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Carrier Services
Qwest takes a disciplined operating approach
Economy is slow, but business services and broadband remain steady
by Sean Buckley
Qwest may not be the largest RBOC with buckets of cash, but it’s confident that it can hold its own in a challenging economic environment.
Speaking at the recent Citibank 19th Annual Global Entertainment Media and Telecommunications Conference, Qwest’s chairman and CEO Ed Mueller offered a preview of Q4 08 earnings.
While not providing specific details (these will be revealed during its Q4 08 earnings call in February), Qwest reported that each of its business units — enterprise, wholesale and consumer — all performed in line with operating expectations and maintained cost controls.
Mueller acknowledged that while these segments are certainly being impacted by the economy, he maintains that the continued demand for high speed data services across the three segments offset losses it had in traditional voice services.
Despite the positive outlook the service provider has set for its Q4 08 earnings, Mueller says Qwest will continue to execute on a cost discipline strategy.
“We’re all cautious about the macro environment but we’re pretty happy with what we delivered in '08 and we’ll see more of the same in '09,” he said.
Broadband: the consumer anchor
With cable and wireless voice offerings aplenty, consumers have a lot of sources for telecom services. Even in a good economy, the growth of competitive offerings obviously place continual challenges on traditional service providers such as Qwest.
And the continued decline of its traditional voice business certainly reflects the effect of competition.
In Q3 08, Qwest’s traditional voice service revenue of US$1.8 billion declined 8 percent as a result of wireless substitution, cable competition and a weak economy.
By the end of Q3 08 Qwest’s total access lines were 11.9 million — a decline of 8.9 percent compared to the third quarter of 2007.
“We have two impacts on us: one is cable and their success in telephony as well as wireless substitution,” Mueller said. “Wireless substitution will increase a little as we go forward in '09 because we find that wireless substitution occurs when you have a trigger like moving, or a consumer reassesses their spending.”
Still, Qwest is confident the services it can deliver over FTTN will offset these threats. In fact, when Qwest considers its total 6 million traditional access lines, any one that has high speed data services will have a lower churn rate.
“There are pressures on our consumer segment, but our consumer segment strategy is to make our high speed Internet our anchor,” he said.
Since launching its FTTN network build in 2008 — a network that it's allocated to spend $300 million to build — Qwest has seen decent adoption of its higher speed data services in the regions where it has made them available.
By the end of Q3 08, Qwest reported it had reached its goal to extend its FTTN buildout to connect to more than 1.5 million potential customers.
So far, Qwest’s FTTN broadband strategy is resonating with consumers. In Q3 08, Qwest added 61,000 subscribers with about 40,000 of those subscribers buying new higher speed FTTN-based services.
“We were late with our DSL deployment due to the financial constraints of the company several year back so our market share is lower probably than AT&T and Verizon’s region,” Mueller said. “With the exception of the second quarter because we were dark in the market, I think we’re getting at least 50 percent of new adds. Two thirds of our customers in this Fiber to the Node build buy 7 Mbps or more.”
To make its FTTN-based service competitive with similar broadband cable provider offerings, the operator decided to reduce the price of its FTTN-based Quantum Connect from $99.99 to $59.99.
Upping speeds and lowering prices are compelling, but Mueller thinks the overall broadband industry has to get better at selling the “value” of broadband service to consumers.
A key part of the broadband value chain will be video. Although the carrier in its former US West days was one of the early pioneers in delivering video over copper lines, Qwest has no intentions of embarking on the same ambitious TV plans of Verizon and AT&T. (see BBWF: Qwest’s CTO Pieter Poll sticks to his guns).
“I believe over time there will be a significant number of people that will be ambivalent on how they get their video, and a big chunk of it will come from the Internet,” he said. “We’re not on the IPTV mission, but we do think there will be potentially ad-based video with QoS and high def signals and you won’t care if it comes via cable or Direct TV or the Internet.”
Mueller added that in addition to the various modes that consumers will get their video, there will be “more interactivity between the media than we have today.”
Prudent business strategy
When it comes to serving business customers, Qwest readily acknowledges it’s not trying to be everything to everybody, yet the opportunity is still quite large.
After suffering a series of slowdowns, Qwest in recent years has been able to steer the business group towards a path of profitability.
In Q3 08, Qwest reported its business revenue was $1.0 billion, up 7 percent year over year, while seeing 5 percent declines in its mass markets and wholesale market segments. Part of this profitable outlook was boosted by a spate of new wins, including ones under the federal government's Networx contract.
Qwest attacks the business services opportunity on two fronts: the Business Markets Group (in region) and then Qwest Communications network (out of region).
Of course, Qwest does face the challenge of paying local access charges to complete circuits when it goes out of region.
It’s not like Qwest does not have a good deal of network assets. Prior to merging with US West to create the company now known as Qwest, the company built a long haul backbone network that stretches throughout both its own 14-state and throughout the United States.
However, when it goes out of region it has to rely on other local carriers to complete circuits with other carrier partners in local markets.
“Access cost is a big deal to us,” Mueller said. “We review every one of those bids, and in the enterprise space we’re not at the very high end. We’re not competing in the financial markets in New York, so we go down-market and that’s helping us.”
Businesses may be realigning their spending patterns on business services, Qwest will see the benefits of the sales funnels that are coming in Q4 08 and possibly Q1 09.
Nonetheless, the service provider is being realistic about its business customer prospects and manages contingency plans to deal with potential slowdowns.
Unlike AT&T and Verizon — two service providers that have successfully gone after large financial firms in big cities such as Boston and New York — Qwest believes that it can make the better mark for itself in the mid-sized business market when it ventures out of region.
Ironically, Qwest believes it can the fact that its not chasing large customers out of region to its advantage.
“Maybe it’s not great, but having a 4 percent market share helps us there because it’s a lot easy to take market than trying to defend a 96 percent market,” Mueller said. “We get spillover and we don’t have to reduce the price of a service for some big customer we may have.”
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