Cable and telcos have never been the best of friends, but the recent move by TDS (NYSE: TDS) to purchase Baja Communications shows that cable properties can offer value to telcos that need to rapidly scale their residential and commercial footprints.
Like other independent telcos, TDS isn't exactly a novice in the cable services game, having purchased other smaller telcos that had cable operations. However, it sold off the majority of those assets in the late 1990s.
The Baja purchase creates various opportunities for TDS, particularly in the video and business services segments.
For one, the deal immediately expands TDS Telecom's video services base. Currently, it has been serving its consumer base through a mix of IPTV in 10 markets and satellite services via its partnership with Dish Network (Nasdaq: DISH).
As of the end of Q4 2012, TDS had 7,900 IPTV subscribers in the 10 markets where it offers the service, while offering Dish satellite in other markets where it has not built out the service yet. Similar to AT&T (NYSE: T) and Verizon (NYSE: VZ) with their U-verse and FiOS offerings, TDS has found that customers with more than one service are less likely to churn to cable.
While TDS has gained video experience in the markets where it currently delivers IPTV, it's still a younger player that lacks the clout of a major cable MSO or larger telco to negotiate rates with major content providers.
"We see lots of opportunity to capture market share in these Baja markets," said Drew Petersen, vice president of government and regulatory affairs for TDS Telecom, in an interview with FierceTelecom. "The other intrinsic benefit we get right away from having substantial subscriber counts on the cable side as we grow our IPTV activities [is] we have found that things like retransmission consent and access to content are expensive propositions. We have improved our position from a negotiating standpoint from partnering with Baja."
No less compelling is that TDS will also be able to extend its growing base of managedIP services set in addition to IT and cloud services. During the fourth quarter, it had a 77 percent increase in managedIP stations, for example.
Now, the company will be able to leverage Baja's already built out DOCSIS and fiber-based network infrastructure to bring its managedIP services set to a set of underserved businesses that probably can't get access to these services.
"We think managedIP is something we can bring into the Baja market relatively quickly and really penetrate the commercial space," Petersen said. "They have been very focused on residential customers making big capital investments on their DOCSIS 3.0 upgraded network, but their focus on the commercial side has been largely four line and smaller businesses."
In addition to managedIP, TDS could also extend its Hosted and Managed Services (HMS) suite to the Baja business base.
Of course, the question is how TDS will be able to execute on its newfound cable strategy. Throughout the past two decades, there have been well-documented cases of telcos like AT&T that made multi-billion dollar deals to recapture their former local voice services glory only to eventually sell the properties when they could not make them profitable.
Perhaps some of that skepticism was alleviated this week when TDS announced that it hired cable veteran Mark Barber, who is best known for scaling Cobridge Communications' operations markets with $65 million in annual revenues.
TDS is not the only independent telco seeing value in pursuing cable properties, however.
Consolidated Communications (Nasdaq: CNSL), for instance, gained cable properties in Kansas City, Mo., and Kansas City, Kan., when it purchased SureWest last July. Though Consolidated is still going through the integration process, Bob Udell, COO of Consolidated, said a cable operator could be used not only to scale the company's overall TV subscriber base but also for "commercial opportunities that may have not yet been exploited."
Yes, it's true that cable operators and telcos have never shared much in common besides the poles they use to carry their respective signals to homes and businesses. But these two entities that were once enemies may now become greater allies.--Sean