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Stop worrying about access line loss

When I recently sat down with Windstream CEO Jeff Gardner, I mentioned the fact that, a day earlier, Verizonís CEO Ivan Seidenberg had pronounced that he had stopped worrying about access line loss.

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ďWell no kidding ó he doesnít have any [access lines] left,Ē Gardner said. ďHe sold them all. Iím surprised thatís an epiphany for Ivan.Ē

Verizonís repeated shedding of rural lines can make such businesses seem undesirable (especially in the case of Fairpoint Communications, which is struggling to avoid bankruptcy after having acquired Verizonís rural lines in three states). But those who repeatedly pronounce the death of the wireline telecom business ó the typical leap of logic that follows most reports of access line loss ó often overlook some important facts about the world outside of Bell territory.

Rural markets typically face less competition from cable and wireless and generate healthy cash flow. For example, the rural wireline assets Verizon is now trying to unload to Frontier Communications have higher margins and much smaller line loss than the assets it is keeping. (In fact, Verizonís wireline business doesnít generate cash, despite the fiber-rich, multiservice network that many would say leaves more rural telcos pale by comparison.) And those assets also consume less capex. According to Craig Moffet, analyst with Bernstein Research, the properties Verizon is selling to Frontier contribute about 9% of segment revenue and 15% of segment EBITDA but account for only 4% of segment capex. ďThese properties therefore generated a disproportionate amount of free cash flow,Ē Moffet wrote in a note this summer.

Thatís not to say carriers like Windstream donít have their own worries. The lack of a wireless offering and the challenging economics of rural broadband are problems for any rural telco. And although Windstreamís access line loss is about half that of Verizonís, itís likely to continue. (But unlike Ivan, Gardner said: ďWe care about [access line loss] a lot more. We manage these markets a lot differently.Ē)

So if Seidenberg has finally decided this month what Verizonís focus will be going forward, what about Windstream and those like it? Gardner said Windstream is targeting two core businesses: residential broadband and business services. While corporate customers represent a third of Windstreamís business today, Gardner wants to push that up to half in five years, adding a range of IT services such as tech help and cybersecurity to its high-speed connections. Windstream relies on a satellite partner for residential video, but it is also investigating the terrestrial approach of Sezmi; Gardner lamented that the slow economy may have somewhat staunched start-up innovation in the over-the-top (OTT) video realm. But he noted that Windstreamís base, which skews older, is slower to adopt OTT service ó a fact that may also help Windstream stave off OTT competitors longer than its more urban counterparts.

Of course, reaching equilibrium between residential and business customers wonít be just a matter of growing business revenue for Windstream; it will also come from having relatively slower growth on the residential side, which the erosion of the voice business may continue to help, in its own way. So Ivan is right: Itís time to stop worrying about access line loss.
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© 2014 Penton Media Inc.

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