Wednesday, March 21, 2012

The Future is More Than Cloudy

Internet bandwidth out of telco hotels is ridiculously cheap.

Not just HE at under $2 or Cogent at under $4, but all carriers: CenturyLink, XO, L3.

I reported earlier this week that telco debt was out of control: “The debt in this industry is crazy. AT&T and VZ combined have $105 Billion in debt. The top 5 MSO's have about $100B with Comcast at $40B. Level3 is at $8.5B. WIND has $9B. CenturyLink has $22B. When you are paying 7.75% on those notes, that's big bucks! Zayo already had $682.7 million in long-term debt; now it will have about $2.9 Billion in debt on approximately $900 million in annual revenue.” Sprint has $20B in debt and $34B in revenue.

Yet they continue to erode pricing, which erodes revenue and income.

With pricing declining, how do you re-pay all that debt?"

You could argue that the cost of a 1GE port card has come down, but that card has to sit on bigger hardware than DS3 or T1 cards. And 10GB cards are NOT cheap. Neither is the gear to run those cards. So what is the industry going to do?

According to the 2010 FCC report: “In 2008, the industry reported $297 billion in telecommunications service revenues, a small decrease from 2007’s $299 billion. ... Chart 1 illustrates that overall telecommunications revenues have been relatively constant since 2000. The chart shows how the wireless service share of the industry has grown rapidly while the toll service share of revenues has declined.” ATLANTIC-ACM just reported how international toll has declined. (They are blaming Skype for that.)

In this report, “The U.S. telecommunications sector, which endured a revenue decline in 2009 due to the struggling economy, is on track for steady growth, with spending projected to climb from $985 billion in 2010 revenue to $1.2 trillion in 2014. That's according to a preview of the Telecommunications Industry Association's 2011 Market Review and Forecast, obtained by Tech Daily Dose.”

This is how the 2010 numbers are broken down. [see Plunket Research]

Where’s the growth? Cloud and mobile.

Mobile Broadband Will Drive U.S. Telecom Revenue 2011 to 2016," writes Gary Kim.

“The US telecom market generated $367bn in service revenue in 2010, an increase of 3.1% over 2009. Burgeoning growth in mobile broadband, the relatively inelastic nature of demand for pay-TV and continued growth in fixed broadband will offset the ever-shrinking fixed circuit-switched market. We expect the market to grow at a 3.1% CAGR over 2011-2016, reaching $443bn in 2016. Mobile data will be the largest contributor to growth over the next five years." [from a Pyramid report]

Gary Kim continues with: "U.S. Telecom Industry Revenue Flat Through 2015."

That being said, telcos will need to get costs in line and reduce as much staff as they can. Ultimately, customer service will decline as well.

For telcos without their own cellular network, Cloud will be a huge factor.

CLEC's will be chasing the same ball: Cloud and Multi-Location business, since single site and small business will be too expensive too win. Basically, ILEC's and CLEC's have given up the small business market to cablecos. At which point, cable will be the new monopoly. At that time all partners - agents and wholesale - will suffer, in my opinion. Beware.

Cablecos are also chasing this market with reduced pricing - even giving away access with Hosted PBX service. At some point, the price has to bounce.

There are not too many elements that make delivering a T1 SIP trunk cheaper than delivering a PRI, except the card and switch. Many providers use an SBC (session border controller) to deliver a SIP trunk instead of buring a license on a softswitch. Telcos use a paid-for class 4/5 switch to deliver PRI. The last mile costs the same. The cost of terminating minutes is about the same (and will change significantly with USF Reform). So I wonder where the huge cost savings comes from.

Overall, the US telecommunications industry is looking at a reboot in 2014 or 2015. When Bernstein analyst Craig Moffett downgraded Sprint shares this week, he should have downgraded them all. Approximately $300 Billion in debt with flat revenue. That is not a pretty picture. As noted earlier, cloud has some pretty heavy hardware costs, as well as real data center costs - power, cooling, bandwidth, battery, maintenance - so that cloud money doesn't come cheap.

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