If you ask five different people what Lumen Technologies’ strategy is, you’ll likely get a different answer every time. That’s in part because Lumen seems to have its hand in a lot of cookie jars: residential, commercial, edge and value-added services like SD-WAN, for instance. But Lumen is also, as CEO Jeff Storey has said, in the midst of a transformation from a telecom to a technology company. Still, the question about strategy is worth asking, which is why Fierce posed it to both Lumen itself and some analysts.
Nick Del Dio, managing director at analyst firm MoffettNathanson, noted Lumen’s primary asset is an expansive fiber network, which is the product of both “substantial M&A activity and organic construction.” Lumen told Fierce its core businesses are divided into two primary customer segments: Enterprise and Consumer.
Del Dio noted Lumen derives the largest chunk of its revenue from network services it provides to business customers. This accounts for around three quarters of its revenue, he said. However, a “meaningful” chunk of Lumen’s sales stem from legacy services like copper voice, which are “in a state of inexorable decline,” with other revenue streams at risk of following suit.
“The overall market for commercial wireline services, of which Lumen is a large contributor, is declining (we estimate at a -2.6% rate in Q3 2021),” he wrote in response to questions from Fierce. “Lumen’s business segment growth rate could improve from the weak down ~5% rate of the past couple of quarters, but it’s hard to envision it growing.”
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Enter Lumen’s transformation effort.
IDC Research VP for Worldwide Telecommunications Research Courtney Munroe said Lumen is “very focused” on revamping its business and “doing a lot of positive things” to stabilize the declining elements and get into growth markets by offering digital add-ons and cloud services at the edge.
“I don’t think they’re grasping at straws; I think that they have no choice really,” Munroe said. “I think that they are a prime example of a telco who is trying to transform from a legacy, traditional business to provide more digital platform and cloud adjacent services.”
A Lumen representative told Fierce that as far as the enterprise segment is concerned, its focus for growth is on offering compute and application services, which leverage its edge compute and threat intelligence capabilities. These include things like SD-WAN and SASE, as well as managed security services and edge application delivery. The cornerstone of its plan is the Lumen Platform, which is designed to combine its capabilities across its technology stack and simplify consumption of its services.
“Businesses ultimately derive value from tech using their apps and workloads," the representative wrote. "We believe the increase in connected devices and the data generated will cause an architectural shift in how apps need to be deployed. The Lumen Platform aims to be the fastest, most secure platform for next gen apps and data. We have a huge advantage with our world-class, deeply-peered network coupled with our edge investments to deliver compute and storage services on the edge, closer to our customers, offering the best balance of performance, speed of deployment and cost.”
Del Dio, though, was skeptical the move to offer connectivity-adjacent services like security and edge computing will pay off quite the way Lumen thinks. “Our suspicion is that these initiatives will not prove sufficient to turn the business – they’re small relative to the current base of revenue, and Lumen may not be the best-positioned player in a competitive market to sell them.”
Quantum Fiber
However, Lumen is also investing elsewhere, namely in expansion of its Quantum Fiber network and companion security, voice and collaboration products, the company representative said.
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In November, Lumen laid out plans to grow its network to pass a total of 12 million locations with fiber over the coming years. Del Dio said compared to Lumen’s enterprise efforts, it’s “easier to see how FTTH investments are likely to drive incremental revenue.”
“In most of its markets, it’s Lumen versus a cable company for broadband, a duopoly, and Lumen is going to mechanically achieve a certain market share if it upgrades its plant from copper to fiber and does a good job operating and marketing the service,” he told Fierce. “It’s not rocket science.”
Meanwhile, Munroe argued Quantum Fiber is really more about the enterprise market than it is about serving residential customers. “Verizon and AT&T do this, too. You’re going to go after primarily the business market, but you can also leverage that fiber capacity to serve residential customers in that neighborhood,” he said, noting targets will be high-end customers who are likely to buy gigabit service rather than, say, a 25 Mbps tier. “You don’t want to get into the real small residential or rural markets. It has to be a high-density market where you can leverage the business segment as well.”
During Citi’s recent AppsEconomy conference, Storey acknowledged it will use Quantum Fiber to target business customers.
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“The reason I don’t say homes passed and I say locations passed, if you parse my words from before, is because SMB is an important part of that,” he said. “We believe that as we go by consumers, we’re going by small and medium business customers. We think the capabilities that we deliver in Mass Markets in general apply to consumers and they apply to small businesses. So, we think there’s a great opportunity for us to continue to expand our capabilities and expand our footprint and expand our market share.”
So where does this all leave Lumen? Well, Storey has confidently stated the company expects to return to topline revenue growth in the next two to three years.
Again, though, Del Dio has his doubts. In a research note published in November, he and fellow MoffettNathanson analyst Michael Srour concluded “Lumen appears likely to fall short of its goal…That sort of inflection would really depend on dramatic improvement in the business segment, as the benefits of FTTH deployments can’t happen with the speed required to materially change growth during that timeframe. And the business segment faces material, sustained headwinds that make a turnaround of the magnitude required…a serious challenge.”