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Internet Telephony: September 27, 2010 eNewsLetter
September 27, 2010

Small Telco Operating Profit Drops Significantly, Study Finds

By Gary Kim, Contributing Editor

A study of data submitted by 221 small U.S. telcos by Telergee Alliance confirmed trends you would expect: Broadband and wireless are growing, cable TV is flat, and voice is declining. As has been the case for several years, operating costs also are growing while profit margins are shrinking. 

Wireline subscribers declined 3.4 percent, cable TV grew 0.4 percent, broadband subscribers increased 11 percent, and wireless subs 5.4 percent, according to the study

For service providers as a whole, operating revenue declined 0.2 percent, operating expense grew 2.8 percent, operating margin decreased 9.8 percent, and net income shrunk 5.4 percent, Telergee Alliance said. But the operating margin hit was most obvious in the wireline area, where profit margins dropped a whopping 17.3 percent. 

Non-regulated services did better, with a 2.8-percent profit margin, though that obviously is not enough to offset the 17.3 percent drop in the biggest revenue source, namely voice. 

Landline minutes of use decreased approximately 13 percent.

Telergee Alliance is an organization of CPA firms and a provider of rural telecommunications performance data.

Like all telcos, small rural carriers continue to lose access lines to wireless and, in some cases, to cable companies. Access lines declined an average of 3.8 percent between 2008 and 2009, the Telergee study found. 

Small telco operating margins now stand at an average of 10.3 percent of operating revenues, Telergee Alliance says. 

Small telcos that have CLEC operations saw those margins decline 20.4 percent, driven in large part by an average 2.6 percent line loss. 

Small carrier wireless operations also experienced a loss of about 2.2 percent in 2009. That’s a substantial drop from 2008, when margins were 4 percent, and it occurred despite an average increase of 5.4 percent in customers. The drop in profitability was driven in part by a drop in average revenue per user, which stood at $37.12 for 2009, down from $40.93 in 2008.

As some had expected all along, video entertainment is winding up as a way of gaining customer "stickiness" and preventing churn, but is not contributing to profit, though it does contribute revenue.

Most small telcos are lucky to break even on video services, and IPTV (News - Alert) is likely to lose money. 

And though small telcos traditionally have not had lavish employee levels, if revenues are flat to falling while uncertainty is increasing, about the only practical thing organizations can do is trim operating cost. In most cases, little is discretionary but employees. 

That will be unpleasant, but hard to avoid if the U.S. communications market (not parts of the global market) continues along the present path of dwindling fixed-line voice, maturing video entertainment and slowing mobility growth. Broadband access appears to be one of the few product segments with a double-digit growth profile. 

But it won't be long before even that growth rate slows, keeping up the pressure to find new business models and revenue sources. So far, there is no compelling evidence that some breakthrough new revenue model has been found, which will increase the likelihood of "growth through acquisition" activity. 

Bidden or unbidden, that's just the state of the market these days. 

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Tammy Wolf


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