Monday, October 31, 2016

Another Day, Another $34 Billion in Telecom Industry Consolidation

            Today’s mega-merger combines CenturyLink and Level 3 Communications, two major players, but surely not on most consumers’ radar screens.  CenturyLink has acquired an impressive array of companies over the years including the AT&T spunoff Bell Operating Company, formerly known as US West and before that, Mountain Bell.  Level 3 owns and operates one of the largest inventories of domestic and international fiber optic transmission lines in the world.  If you run a traceroute for just about any web link, Level 3 would have at least one line in the list of networks traversed.  The company also serves as the major Content Distribution Network for Netflix.

            In this time of low interest rates, massive retained earnings and the urge to acquire scale, this merger will generate little concern, or interest.  One can dismiss all the hype about efficiency, scale and synergy gains and still tolerate a merger of this sort, because of how much it differs from AT&T’s recent announcement of its intent to acquire Time Warner.

            With the exception of CenturyLink’s first and last mile, local exchange services and middle mile links between businesses in the Mountain West, both this company and Level 3 operate in mostly competitive markets, or at least ones that lack substantial barriers to market entry.  There are existing facilities-based competitors and technological innovations support new ways to expand transmission capacity and use new radio spectrum options.

            In the vernacular, both companies face inter-modal and intra-modal competition.  Inter-modal competition occurs when there are multiple content transmission options: fiber optic cables, copper wire, satellites, terrestrial microwave radio, Wi-Fi, Wi-Max, 4G and 5G cellular radio, etc. Intra-modal competition refers to the availability of multiple carriers in each of the above content transmission media.

            I am not thrilled when companies have easy and expedient ways to buy market share, instead of earning it through superior business skills.  I wish companies had to devote sleepless afternoons sharpening their pencils and the value position of the goods and services they offer.  On the other hand, we should realize that bigness and unlimited access to capital does not guarantee success.

            Sponsored researchers may wax poetic about the virtues of vertical and horizontal integration and how it only takes 2 or 3 players to achieve a competitive market.  They cannot guarantee that a fully integrated company can achieve best practices, much less ok practices, in each of the industry sectors they choose to operate.

             Telecommunications history provides countless examples of how large companies unilaterally opted to divest non-core assets including Time Warner (print media, films, cable television operators) and General Electric (NBC).  Are their spun off ventures worst off?

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