Do Service Providers Earn Back Their Cost of Capital?

To the extent that all U.S. broadband networks rely on private capital to invest in new broadband facilities, the question of financial return for such investments is fundamental. After all, telcos, cable companies, satellite and wireless providers go to private markets for the funding to build their broadband networks, and those investors have lots of choices.

If the financial return, and the risk, of broadband facilities investment do not roughly match or exceed what is available from alternative investments, those investments will not be made, and it won't matter much how much people scream about what they can't get.



In that regard, it is fair to note that many investors no longer consider telecom an especially desirable investment. It is rare these days to find a venture capitalist willing to consider backing a new telecom equipment supplier, for example. To the extent that interest remains, it is centered on mobile and mobile applications.



And there are reasons for that investor caution. Any perusal of industry statistics or quarterly or annual financial reports, at least in developed markets, will show stress around the traditional revenue sources most communications or video suppliers rely on. 

Growth rates are down, subscriber trends are negative in many cases, profit margins are lower than has been the case historically, and there is more competition and a shift of value elsewhere in the Internet, broadband and wireless ecosystems. 

In fact, Bernstein analyst Craig Moffett argues that, over the last decade, the returns on invested capital in communications networks in U.S. markets have been anemic, at best. He argues that economic value creation has been, in aggregate, barely positive.



Wireline networks have the weakest returns on invested capital with a 1.5 percent gain over the last decade. Wireless networks had a meager return of 0.3 percent. Cable garnered a 2.5 percent return. Satellite networks had the best return on invested capital at 5.5 percent. Others, including AT&T, Comcast, Dish,Sprint and Verizon, have negative returns, Moffett argues.

It probably goes without saying that potential end user shifts in the direction of over the top video entertainment do represent a threat to subscription video revenues now earned by telcos, cable and satellite companies.


A new study by Edelman suggests U.S. consumers are are disenchanted with their entertainment choices. Only about 17 percent of respondents think entertainment sources today provide “very good” or “excellent value.” That should send up a warning flag about the latent potential demand for different video and other entertainment options. 


Declining entertainment value obviously creates a gap that competing providers might be able to exploit. Unlike many other businesses, though, the video entertainment business is unusually controlled by content creators and distributors, rather than distributors. DirecTV, for example, recently had unusual success with its “Sunday Ticket” service delivering National Football League games, says Michael White, DirecTV Chairman, Chief Executive Officer and President.

Those sorts of issues mean there is potential for alternative distribution methods, so long as content providers are willing to cooperate. For fixed-line access providers, there are other issues, beyond a threat to existing video service revenues, though. Some would argue that fixed networks already have trouble earning a return on invested capital that justifies deploying that capital.


Whether or not a provider of goods and services can remain in business is not a consumer's problem, of course. But the apparent difficulty of making money in the fixed-line service provider business is a key concern for service providers, naturally. 


Beyond that, to the extent fixed access networks are seen as a key underpinning of economic growth, and a "national resource," there are key public policy issues. Specifically, if robust and high-speed broadband access is a "public good," inability to earn a return on invested capital is a broader problem. 

Comcast, Time Warner Cable, Bright House Sell Spectrum to Verizon

SpectrumCo, LLC, a joint venture between Comcast Corporation, Time Warner Cable, and Bright House Networks, is selling Verizon Wireless its 122 Advanced Wireless Services spectrum licenses covering 259 million POPs for $3.6 billion. What might be noteworthy is the strategic change of direction. The cable companies purchased the AWS spectrum at least in part as a potential foundation for wireless service.

The sale, and the agreement by the owners to resell Verizon Wireless services instead, suggests the cable operators once again have decided that they could not create independent wireless operations.

Moreover, given the business relationship cable companies have had with Sprint since at least 1994, the move also suggests that the cable operators are breaking with the idea of Sprint as a strategic partner. Since cable companies have been among the potential buyers of Sprint Nextel, the latest moves would seem to indicate no interest in that area.

Cable TV operators have been spending money to get into the wireless business for decades, with little success. In 1994 Sprint, Tele-Communications, Comcast and Cox Cable formed a joint venture to build a nationwide network to provide wireless service.

However in 1998, Sprint assumed control of the business and bought the cable companies' interest in the company.

In 2005 Comcast, Cox, Time Warner and Advance/Newhouse formed a joint venture with Sprint Nextel to provide a quad-play cable TV, high-speed data, landline and wireless service to their customers. But the quad-play idea never panned out and Pivot never grew beyond the initial 33 markets Sprint launched in November 2007.

Sprint said that Pivot was being hindered by provisioning issues. Time Warner later said that demand for Pivot services was "tepid." Pivot users eventually were given the option of switching to Sprint's regular service.

In 2008, Sprint and Clearwire announced that they would combine their WiMAX businesses and create a new company that would include a $3.2 billion investment from Intel, Google, Comcast, Time Warner Cable, Bright House Networks and Trilogy Equity Partners.  Cable wireless history

Recently, Cox Communications decided to shutter its own wireless business as well.

Comcast owns 63.6 percent of SpectrumCo and will receive approximately $2.3 billion from the sale. Time Warner Cable owns 31.2 percent of SpectrumCo and will receive approximately $1.1 billion. Bright House Networks owns 5.3 percent of SpectrumCo and will receive approximately $189 million. Comcast, Time Warner Cable sell spectrum to Verizon