2010 Year in Review: Incumbents work through IP growing pains

The News: For incumbent wireline providers, 2010 continued to be one of ongoing revenue transition from legacy TDM to IP services--one that's expected to continue throughout 2011 and beyond. In other words, service providers are going through a growing pain process where legacy service revenues continue decline as IP services continue to rise.

In taking a look back at the earning statements of all of the major incumbent carriers AT&T (NYSE: T), Qwest (NYSE: Q) and Verizon (NYSE: VZ), one of the common themes we saw consistently was that while legacy business and residential service revenues continued to decline, IP services (IPTV, IP VPNs and Ethernet) continued to rise throughout 2010.

Likewise, large Canadian carriers Bell Canada (NYSE: BCE), Telus (Toronto: T.TO) and MTS Allstream saw an ongoing uptick in residential and business-grade IP services during 2010.

On the residential services side, it's clear that while traditional POTS service revenues continued their industry-wide decline, IP-based services like IPTV continued to rise.

Take a look at just AT&T, for example. As pointed out in our sister publication FierceIPTV, AT&T's U-verse IPTV service topped $1 billion in revenue during the second quarter.

Speaking at the recent UBS Warburg UBS Global Media and Communications Conference, Rick Lindner, CFO of AT&T said of the IP service, "When you look at where the company was only 5-10 years ago, revenues in wireline were primarily driven by basic TDM voice (local and long distance)," Lindner said. "Today, the majority of the revenues in our business are driven by data and more and more by IP-based data services and video."  

But the IP transition for AT&T and other incumbents isn't just about residential services alone. As the world continues to recover from the economic crisis, service providers are seeing their customer's transition from legacy Frame Relay and ATM-based services to IP-based VPNs and Ethernet.

During the third quarter, AT&T reported that while it saw continued Frame Relay service revenue declines, strategic business service (Ethernet and IP/VPN) revenues were up 15.4 percent.

Similarly, Verizon and Canadian operator Telus reported similar upward trends in their IP-based residential and business revenues during the third quarter. Verizon saw broadband subscribership rise 20.8 percent and business services rise 6.9 percent, while Telus' broadband subscription base was up 67 percent from Q3 09 due to the launch of its Optik TV and Optik Internet service in June 2010, in addition to expanding the reach and rate of its broadband services.

Of course, the ongoing drive towards IP-based services comes at the expense of declines in traditional TDM and ATM-based private line legacy services--a trend that Bob Rosenberg, president of Insight Research, believes will continue throughout 2011 but start to rebound by 2013.

"The total service provider revenue may look flat because what had been private line revenue now shows up as IP revenue," said  Rosenberg in an executive summary, "Private Line and Wavelength Services, 2010-2015". "This transition is creating an upheaval that is likely to last another couple of years."

However, Rosenberg added that the growing demand for both wireless-based video and the desire for global connectivity will drive increased demands for high speed wireless backhaul and retail private lines to connect cell sites and business locations.

What's significant about it?: Although service providers will have to suffer near-term declines in their legacy TDM-based voice and private line services, the ongoing adoption of lower priced IP-based services not only reduces a service provider's operational costs, but over time will produce new revenue opportunities.      

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