Are Telcos Still Making Money?

By Gary Kim July 18, 2011

You would be hard pressed to find a single quarter in any recent year when the likes of AT&T and Verizon Communications did not show steady revenue growth and relatively stable earnings, with the ability to pay dividends. That isn't to say all providers are in the same condition. From time to time, many providers have faced some distress. 

But Craig Moffett, Bernstein Research analyst, has been a notable "bear" on business prospects for the large mobile service providers. He now calculates that AT&T and Verizon Wireless are not even earning a return above their cost of capital. 

In other words, AT&T and Verizon now are already losing money, investing in networks and services that do not earn back the cost of the borrowed money driving the investments. But most of the problem comes from the wireline businesses, he argues. 

AT&T and Verizon executives would disagree, of course. In part, Verizon aregues, returns have been depressed recently because of heavy investment, both in the FiOS program and wireless upgrades, but the revenue impact of the sluggish economy. Over the long term, those issues will recede, Verizon argues. 

Still, there are signs executives are trimming investment in fixed line networks, to favor mobile networks. Read more here.

According to analyst Strand Consults, many European mobile operators in 2009 were selling mobile broadband for around 50 per cent less than it costs to support such volumes of  data. See this.

Beyond that are the long-standing issues caused by third party apps, which increasingly can supply some of the value traditionally provided only by service providers. Voice is one example.

Voice revenue telcos get from the average wireless subscriber has declined from $50 per month in 2005 to just above $33 today in 2010.

Text messaging, long a hugely profitable service, represents 16 percent of Verizon Wireless’s revenue, and contributes as much as 40 percent to total profit. The numbers are similar for AT&T Wireless are similar, says Moffett. The problem is that mesaging alternatives might be increasingly viable alternatives. Read more.

To be sure, industry executives have been dealing with the maturation and decline of several foundational services for decades, and have successfully shifted business models before. 

But some of us, and apparently many within the European Community policy community, do not necessarily view telcos and mobile service providers as "rich monopolists" that need to be restrained. Though large organizations with substantial revenues, there are clear threats to all of the key revenue segments, ranging from video to voice to text mesaging to broadband access. 

As value continues to shift to "over the top applications" and devices, the access part of the ecosystem gets devalued. That seems an unstoppable process. 

Gary Kim is a contributing editor for TechZone360. To read more of Gary’s articles, please visit his columnist page.

Edited by Rich Steeves

Contributing Editor

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