Study: Fiber-based services could solve small telco profit squeeze

Small independent telcos are experiencing a profit squeeze, according to a new study from the Telergee Alliance, a network of seven certified public accounting firms with telecom specialties. Net income for 196 small telcos surveyed decreased a median of 22.3% in 2008, researchers found. The 2009 Telergee Benchmark Study, made available exclusively to clients of Telergee firms and to TelephonyOnline, surveyed small US telcos with total access lines ranging from fewer than 500 to more than 18,000.

Although telcos experienced a median 10.7% increase in non-regulated revenues, it was not sufficient to offset the impact of a median 2.2% decrease in telcos’ traditional wireline revenues and a median 2.9% increase in wireline expenses. Driving the decrease in wireline revenues was a decline in access lines, which experienced a median 3.5% decrease.

Many small telcos, particularly those in rural areas, receive Universal Service funding to cover some of their network costs, and that has minimized the impact of a decline in voice lines, noted Rick Betts, a partner with Telergee member firm Moss Adams and coordinator of the Telergee study. “Even though a company may have fairly significant customer loss, the revenue loss is somewhat mitigated by Universal Service support and cost settlement,” Betts said.

Independent telcos have pursued a wide range of new business opportunities in an effort to replace lost landline revenues. Some of these ventures, including wireless, competitive local exchange carrier (CLEC) operations and traditional cable service, generate revenues but yield narrow or declining margins. The most successful non-regulated service, the Telergee study found, is Internet connectivity, which comprises a median 12.9% of respondents’ total operating revenues.

The long-term solution to telcos’ revenue squeeze, according to sources from several Telergee firms, is to offer fiber connectivity to end users capable of supporting higher speed data and, potentially, advanced video services based on the Internet protocol (IPTV). Nearly half of telcos in the Telergee study said they plan to offer IPTV by the end of 2010, including 19.5% that offer the service today.

“IPTV will be the gold standard,” said Pepper Younts, a partner with Turlington and Co., another Telergee Alliance firm. “It’s just a matter of getting fiber to the home.”

More than three quarters of telcos in the Telergee study have competition from companies offering digital cable service--and IPTV could put the telcos in a much stronger position against those companies, Younts said. “If you can combine that with broadband so you’re selling two services instead of one, that works out really well,” he said.

But how profitable IPTV will be is still being debated. Some small telcos have complained that programming costs are too high to make a decent margin. “If you start looking at some programming costs and compounding them at present growth levels, they start getting way out of hand as to the penetration levels they would require,” said Tom Farm, a principal with Olsen, Thielen & Co., another Telergee firm.

Farm applauded the efforts by some small telcos to achieve a regulatory solution to the programming cost quandary. “We agree that something’s got to be done to bring those costs in hand,” he said. “Clients have to be able to offer smaller packages or a la carte programming to get programming costs down.”

Universal Service support for broadband connectivity also could go a long way toward solving the small telco revenue squeeze, sources at Telergee firms said.

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See TelephonyOnline for additional coverage of the 2009 Telergee Benchmark Study. Independent telcos interested in participating in next year’s study should visit Telergee.com.