It's dangerous to read too much into short-term results like quarterly earnings, but it can be useful to try to inform your perspective on which long-term strategies are working, and which ones aren't. Now that most of the public telecom companies have reported 2nd quarter earnings, it's time to speculate about what it all means.
Rob Powell has an excellent summary of the winners and losers, here. He concludes that colocation is hot, owning your own fiber is good, the slow economy is not having broad effect in telecom, and that competition among CDNs is heating up.
Dave Rusin agrees with Rob Powell that Time Warner Telecom was one of the big winners, and gets more specific by saying that not just any fiber, but metro fiber is the big reason why TWTC is doing well.
I tend to agree with both Dave and Rob. Here are a few additional observations:
- Focus counts for a lot in telecom strategy. Internap lost focus with its Vitalstream CDN acquisition, and it is showing in the company's financial reports. The AOL-Time Warner merger was possibly the worst telecom merger ever, and the results were still dragging Time Warner Inc. down in the 2nd quarter, many years after the fact.
- Intellectal property can also count for a lot, these days. That's part of why Skype and 8x8 are holding their own despite being "over the top" service providers, leveraging somebody else's network. However, that doesn't explain why Limelight is doing well despite losing an intellectual property lawsuit to Akamai, and despite being hit with a second patent lawsuit by Level 3. However, the Limelight intellectual property story hasn't reached its conclusion, yet.
- I agree with Rusin that metro fiber is a great asset, when connected to the right buildings. I would say that copper is not completely dead yet, though. Hybrid Fiber-Coax architectures still have some life left in them, and the cable guys are going to continue making noise, not just in residential markets but also in the small-medium enterprise market. After all, the main difference between FiOS and the cable HFC architectures is where the optical-to-electrical conversion is done. FiOS does the conversion at the home, while HFC architectures do it in the neighborhood. Over time, the advantage goes to the passive optical networks due to lower operating costs and higher bandwidth ceilings. However, here in 2008, the cost differences are not as clear.
- Competing on price alone is a difficult strategy, as shown by Cogent's earnings. $4 per Mbps for wholesale Internet access is mighty low, and if the trend continues it will be hard to sustain the business on those kinds of prices. Far better to have your own fiber and be one of a very limited set of service providers serving a building. This helps you hold the line on prices in the long run.
- VoIP as an over-the top primary line residential replacement is nearly dead. Vonage is investing $65M per quarter to win almost exactly the same number of subscribers as they lose each quarter, and Vonage is the main remaining over-the-top residential primary line replacement player. The cable guys now own this space.
I made a list of 2nd quarter winners and losers, mostly cribbed from Rob Powell's list, but with few of my own additions for the companies I track that Rob does not.
Winners:
- Time Warner Telecom
- Global Crossing
- Equinix
- Savvis
- Switch and Data
- Comcast
Holding steady:
- AT&T
- Verizon
- Level 3 Communications
- XO
- Limelight
- 8x8
- Skype
- Cablevision
- Charter
Losers:
- Internap
- Paetec
- Akamai
- Cogent
- Vonage
- Time Warner Inc.
Time Warner, Inc., was a loser mostly because it was saddled with AOL, which posted disappointing results. Now that Time Warner Cable is spun out, the cable unit will be evaluated on its own in future quarters.
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