Bill Blessing, Senior Vice President of Corporate Strategy & Development, EMBARQ Corp. |
An interesting countertrend has developed on the outskirts of telecommunications — the separation of wireline and wireless holdings.
As the industry emphasizes the central importance of wireless, and many large incumbent telcos increase their girth in densely populated areas through acquisition, while sloughing off weaker, rural properties, Sprint Nextel Corp. spinoff EMBARQ Corp. is charged with serving a hodgepodge of rural and suburban customers with its quadruple play of services — yet without a wireless network of its own.
On May 17, 2006, Sprint Nextel left EMBARQ with a remarkably scattered collection of local wireline networks that range from northern Washington, dapple across various other parts of the country, and move eastward to blanket select areas of Florida, North Carolina and Ohio, among other states.
The company, which serves parts of 18 states, offers voice, Internet and data on its own networks, in addition to providing wireless services via an MVNO model/reseller relationship with Sprint Nextel, and satellite TV through a partnership with DISH Network. So, as far as its overall services portfolio, EMBARQ is pretty similar to many telcos today.
EMBARQ is not even completely unique in its position as a wireline-only network operator that was carved from a larger wireless/wireline entity. Alltel this year spun off its landline business and merged it with VALOR Communications Group to create Windstream Communications.
However, EMBARQ stands out among the other top rural telcos in terms of size and positioning as a growth company, says Probe Financial Associates Inc. co-founder Victor Schnee.
EMBARQ’s networks are dispersed across the United States – with coverage in 18 states – and include both rural and suburban areas. The company offers voice, Internet, data, wireless and entertainment services and is the dominant service provider in Las Vegas, much of Florida, including Orlando, as well as large parts of North Carolina and Ohio. |
Windstream has about 3.4 million access lines and approximately $3.4 billion in annual revenue, whereas EMBARQ has more than twice that many access lines and expects 2006 revenue to be $6.25 billion to $6.31 billion. At 7 million access lines, EMBARQ is on the heels of the RBOCs, and just shy of CenturyTel Inc., Citizens Communications Co. and Windstream Communications combined. That size, combined with EMBARQ’s strange mix of geographies, puts EMBARQ in a “really different” category, Schnee says. Among the Tier 2 ILECs, he adds, EMBARQ “appears most exposed and will be pressed to develop a growth strategy — time is really not on their side.”
Schnee explains that because EMBARQ is the dominant service provider in key areas like Las Vegas, it is likely to suffer more line loss as a result of competition from cable companies. Add that to the trend of wireless replacement, he says, and EMBARQ could be facing a steep — but not necessarily impossible — uphill battle.
Bill Blessing, senior vice president of corporate strategy and development at EMBARQ Corp., says because of the company’s diverse territories, the company does indeed face more access line loss than the rural LECs mentioned above, but he adds it will be less than that of the RBOCs. During the third quarter of 2006, the company lost 6 percent of its access lines compared to the third quarter of 2005, and it expects access lines to decline at a mid-to-upper 6 percent rate for 2006.
Like so many service providers, EMBARQ is trying to offset access line loss by selling additional services like high-speed Internet and video, and pushing bundles. In late November, Blessing told xchange EMBARQ expected to reach 1 million high-speed Internet customers by the end of last month, which would be an increase of 44 percent in 2006.
But ultimately, EMBARQ still needs to articulate a long-term plan delineating where they’re going, how they’re going to differentiate and what kind of company they are trying to build, says Schnee. So far, he likes what he sees.
While the other big ILECs are paying out 6 to 8 percent dividends, EMBARQ has been paying around 4 percent, says Schnee. (Blessing says EMBARQ has paid a 25-cent dividend each of the past two quarters but does not have a set dividend policy. Rather, the board of directors sets the dividend each quarter.)
“So our attitude is, that’s an interesting strategy,” Schnee says, “and probably we agree with the strategy. You have 7 million lines, you ought to be thinking about ‘Where do we go from here?’ rather than ‘How do we defend a dwindling base?’ But time isn’t on your side, because the attrition you’re facing is very substantial. You’ve got to make some move that identifies where is this growth coming from.”
Potential areas of growth, he says, are wireless, video, Internet-type services, content services and digital media, so Schnee suggests EMBARQ would do well to become a more strategic partner to Sprint Nextel on the wireless front and/or forge close alliances with one or more of the search engines.
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The company seems to have a good start with differentiating on the wireless side. EMBARQ this fall launched Smart Connect and Smart Connect Plus services — which allow calls to move seamlessly between a business’s cellular and on-premises Wi-Fi wireless and wireline networks — in Las Vegas, Orlando and Charlottesville, Va.
