29% WIRELINE CUSTOMERS

One of the biggest challenges for telcos, again illustrated by AT&T and Verizon, is managing revenue mix and the impact that growth versus erosion in different sectors has on overall margins. Despite growth in enterprise, wireless and video, wireline revenues are still a huge part of the mix for service providers. For instance, consumer wireline accounts for 29% of Verizon's business and 21% of AT&T's, according to Bernstein Research.

Craig Moffett, analyst for Bernstein, recently dove deeply into the FCC's Automated Reporting Management Information Systems (ARMIS) database of regulatory filings, which lays bare on a state-by-state basis trends in access revenues, capital spending, EBITDA and free cash flow in the U.S. wireline sector.

Of the two carriers, Moffett reported, Verizon faces the bigger challenge managing consumer wireline erosion, highlighted by two trends pulled out of the ARMIS data: access line losses show no signs of relenting, and the loss of volume (revenue) is leading to a big decline in margins in the consumer wireline segment. Moffett's analysis of Verizon's ARMIS numbers found a 1200 “basis point” drop in consumer wireline margins over the past seven years, with another 140 basis point drop in 2007.

It will be hard for lower-margin — but growing — businesses such as enterprise and video to make up the difference, he said. Ultimately, video services such as FiOS and U-Verse “provide a measure of top-line growth, but [do] little or nothing for long-term margins, replacing as [they] do high-margin telephony business with low-margin video,” Moffett said, noting that “after all, somebody has to pay Disney and Viacom” for the content that rides on new video networks.

Bottom line: While growth in some sectors appears strong, declining residential wireline volumes will make it difficult to keep wireline margins from eroding as well. The same can be said for increased price competition. …

$99 UNLIMITED PLANS

When the wireless industry rolled out $99 plans earlier this year (some just voice, some all-you-can-eat), analysts raised a red flag. Would a price war sink all boats? Or was $99 just a new price point that would only result in some gains and some losses?

Early returns show minimal impact, although long-term trends toward lower fees and bundling will affect wireless operators. AT&T, for instance, said migrations to the new plan from customers previously paying more than $99 per month were in line with internal expectations, but migrations from lower-priced plans up to $99 were better than anticipated. Prior to the offering, about 1.5% of new customers would sign up for $99 plans. With the new plan, about 4% of new customers are opting for $99 service.

“It's is too early to tell whether this will be indicative of the overall impact of the introduction of unlimited plans,” said Jan Dawson, analyst for Ovum, “but it appears that some of the doomsayers may have been a little premature in criticizing the new plans when they were launched.”

Bottom line: The verdict's out on the $99 impact, though the industry has seen downward price trends before. But unlimited wireless could accelerate wireline replacement. All that bottom-line pressure makes the hunt for top-line opportunities more important. …

$99 "UNLIMITED WIRELESS DEALS AVAILABLE IN THE U.S.

AT&T: Just voice

Verizon: Just voice

Sprint: Voice, Web, e-mail, SMS, push-to-talk, GPS, more

T-Mobile: Voice, SMS, picture messaging

$250 BILLION PLATFORM OPPORTUNITY

There's a lot of talk about service providers getting into the platform business. U.K.-based consultancy STL Partners has done the strategy work and crunched the numbers — especially with its Telco 2.0 initiative — and sees a potential $250 billion new and completely incremental market for telcos acting as a business-to-business, value-added services provider.

In other words, operators would take existing assets and leverage them to reduce friction in the digital economy, collecting significant tolls along the way, said Martin Geddes, lead analyst for STL. Telcos have a wide array of capabilities they could point to this task, including identity and authentication, billing and payment, fulfillment, customer support, ad insertion, and more, Geddes said.

“The reaction I get going to operators is very positive. It draws together many disparate activities — advertising, payments, e-commerce, wholesale, etc. — into a coherent overall framework,” Geddes said. “Importantly, it takes a business view of ‘the platform’ rather than focusing on [application programming interfaces].”

Such an opportunity doesn't ignore the retail channel but instead uses it opportunistically to drive greater opportunities, much as Google drives its profitable ad business with free search results and applications, Geddes said.

Intriguingly, STL has been modeling non-communications businesses — such as eBay, iTunes, the London Stock Exchange and Internet betting site Betfair — as models for what it calls this new “two-sided” telecom opportunity.

Bottom line: Telcos own valuable assets that are underused today, but they must define a new “platform enabler” role to fully monetize them. Open APIs and SDKs are a step, but business models placing telcos in a more central role (beyond pipe provider) in the digital economy are crucial. If telcos don't build tomorrow's digital platform business, someone else will. …

Next page: DATA CENTER INVESTMENTS, P2P DOWNLOADERS