AOL Results Show Importance of Legacy Revenues

By Gary Kim February 08, 2013

Service providers need urgently to discover huge new revenue streams to replace lost legacy revenues (whether than is voice, messaging or video). But history suggests that, no matter how important, the legacy sources will be important, and have huge financial value, for quite some time.

Consider AOL, which drove the Internet access business not so long ago.

Despite the fact that most people have switched to broadband access, AOL continues to earn significant access revenue from its old access business. Dial-up access in fact still represents more than half of AOL’s total profit.

In fact, subscription revenue actually grew sequentially in the fourth quarter of 2012 due to 4 percent growth in average revenue per user, compared to the third quarter of 2012. Also, the rate of decline is slowing, suggesting that AOL’s remaining customers have some affinity for the product that makes them more resistant to churn.

Something like that will probably happen for telco voice and messaging operations, and cable operator video operations. Even as each of those formerly key revenue sources declines, the relative contribution to gross revenues and actual profit might remain quite high, for quite a long time.

In other words, despite all the effort rightly to be focused on creating new lines of business, in the medium term, telcos and cable operators will derive huge value from protecting what remains of their legacy businesses, and from exploring new ways to add value to those products, or to reposition the way the products are packaged and sold, even as other revenue sources grow.

By some estimates, gross profit margins averaged 86.51 percent for the telecommunications industry in 2010, though net margin was only about 10.99 percent, on average.

Also, profit margins vary dramatically by product. Text messaging margins are almost arbitrary, and can in principle feature margins of 80 percent, though margin is dropping. Voice margins, which once were safely in the 40-percent range, probably have dropped into the 20 percent range.

Something like that has happened to video subscription profits, which once were predictably in the 40-percent range for cable operators and now seems to have dipped to about 20 percent.

But the relative importance of video, voice and messaging revenues will remain high for quite some time. Just ask AOL.


Edited by Rich Steeves

Contributing Editor

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