As we flicked through coverage of the latest telecommunications mega merger this week, that of CenturyTel merging with Qwest, it began to become obvious that no-one right now, that is apart from the Obama administration, cares very much about the mostly rural customers of these telcos. Investors certainly don’t, so much so that they are likely to scupper the deal, primarily by selling CenturyTel shares, like they were going out of fashion.
The deal is in the form of a $10 billion plus share swap, and any major fall in the valuation of CenturyTel is likely to push the two back to the tables to renegotiate a better deal for Qwest.
The Obama administration could have almost done its part for the National Broadband Plan and the Broadband Stimulus package by giving all the money to this combination and saying, ‘you can have it but everyone must have broadband.’ But then most broadband plans that will benefit from these two initiatives are likely to be wireless in nature, and neither CenturyTel or Qwest have any wireless services.
CenturyTel sold off its wireless infrastructure to Alltel, since acquired by Verizon; Embarq; now part of CenturyTel IS made up of the local lines business of Sprint, so it never came with any wireless connections, and it partnered with Sprint; while Qwest sold off its fledgling, financially hampered, wireless business off to Verizon some years ago. With the exception of 700 MHz spectrum acquired during the 2008 sale of analog TV spectrum, this merger has no wireless assets. That’s partly what’s killing it.
AT&T, when it came out with figures last week, was not only saved by its cellular performance, but saved specifically by its relationship with Apple. Verizon figures, out this week, show the same kind of competitive and pricing pressures, eating away at its growth, and that’s with continued growth in cellular. Any Telco in the US which does not have the benefit of a thriving cellular operation, is almost certain to find that it cannot help but lose fixed lines, and slowly shrink its way into oblivion.
Both CenturyTel and Qwest will lose fixed lines to cable and to cellular, and yet they own neither. Which is why investors see this as tying two stones together to see if they float, when in our view they should be seeing this as a consolidation that may bring economies of scale and buying power to two organizations which are embattled due to the same problems, and yet they both remain cash generative.
Around the world it is fairly clear that satellite TV is growing, and cable TV is shrinking in terms of numbers of households signing up. There are fundamental reasons for this to do with building out infrastructure. In India last year 10 million homes signed up for satellite TV, mostly because there is no way for a fixed line to reach those homes. But there is another truth, which is that cable operators, once they have changed their technology to digital cable, can reap the rewards of a triple play ‘ selling fixed voice, broadband and IPTV. They may be losing households, but they are driving up Arpu consistently throughout their footprint. And more than half of the merger footprint would be reached by cable operators ‘ which neatly phrases the problems of these two companies. How do they respond, especially when they don’t have wireless?
Currently the merged CenturyTel operation would mostly have pay TV service provided through satellite TV with relationships with both DirecTV (at Qwest and Embarq) and Dish (at CenturyTel), in different parts of the country.
But much of the coverage has centered on the fact that post merger, both would offer IPTV, through a laying of substantial elements of fiber in the least rural parts of their footprints.
CenturyTel was one of the early innovators in IPTV back in 2005 and we seem to remember built a system around Widevine DRM and Modulus (now Motorola) encoders. So yes it has a fledgling IPTV operation and it is trialing further IPTV services in more far flung parts of its footprint. It’s only natural that CenturyTel highlights this type of ‘upside’ to get investors on board. But it doesn’t sound like much of an upside to us, building out a load of fiber, in other worlds taking on more and more cost, in the hope that it can emulate its RBOC brothers at Verizon and AT&T and build a triple play, just like the cablecos.
Investors just want nothing to do with that kind of unforgiving spend, which has made them less and less happy with Comcast management, as it upgrades through layers and layers of new cable technology, and with Verizon, which will take 20 years to wire up half of the US with expensive fiber. Sensible levels of additional fiber at CentuyTel/Qwest are inevitable, and it may well produce excellent backhaul services for both the existing cellular operators and to underpin a new network for that 700 MHz spectrum, when it gets built out.
Another area that investors might be pointed at is the new way in which the Universal Service Fund will be directed towards the provision of broadband lines in rural parts. CenturyTel has been exceptionally proactive, both in the upgrade of dial up lines to full broadband lines, and in dropping the FCC ideas about just how to revise Universal Service handouts. These two together could be extremely interesting for both companies.
In 2009 Qwest only received $66 million in federal universal service high-cost subsidies, which is why perhaps it only added 100,000 broadband lines from a year previous. CenturyTel has only taken a few years to upgrade all of its dial up lines to broadband and has then purchased nearly as many broadband lines again when it bought Embarq in 2008.
If suddenly this merged entity could install DSL lines for the same cost as others operators installed them, with the rest of the cost being picked up by the Universal Service Fund (soon to be called the Connect America Fund – CAF), then it has the responsiveness to rapidly convert perhaps another 2 or 3 million access lines to broadband in short order, perhaps more, and we suspect it might be able to do this in little more than a year. The problem with rural is that installing a DSL line on a loop that is any longer than 6.5 kilometers (US loops can be as long as 18 km), needs considerable build out to reduce loops or specialist chips or both, hence the need for the subsidies.
Today CenturyTel has just 7.0 million access lines but 2.26 million broadband customers, 1.46 million of which it acquired with Embarq. If it buys up Qwest it would double these once more by adding 3 million from Qwest, as well as another 10.2 million access lines. It would also add 880,000 video subscribers using DTH. CenturyTel does not break out the number of video customers it already has, but if it was a similar number that might suggest there are as many as 3.5 million broadband customers who are NOT video customers ‘ many of which would be in reach of a classic multicast IPTV service.
But there is another way here, in fact two ways, of putting video services out to customers, and these are using Over the Top Technologies and specifically, acting as a TV Everywhere video extension either from the existing IPTV services or on behalf of its DTH customers, or both. Widevine, which was the initial supplier of CenturyTel’s DRM, is also the company making hay with cable operators around TV Everywhere DRM and sign on. It will have already pointed out what it can do for the merged CenturyTel Qwest in the event that it is asked to.
Let’s consider this for a second. In such an underserved community the attach rate for broadband could double or even treble, if conventional pricing, between $30 and $40 a month for a broadband line, instead of the $100 a month that specialist forms of broadband like satellite tend to cost ‘ and this is exactly what is likely to happen under the Obama administration. If this is sold in a bundle, with what appears to be an IPTV service, but which in fact is either a TV Everywhere service, not one that is limited to customers of its multicast IPTV service but which can work on ANY broadband line, sold separately, as a pure OTT service, then overnight it night have a viable, footprint-wide triple play for the first time ‘ just as OTT technology is coming into its own.
Additionally, if CenturyTel is true to its word, and it uses that 700 MHz spectrum not for cellular service, but for wireless video (it has made brief references to this in its filings) then a pay TV-broadcast service offering could be brought to non-broadband homes in the same way.
Suddenly we have a $5 billion business buying $12.3 billion business, and it might just have a basis for stopping its access line decimation from cable, using radio and Over the Top technologies that others are less keen to deploy, simply because elsewhere these techniques will eat into existing services.
If the executives trying to sell this merger focused on those points, then the CenturyTel share price might become buoyant once more, and the deal might go through.