Telergee study: Small telcos’ profit struggle intensifies

I wrote a large part of this week’s column on a plane flight, which gave me the opportunity (while my tray table was in the upright and locked position) to ponder the best word to describe the results of the recently released 2010 Telergee Alliance Benchmarking Study.

The study, conducted by a group of accounting firms with an Independent telco specialty, summarized financial data for 2009 submitted by 221 small U.S. telcos — a representative sample of the 800 or so small telcos nationwide. The most appropriate word for this year’s study, I decided, was “sobering” — which is not meant to suggest that small telcos were previously in any sort of giddy or intoxicated state.

In fact, the story series we did last year about the 2009 Telergee study (based on data for 2008) underscored a range of issues facing small telcos — including declining access lines, declining access charge revenues and declining margins. This year’s study saw no trend reversals — just more movement along the same trend lines. Perhaps of greatest concern was how much one critical trend accelerated in just one year.

“Operating margins dropped really significantly,” said Rick Betts, partner for Telergee Alliance firm Moss Adams and survey coordinator. “This year the drop was 10% from the previous year.”

The biggest hit came on the regulated side, with wireline margins dropping 17.3%. Non-regulated margins increased but only by 2.8%, which was insufficient to turn the overall number positive.

Like all telcos, small rural carriers continue to lose access lines to wireless and, in some cases, to cable companies. Access lines declined an average of 3.8% between 2008 and 2009, the Telergee study found. Small carriers are reluctant to make up the loss by raising rates because that move could accelerate line loss — and although switching costs have declined, most other costs have remained the same or increased, Betts said. As a result, small telco operating margins now stand at an average of 10.3% of operating revenues.

Even on the non-regulated side, small telcos are facing some major profitability challenges. Small telcos that have CLEC operations saw those margins decline 20.4%, driven in large part by an average 2.6% line loss, which Betts speculated is likely due to wireless substitution. But at least small carrier CLEC operations are profitable.

The same cannot be said for small carrier wireless operations, where expenses exceeded revenues by about 2.2% for 2009. That’s a substantial drop from 2008, when margins were 4%, and it occurred despite an average increase of 5.4% in customer count. The drop in profitability was driven in part by a drop in average revenue per user, which stood at $37.12 for 2009, down from $40.93 in 2008.

One possible explanation is that large national carriers may be getting the highest-value customers because they are in a better position to offer nationwide plans and have the latest wireless devices. Another consideration is that some small carriers resell other carriers’ wireless services, rather than operating their own networks, yielding narrower margins.