“This is the first commercially available product that blends wireline and wireless to give the customer improved quality and lower cost,” says telecom analyst Jeff Kagan. “This should be very popular with their business customers. The wireless phone can be used whether in or out of the office and it automatically hands the call off between the Wi-Fi network in the office and the wireless network. When using the Wi-Fi network, it is logged onto the wireline service, saving wireless minutes.”
Smart Connect allows subscribers to use EMBARQ local phone service and any wireless service. The customer has to push a button to shift the call from one network to the other, except with Smart Connect Plus, for which users must be on both EMBARQ local and wireless service, so calls shift automatically. Users have to purchase a $400 EMBARQ phone for this version. Monthly rates are $14.95 and $19.95, which Kagan says should be recovered in saved wireless minutes.
Blessing adds that EMBARQ, which announced 24,000 wireless subscribers after its first full quarter of operations, also offers integrated voice mail with a common “box” for wireless, home or office messages.
“EMBARQ is the only company out there marrying together wireless and wireline technologies,” Blessing continues.
So, while separating wireless holdings from wireline operations seems to be counter to the hot trends of fixed mobile convergence and IMS, EMBARQ doesn’t necessarily need to own its own wireless network to pull the trigger on a fixed mobile convergence strategy. If the cable companies can use Sprint Nextel for wireless, why can’t EMBARQ? Certainly, if the future is really about services, not just the connections, then who owns the network would be immaterial. Wouldn’t it?
Breaking Up
Sprint Nextel Corp. recently separated its wireless and wireline holdings by spinning off EMBARQ as a wireline-only entity. Alltel did something similar with Windstream Communications. And — while it was the wireline spinning off the wireless earlier on — a similar trend happened a few years back as Pacific Telesis in the early 1990s cut the cord with what became AirTouch, and AT&T Corp. in 2001 let lose its wireless property.
So, why did these companies elect to break up wireless and wireline? Does this strategy make sense? And, can we expect more of the same in the near future?
For Pacific Telesis, the idea of spinning off what became AirTouch was a move to enable the wireless entity to focus exclusively on wireless, free itself from Bell regulatory restrictions, and allow AirTouch and Pacific Telesis to file separately for new wireless spectrum the FCC was auctioning off in the PCS bands at the time. People also talked about how the move would allow more conservative shareholders to stick with the traditional telco stock and continue to receive dividends, while more adventuresome shareholders could go with the wireless, nondividend, growth stock. The IPO was one of the largest at the time, but in the long view, some pundits questioned whether Pacific Telesis — which later was bought by SBC Communications Inc. — might have been able to go it alone had it kept its high-growth wireless business.
As for AT&T, breaking off its wireless holdings (as well as the high-speed Internet business it had acquired from cable giant Tele-Communications Inc.) was clearly an act of desperation. The move was part of a major reorganization by then-AT&T chief C. Michael Armstrong, who was attempting to reverse AT&T’s stock slide and double-digit revenue declines in consumer long-distance and slower-than-expected growth in business services. As you know, things didn’t really pan out for AT&T, which later also became part of SBC, now known as AT&T Inc.
Victor Schnee, co-founder of Probe Financial Associates Inc., says that while he thought it was a bad move to spin off wireless in past years, he now believes separating wireless is the way to go. That’s because whereas companies including a wireless property see valuations of below $1,000 per wireline subscriber, independent companies have far higher valuations per wireline subscriber, Schnee says. “When you have very complex organizations, it’s harder for people to value them correctly and rationally because ... there’s a lot of moving parts,” he adds.
Schnee continues that it also makes sense to separate wireless and wireline holdings from a technological point of view. “The wireless network ... gets upgraded faster because of growth and you can change it out a lot faster versus wireline, which takes a really long time,” he says, indicating that it’s difficult to truly align and “converge” two types of networks that are based on such a different upgrade environment.
As for the final question: Can we expect more wireless spinoffs in the near future? The answer is a definite maybe.
This countertrend of separating wireless and wireline might be repeated with Cingular Wireless should the BellSouth Corp. merger with AT&T be OK’d because, again, standalone wireless properties tend to garner higher valuations. “I think it would be a brilliant move if it happened,” says Schnee. “Stockholders would be cheering.” However, he adds, every time a wireless entity is spun off, it leaves some of the debt with the wireless business.
| Links |
| Alltel www.alltel.com AT&T Inc. www.att.com BellSouth Corp. www.bellsouth.com CenturyTel Inc. www.centurytel.com Citizens Communications Co. www.czn.com DISH Network www.dishnetwork.com EMBARQ Corp. www.embarq.com Probe Financial Associates Inc. www.probefin.com Sprint Nextel Corp. www.sprint.com Windstream Communications www.windstream.com |
