Big telecom gets bigger while the small get teeny tiny, part 2

by Steve Blum • , ,

Size matters in the telecoms business. That’s true when success is measured by broadband subscriber counts, as I explored in yesterday’s post, and it’s true for share prices too. Some companies might be heading for a very hard landing.

It’s the small and mid-sized telephone companies that are in the roughest shape. CenturyLink’s share price is down 41% since this time last year, which is the best of the middle of the pack. Its purchase of Level 3 Communications seems to be slowing its descent. The picture is much worse for Windstream (down 73%) and Frontier Communications (down 82%). That’s led to speculation that complete collapse might be just over the horizon, according to a story by Joan Engebretson in Telecompetitor

“The market anticipates that both these companies will go bankrupt in the not-too-distant future, judging by their sagging bond prices and nosebleed credit default swap prices,” said [MoffettNathanson financial analysts]…

Frontier’s issue, according to the researchers, is that in the residential and small to medium business market, it is competing using mostly obsolete copper assets against technologically superior cable HFC and wireless. And CenturyLink faces the same issue in those markets, although that company is not so reliant on those markets.

In the residential and SMB market, however, “the competitive endgame is preordained,” the analysts wrote. “The telcos are destined to lose this one.”

By comparison, the big telcos are performing pretty well, although not at the same level as the two cable giants. Comcast (up 15%), Charter Communications (up 22%) and Verizon (up 2.4%) have all seen their share prices increase over the past year. AT&T is the exception, with its share price dropping 5.4% over the past 12 months. But it’s still pursuing its troubled takeover of Time Warner, which has knocked its valuation around. At its most recent peak, before the feds dropped the hammer on the deal, AT&T’s stock market performance over the past year looked a lot like Verizon’s.

Although most small cable companies are still gaining broadband subscribers at least to a degree, the industry-wide downward trend in video subscriptions is hurting their business model. Their future upgrade paths – a choice between costly fiber to the home rebuilds or less pricey but less capable DOCSIS 3.1 technology upgrades – create uncertainty. Altice USA, which is also plagued by doubts about its rapid acquisition and expansion strategy, has lost 42% of its stock value since it started trading separately from its European parent company last June.