Moffett's The End of the Line(s)
Written by Dave Burstein   

End_of_the_lineWireline is declining worldwide, including fast-growing economies like China and India. Craig Moffett, one of the most interesting analysts, has run some numbers and come to the conclusion U.S. wireline is in worse shape than many think. He's advising underweight of the U.S. Telecommunications sector because of the issues. He calls it a "crisis."

I believe wireline only carriers - that's everyone in the U.S. except AT&T and Verizon - have an “uncertain future.” For two years I've seen the squeeze and Randall Stephenson saw it far before I did. Lines keep going down, DSL has little room to go up, price increases and job cuts are already extreme. It's tough.

Wireless is likely to continue growing for several years, with T & VZ likely pulling ahead. T & VZ have an enormous advantage over the other mobile carriers because they can efficiently shift much of the calling volume to their wired networks via WiFi of femtos. 40-50% of all calls are made from home or office, so that allows the two companies to virtually double their spectrum with an investment of a few $billion for gateways.

That means AT&T and Verizon, like wireless carriers everywhere, have strong incentive to maintain there wireline networks. Vodafone and Bouygues, recognizing that, have massively ramped their DSL. That's one more reason AT&T is unlikely to dump wireline. They need it for wireless competitive advantage.

What Craig is adding is that margins will be directly affected because there won't be any more room to cut because what remains is mostly fixed costs. DC has been passing this around with the question are they really dying, but not adjusting the broadband plan for that possibility. Major sand castles fall. Think about it. As Craig writes:

  • Wireline still accounts for more than half of Verizon's revenues (after adjusting for VOD's 45% stake in VZW), and a similar amount of AT&T's, yet, paradoxically, is often almost entirely overshadowed by the smaller Wireless business.

  • Investors tend to underestimate the likelihood that wireline revenue declines will be compounded by margin compression, and that the compression should accelerate relative to history, understating the importance of the segment to changes in profitability.

  • Since our analysis of state-level data though 2007, two things have happened. First, the rate of access line losses has accelerated. Second, broadband growth has slowed dramatically, reducing an offsetting ARPU tailwind for margins.

  • Indeed, if one were to also include the in-region wired portion of the wireless network as part of the broader wired picture (recall that the majority of any wireless network is… a wired network) then these companies' still-overwhelming dependence on their wired franchises becomes even more striking, with what is almost certainly three quarters or more of the revenues and assets depending on the wired infrastructure.

  • Because the margins of the to-be-sold properties are much higher than Verizon’s system
    average, a divestiture would reduce margins immediately by another 170 bps, all the way to the 22% range.
    Moreover, because their capex is much lower, it would leave operating cash flow (EBITDA less capex)
    lower by perhaps $900M in 2011.

Those still reading from outside the U.S., don't get confident because the landline fall is currently lower than the U.S.. The U.S. is first, Glen Campbell of Merrill believes, because we have the lowest mobile rates for big packages of minutes. That makes it easier to cut the cord, and 25% of homes have done so. Buckets of minutes are spreading elsewhere. DSL growth is slow almost everywhere so that can't help. Telecom Austria just announced a 400M revenue shortfall. Beware.