOCs need to fundamentally change their businesses. Up to this point, many have opted for the triple play, adding entertainment video to voice and data. He doesn't think that will work, and suggested something rather radical: abandoning the consumer market and focusing on services provided to business customers. That is going to strike some industry executives as equally unhelpful, because of thinner business density in many tier-two serving areas.
Simply put, there might not enough business entities in some, or many areas, to make such a strategy viable. But Greenholtz said the tier-two telcos might have to focus on business services, especially to small businesses, to survive.
 An integrated services provider, CornerStone (News - Alert), may have the right idea, he said. CornerStone has more than 50,000 access lines, providing local and long distance telephone service, high-speed Internet access, VoIP, security services and business telephone systems to business customers in New York, Massachusetts and Pennsylvania.
Established in 2001 by Dan Yamin and Don Walsh, CornerStone has more than 115 employees and 10,000 customers.  The company is headquartered in Troy, N.Y. with offices in Syracuse, Oneonta, Buffalo, New York City and Poughkeepsie
But some will question the appropriateness of the example. CornerStone is a competitive local exchange carrier that recently has made an independent telephone acquisition. Richmond Telephone's service area is five square miles.
In fact, the reverse strategy, which many ILECs now follow, seems more germane. That strategy has ILECs offering services to business customers as a priority, but outside of their regulated territories.
Refocusing on business customers is an apparently appealing idea for independent telephone companies. But it may not be quite legal, and is likely impractical even if there are no regulatory barriers. Tier-two providers do face key challenges. But abandoning the consumer market, in region, likely is not feasible

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Amy Tierney

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