CenturyLink sees Qwest merger as path to facilitate business, broadband growth

CenturyLink (NYSE: CTL) knows that if it's going to stay competitive, it needs to break out of the old telecom regulated mentality.

Speaking at the Morgan Stanley Technology, Media and Telecom Conference, Stewart Ewing, Executive Vice President, Chief Financial Officer and Assistant Secretary, outlined how CenturyLink will capitalize on broadband, business and even mobile backhaul services.

This has been a change for a service that primarily had acted as a rural telephone company delivering mainly voice for much of its life--a strategy that's changed with its acquisitions of both Embarq and now the pending deal with Qwest.

"I think that it was a vision as much as anything else toward diversifying ourselves from the regulated revenues we depended on all of our history, including USF revenues and higher access revenues, realizing that there would come a day when those started to disappear and be redirected," Ewing said. "Part of it was by design to de risk the company from a regulated revenue standpoint."  

Driving stickiness with broadband, video
CenturyLink is finding that these services are helping it offset obvious losses in its traditional PSTN business.

One service that CenturyLink believes is the glue to maintaining customer stickiness is video-whether that is its Prism IPTV or satellite service. Unlike AT&T (NYSE: T) and Verizon (NYSE: VZ), CenturyLink is taking its time with IPTV, having only rolled it out in five markets with plans to expand it to three additional markets in 2011.

During the fourth quarter, the number of Prism-capable homes passed increased 60 percent and Ewing said that it expects to pass about million homes by the end of this year.

One market segment that CenturyLink believes that it can use IPTV to better target the Multi Dwelling Unit (MDU) segment in its markets-one that it had not traditionally targeted in the past.

"We estimate that 25-30 percent of the addressable consumer households are in MDUs, which represent a large market opportunity for us that we have really lost over the years," Ewing said.  

Interestingly, CenturyLink has found that the addition of video to its residential service bundle has become a churn reducer.

"Our experience so far shows that video, whether it's satellite or IPTV, has a significant impact on customer churn," Ewing said. "Our experience to date is that a customer who has one of our triple play bundles is three times less likely to churn than a voice-only customer."

Like Qwest, CenturyLink has also taken a Fiber to the Node (FTTN)-based approach to broadband. The only slight difference in approach to the delivering higher speed broadband is that Qwest has advocated a FTTN approach using VDSL2 and ADSL2+, while CenturyLink has been leveraging ADSL2+ with bonding and VDSL2 in select markets.

As a combined company, the new CenturyLink will have a total of 5.4 million broadband DSL customers.

Still, there are some challenges that both companies will need to overcome. While Qwest continues to make progress with building out its FTTN network, adding 92,000 new customers in Q4, it faces the ongoing issue of migrating customers off the legacy ATM-based DSL service to its IP-based VDSL2 service.

Despite the challenges of this transition, CenturyLink plans to complement Qwest's broadband efforts by "fill in holes they left in some of the metro areas to offer higher speeds," Ewing said," and like Qwest they "will look for opportunities when we build fiber to the tower for businesses or residential subdivisions that we're passing to see if we can enhance speeds in the legacy footprint as well."   

New business opportunities
When CenturyLink completes its acquisition of Qwest, the service provider will instantly gain access to Qwest's existing customer base and business network facilities.

Ewing said that he does not "expect to get much from a synergy standpoint in the enterprise business because we did not have a business like that within CenturyLink," adding that "we will have some large customers transfer over to that group, but we did not a big infrastructure around the enterprise customer base."

By adding Qwest's business network infrastructure into its base, CenturyLink more business selling power for not only new Qwest customers, but also its legacy rural customer base.

Although Ewing can't predict today how much revenue synergies there will be when the deal closes, there will be some because of the larger footprint that the Qwest sales force will be able to sell into and the additional products and services the legacy CenturyLink sales force will be able to sell.

Already, CenturyLink is seeing the possible effects of having Qwest's business services in its larger fold.

"We signed an agreement with Qwest that basically allows our sales team to sell off their network," Ewing said. "We've been able to pick up some MPLS customers (financial companies) that we weren't able to pick up in the past because we weren't able to serve them."

Among the many new business service opportunities that Ewing sees for business is managed security and data services.

"Qwest has a nice data hosting business that generates $200 million a year in revenue and we would like to convert that from more of a hosted business to more of a managed services business and a cloud computing business," Ewing said. "We think that that's is a natural extension of the services we provide to our medium and enterprise business customers, and based on surveys we have done with our customers they are interested in purchasing these services from us."

In addition to expanding its managed service business, CenturyLink sees an opportunity to extend copper and fiber-based services, likely Ethernet, to metro area businesses.

"Another opportunity we'll look at more will be opportunities for metro city fiber or copper where Qwest has a need to reduce the cost of serving enterprise customers in those larger markets," Ewing said.

Betting on backhaul
During the Q4 earnings call, CenturyLink said it would increase spending to $1 billion to fund wireless backhaul fiber builds in 2011--16 percent higher than the $864 million than what it spent in 2010. Initially, this capital increase caused great concern by both investors and financial analysts.

The increase in CenturyLink's capital spending is centered on expanding fiber to more cell towers.

"These are not speculative investments, but rather are based on 5-7 year contracts, which guarantee minimum revenue streams for the life of the contract, and we believe have opportunity for upside as wireless broadband services continue to grow," Ewing said.  

Like Qwest, CenturyLink is bullish on the wireless backhaul opportunity. Both Qwest and CenturyLink currently provide wireless backhaul to Verizon Wireless and other large wireless operators.

In 2011, CenturyLink plans to build fiber out to 3,000 fiber cell towers, with each tower build estimated to cost in the range of $60,000 - $75,000.

Ewing said that its fiber to the tower investment "protects the special access revenues we receive today on the copper-based T1s and DS3 on the towers and positions us well to grow revenue in the future."  

For more:
- hear a replay of the conference

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