MoffettNathanson says CenturyLink might as well keep residential customers

There’s a lot to unpack here. Back in May, CenturyLink said they were looking at their options for their consumer/residential service…

Could the CenturyLink consumer business be sold or spun off? CenturyLink CEO Jeff Storey said yesterday that CenturyLink has enlisted advisors to assist the company in a strategic review of the company’s consumer business. Although he emphasized that it is “really early in the process,” he noted on the company’s first-quarter earnings call that the company is “very open” in the options it would consider.

“Let me be clear, we’re early in what I expect to be a lengthy and complex process,” said Story, according to a SeekingAlpha transcript of the earnings call.

At that time, Storey elaborated:  “During our review, we will not modify our normal operations or our investment patterns. I can’t predict the outcome or the timing of this work or if any transactions will come from it at all. Our focus, though, is value maximization for shareholders. If there are better paths to create more value with these assets, we will pursue them.”

He added, though, that the company is doing a good job of growing broadband where it invests in improving the customer experience and profitably expanding the network.

The company’s consumer revenues were $1.4 billion in the first quarter of 2019. The consumer business saw a 1.3% year-over-year and a 2.7% increase over the previous quarter in broadband revenues. While the company lost subscribers purchasing speeds below 20 Mbps, it gained subscribers purchasing higher-speed services.

I’ve added the emphasis. Interesting that CEO Storey  revealed  that  while CenturyLink “grow[s] broadband” where they invest,  decisions about where to invest are driven by a focus on maximizing shareholder value, not community benefit.  Because they are a business, profitability, not community needs, drives CenturyLink’s investment decisions.

Fast forward a month and it looks like the analysis is in

CenturyLink wouldn’t gain much by spinning off its consumer business, argued telecom financial analysts MoffettNathanson in a research note issued today. The cost of a CenturyLink consumer spinoff would leave the company with little in the way of financial benefits, the analysts said.

Telecompetitor goes into detail…

Spinning off the CenturyLink consumer business would generate what the researchers refer to as “dis-synergies” that would result from the difficult task of dividing a network and other operations that serve both the consumer and business sides of the house. These dis-synergies would “simplistically imply roughly $300 million to $600 million in value destruction from separating the businesses,” the researchers argue.

Another concern about a spinoff is whether it would receive necessary approvals from state public utility commissions.

The analysts also question how much upside there is for CenturyLink’s consumer business. They argue, for example, that the company’s opportunity to provide connectivity for small cells is limited because small cells will be deployed only in densely populated areas and CenturyLink is the incumbent local carrier in only two of the nation’s 50 most densely populated cities.

Again, the emphasis is mine. The worry about value destruction is real for any business; you don’t want to lose value. BUT the worry for communities is that this isn’t really a rousing rationale for investing in upgrading  residential service, rather a recognition that the cost of disaggregating business customers is just too high.

Also of note in the analysis is recognition that small cell technology (necessary for 5G) will only be deployed in densely populated areas. This is not new news, but does reinforce the fact that 5G is not coming to  rural areas anytime soon.

Finally…

Not all of MoffettNathanson’s analysis of CenturyLink opportunities is so downbeat, however.  For example, the researchers see the recent news about FCC plans for a replacement for the Connect America Fund, due to expire in just a couple of years, as a positive, as CenturyLink was one of the largest recipients of CAF funding.

The “potential upside risk is what keeps us on the sidelines,” the researchers wrote.

The upshot is that MoffettNathanson sees CenturyLink’s consumer business remaining within the merged company, where it would be better off anyway.

Again, emphasis is mine. I have heard  industry insiders question the wisdom of CenturyLink accepting CAF funding. The main problem is that they didn’t receive enough funding to adequately cover upgrades to areas where the potential for ROI is slow or uncertain. And the required buildout speeds aren’t fast enough to satisfy all customers. It’s a lose-lose situation.

To create a win-win for both providers and communities, federal funding must be adequate to incent providers to invest in networks that meet consumer needs. The current CAF II requirements of a 10/1 network don’t meet community needs: economic development is in the upload speed. Minnesota state speed goals of 100 Mbps down and 20 Mbps up by 2026 seem much closer aligned to the community needs than the 10/1 speeds currently required by the Connect America Fund (CAFII).

The final line in the industry analysts’ research note reminds us that this is a look from and for the company of CenturyLink – not for the communities they serve…

The upshot is that MoffettNathanson sees CenturyLink’s consumer business remaining within the merged company, where it would be better off anyway.

Blandin released a report in 2017  that points out that industry ROI and community ROI are different. Households with broadband realize $1850 in economic benefits per year. So, the communities need better broadband. The gap is between that community need and the business needs of the provider to deliver profits to their shareholders.

This entry was posted in Digital Divide, FCC, Funding, Policy, Rural, Vendors by Ann Treacy. Bookmark the permalink.

About Ann Treacy

I have a Master’s Degree in Library and Information Science. I have been interested or involved in providing access to information through the Internet since 1994, when I worked for Minnesota’s first Internet service provider. I am pleased to be a part of the Blandin on Broadband Team. I also work with MN Coalition on Government Information, Minnesota Rural Partners, and the American Society for Information Science and Technology.

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