Consolidation and Pressures on the Telecom Industry
Consolidation is normal in most industries. Obviously extreme market conditions can lead to the “shotgun” marriages that are now happening in Financial Services, but Telecom has been relatively unscathed in the recent downturn. In the case of Verizon getting Alltel, Verizon may have benefited from the private equity consortium offloading Alltel only after holding it for one year (http://www.nytimes.com/2008/06/06/technology/06phone.html). Since most private equity firms hold their portfolio companies for considerably longer than one year, Verizon might have lucked in the deal to now create the largest wireless carrier in the US. The most recent merger news has been CenturyTel acquiring Embarq, which is a good move in my opinion, to give CenturyTel additional scale in its core market (http://www.centurytel.com/Pages/AboutUs/PressRoom/pressRelease.jsp?page=Corporate/Press_Release66.html). In full disclosure, I have met most of the C-level executives at CenturyTel and have faith that they will do a good job in with the combined entity even though they are merging with a larger company. My only current concern would be lack of a stronger wireless footprint in order to create a “quad-play” offering. This is probably the start of other rollups of rural operators.
While we may not see significant movement with large Telcos combining, I feel there may be significant activity for the industry’s software and content providers. In a previous blog, I had addressed impact in the venture community from the current credit crisis. Ron Conway from Sequoia Capital has reportedly advised his portfolio companies to start cutting costs while finding a way to profitability (http://gigaom.com/2008/10/08/sequoia-rings-the-alarm-bell-silicon-valley-in-trouble/). This is not always easily achieved since one (cost cutting) tends to adversely affect the other (building new revenue streams). The latest MoneyTree from PWC report shows a considerable third quarter dip in venture financing so Ron is obviously not in isolation here. In order to save portfolio investments, I would expect more match making with smaller software companies in order to provide scale to whether the current market. My concern is that these are new innovators and constraining them effectively constrains the launch of new and innovative value added services. On the other hand, with consumer spending starting to dip and recent reports of shrinking mobile spend, maybe this is a wise choice on the part of the venture firms since there may not be buyers for those services.
What are your thoughts on what will happen in the Telecom industry? Will more big companies merge or simply ride it out?
