Carriers reveal split personalities: Revenue growth comes from outside voice

Second quarter earnings reports of traditional local and long-distance carriers revealed an increasing dichotomy within their operations: Voice services continue to reel in cash and contribute to profits, but wireless, data and broadband services will be the primary source of future revenue.

The overall sales growth stemming from the incumbent and interexchange carriers' (IXCs') second quarter earnings reports were sluggish at best: WorldCom was top in total year-to-year quarterly revenue growth at 14%, 96% of which came from its high-growth businesses of data, Internet and international services (see figure).

But most carriers' wireless and data units typically grew 30% or more. SBC Communications, for example, increased data revenue 38% and wireless revenue 30%, but total corporate revenue increased 9.8%. Carriers that offer wireless services boosted subscriber counts substantially and saw increases in monthly average revenue per customer, as big bucket plans helped increase usage.

For example, BellSouth's wireless revenue grew more than 15% to $919 million, while average monthly revenue per subscriber rose 5.9% to $54. SBC added 537,000 wireless subscribers in the quarter, and wireless revenues jumped 30.6% to $1.6 billion. The two RBOCs are combining their domestic wireless operations later this year to create the No. 2 wireless operator.

AT&T, which saw its wireless business grow 32%, partially attributed its wireline voice dropoff to the increased use of wireless vs. calling card and direct-dial services.

"The driving force in the market today is cost of service. We are seeing the same thing in wireless as we saw in long-distance - once the tariffs dropped to the level of indifference, the volumes went way up," said Herschel Shosteck, president and CEO of Herschel Shosteck Associates.

But wireless isn't the only growth engine for incumbent carriers and IXCs. WorldCom, which has no wireless assets and few prospects after its blocked merger with Sprint, now gets almost half its business from data, Internet and international revenues. WorldCom's dedicated Internet access business grew 70% amid strong corporate and ISP demand, and the company expects to make aggressive moves into the Web hosting and co-location businesses.

"Let me assure you that we will not be paying $53 [billion] or $55 billion for a company the likes of VoiceStream," said Bernard Ebbers, president and CEO of WorldCom, referring to the announced purchase of GSM operator VoiceStream by Deutsche Telekom. Instead of focusing on wireless, WorldCom wants to concentrate on high-margin business services.

To that end, Ebbers said WorldCom may sell, spin off or create a tracking stock for its consumer long-distance and wholesale voice units. WorldCom's revenues from commercial customers grew 20% in the quarter, compared with 1% growth in wholesale and consumer revenue.

"We have historically taken the cash generated by our switched voice opportunities to grow our data businesses," Ebbers said. "We now see the opportunity where our data businesses grow cash at a rate sufficient to maintain the growth that we expect in that segment."

Separating the businesses would raise the top line growth rate of WorldCom nearly 7%, to 20%, said Goldman Sachs analyst Frank Governali. Other analysts believe WorldCom would be better off selling the whole company rather than trying to compete against the likes of AT&T.

"They are so appealing as an acquisition target that they are more likely to be acquired than to go it alone," Shosteck said.

Wholesale and consumer voice services were the biggest drag on second quarter growth. AT&T's consumer services revenue decreased 7.2%, after a 6% decline in the first quarter, and Sprint's consumer long-distance and local voice revenues also slowed.

Does that mean a torrent of tracking stocks and spinoffs to come? Not yet. Voice services still comprise the largest chunk of carriers' revenue stream, and legacy local and long-distance voice businesses allows them to offer "any-distance" service bundles, said Bill Hahn, research analyst for Dataquest.

"You won't be able to charge [separately] for long-distance, but at the same time, you won't be able to do without it," he said.