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October 01, 2012

New Wave of Industry Consolidation Coming?

By Gary Kim, Contributing Editor

The rumored sale of TW Telecom would, should it come to pass, be only the latest example of a longer running trend in the telecom business – that over time, any newly deregulated part of the business ultimately consolidates into a smaller number of players.

Amusingly enough, Wikipedia says AT&T (News - Alert) began in 1983, as Southwestern Bell Corp. In fact, the “Bell System” began to be built in 1878.

More recently, the originally fragmented U.S. mobile industry gradually consolidated into a handful of providers. When digital subscriber line services first began to be commercialized, it was three independent companies – Northpoint Communications, Rhythms NetConnections and Covad – that led the business.

Northpoint was bought by AT&T. Rhythms was bought by WorldCom, which was in turn bought by Verizon (News - Alert). Likewise, the U.S. competitive local exchange carrier business has been marked by a continuous wave of mergers and acquisitions, originally between CLECs, but now likely to feature more acquisitions by cable companies.

Between 2005 and 2011, the number of U.S. CLECs was cut in half, mostly by mergers.

In fact, the 1996 Telecommunications Act actually set off a bigger round of mergers and acquisitions as virtually all firms scrambled to meet new competition in the market.

The point is that “bigness” tends to happen in the telecom industry because it is a scale business. Larger firms have lower unit costs, and also are able to use acquisitions to incorporate technologies, skills and customer bases.

The potential sale of TW Telecom to CenturyLink would not deviate from that pattern, and rumors of such a sale circulated even when CenturyLink was the independent Qwest (News - Alert) Communications.

Such a deal would also illustrate the importance of business customers in the fixed network business. For U.S. cable operators, services sold to business customers are the highest growth part of their business.

Likewise, business services are more important for many rural and independent U.S. telcos as well. Firms such as Windstream (News - Alert) and Frontier Communications, for example, now earn more than half their revenue from business customers, not consumers, even though both firms have roots as rural communications companies whose key clients were consumers.

Though the initial post-1996 CLEC business did see quite a lot of attention paid to consumer customers, that changed in the U.S. CLECs have emphasized business customers since about 2003, when wholesale rates changed.

The point is that a tendency to bigness is part of the telecom business. And it seems likely that a new round of consolidations will start to happen in the U.S. CLEC industry over the next couple of years, in part because most CLECs serve business customers, and business customers are now a key battleground for telcos, larger or smaller. 

Want to learn more about the latest in communications and technology? Then be sure to attend ITEXPO Austin 2012, happening now in Austin, TX. Stay in touch with everything happening at ITEXPO (News - Alert). Follow us on Twitter.




Edited by Braden Becker
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