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WIKI ANALYSIS
Qwest Communications International (NYSE: Q) provides phone, internet, wireless and long-distance services to over 14 million customers in 14 Western states. Qwest generated $13.9 billion in revenue (2006). Of the seven regional Bell Operating Companies (RBOCs) formed when AT&T was broken up in 1984, Qwest is the only one that has not merged with another RBOC and is now the smallest RBOC.
Qwest's wireline segment has been declining during recent years due to increased VoIP competition. Qwest's lack of considerable assets in the booming wireless segment expose it to losses in the wireline segment, but increased growth and profitability in its long distance sector could help offset the loss. It recently replaced management and has come a long way since its shady days of insider trading and fraud by decreasing debt 33% in just 5 years. Government regulation of mergers, acquisitions and net neutrality will also heavily impact Qwest services.
Company Overview
Qwest spawned the landmark break-up of AT&T in 1984. The company has grown through a series of transactions since then, as seen in the diagram below:
Qwest operates in three segments:
- Wireline: Qwest's wireline segment is by far the biggest of its three segments. The wireline segment consists of voice services and data, internet and video services.
- Wireless: Qwest has an agreement with Sprint Nextel to resell their wireless under the Qwest brand name. The wireless segment carried 770,000 wireless customers as of July 2006.
- Other: Other consists of leasing unused property and office space.
Customers
Qwest customers can be broken down into three different categories.
- Mass Market: The average consumer and small businesses
- Businesses: Local, national and global businesses; government entities; educational institutions (public and private)
- Wholesale Customers: Other telco providers that purchase Qwest's services to sell to their own customers
Disadvantages from lack of diversification
Absence of wireless services
Qwest's wireless service consists of reselling Sprint wireless service under the Qwest brand name. Since Qwest has to purchase its wireless services from Sprint and mark-up the price to make a modest profit, its profit margins are lower than a company that provides its own wireless. Qwest's higher wireless prices can be linked to the loss of customers during recent years as other companies have been decreasing already cheaper wireless prices.
Qwest's wireless service has not been faring well in recent years. Its wireless subscriptions decreased 20%, from 1 million (2003) to a mere 770,000 (2006). Qwest's loss in customers is shocking considering that the wireless industry grew by an astounding 50%. Qwest has not shown much interest in expanding into the booming multi-billion dollar wireless industry. It's lack of a strong wireless services makes it especially vulnerable to increased wireline losses.
Threats from bundling
Bundling is an important marketing strategy that offers several products to be sold as one combined product, is cheaper than buying each product individually and increases the number of total products sold and overall sales. Bundling is successful because it's cheaper and easier for the customer to pay just one bill, instead of a bill for each service that subscribe to.
Many telco companies use bundling to sell their wireless services with other services such as land lines, long distance, or internet services. If Qwest decides to grow its wireless services and bundle its wireline services, it could decrease the loss in customers.
Threat from growth of VoIP
The growth of VoIP, Voice over Internet Protocol, will affect the number of Qwest's wireline service customers because it replaces the wireline phone services that the RBOCs provide.
Qwest provides customers VoIP service, but it's not widespread and not efficient enough to provide to all of its customers. It has a solid wireline network and cannot afford to dispose of all of their wirelines for an extended VoIP network. If they decide to extend their VoIP services, they risk cannibalizing their own customers. In other words, if Qwest offers more VoIP service, then it would attribute to wireline losses by offering their wireline customers their VoIP services instead.
Long Distance Lines
Qwest gained efficiency through its national long distance segment by shifting many of their out-of region traffic to their network. Qwest's national long distance segment has considerably increased since 2005 because of new marketing strategies. The long distance segment still has a large amount of out-of-region traffic that contributes to dragging profits. If Qwest can focus on continuing efficiency by shifting more out-of-region traffic to its own network, its long distance segment will help boost slow profits.
Debt reductions
Qwest has been rapidly paying off its multi-million dollar debt since new management was hired in 2002. New Qwest management has decreased the debt 35% from $20 billion to $14 billion over the 5 years ended Dec. 2006. The debt reduction, though explained in part by efficiency improvements, is also the result of eliminating the dividend reducing CapEx, and recovering from various accounting shenaddigans.
Lawsuits troubles and media coverage
Qwest's troubled past continues to haunt them. Qwest has had a long legacy of fraud accusations and insider trading. Past board members still own a large portion of Qwest stock and could choose to divest their shares. Any new litigation issues would hurt profits because of settlements and lawyer fees.
- Fraud and Insider Trading: In 2001, Qwest settled an alleged securities fraud case with the U.S. Securities and Exchange Commission (SEC). It's misdeed cost Qwest $250 million in settlement fees. Qwest's former CEO Joe Naccio was recently convicted of insider trading by selling $52 million of Qwest stock. Qwest admitted to improperly reporting $2.2 billion in revenue between April 1999 and March 2002. Due to bad press and extreme loss of investor confidence, Qwest stock fell from $50.00 USD in June of 2000 to a mere $2.80 USD in June of 2001.
- Past Management: Qwest's founder, Phil Anschutz, was not reelected to the Qwest board, in fact he didn't even stand for reelection. Anchutz still owns about 16% of Qwest stock and if he decides to sell or diversify his shares, Qwest's stock prices could fall due to the increased number of stock shares available to the public.
Government regulation of merger activity
Since Qwest is the smallest company in the telco industry, being bought out or merging with another company is not out of the question. The FCC and U.S. Justice Department have been allowing large scale mergers and acquisitions in recent years, such as the AT&T Wireless-Cingular merger and Verizon Communications acquisition of MCI. These multi-billion dollar mergers negatively affect Qwest's wireline and wireless services because of their competition's increased resources.
Net neutrality discontinuation risk
Net Neutrality is the idea that all internet users should be in control what applications they use on the internet and what content they can view, which basically means restriction-free internet use. Currently, there are a few telecommunications bills within the Senate and House of Reps without significant net neutrality protection. If the bills are passed and made into laws, Qwest's internet service would be severely affected, as well as alter the internet as a whole.
If the government decides to discontinue net neutrality, internet providers can block competitor websites, content and services from users, or even decide which information gets to users fastest. Qwest and other smaller internet providers would be for equal access to the internet so that the large companies wouldn't have even more of a competitive edge.
Qwest versus the Competition
The telecommunications industry is extremely competitive and ever changing due to advances in technology. Over the last 15 years, over 90% of the original telco companies have gone out of business or merged with larger firms.
Qwest is the smallest of the RBOCs and competes with the three other RBOC giants Verizon Communications (VZ), AT&T (T) and Sprint Nextel (S). Qwest has fallen far behind its RBOC competitors because of its lack of successful wireless assets. Since Qwest does not have wireless assets as widespread as its competitors, they are at a huge disadvantage in terms of size, growth and revenue.
For Qwest, large scale mergers and acquisitions are bad news since Qwest is smaller than its competition. Companies consolidating together will have more resources to compete and shift market share from their competitors. The AT&T Wireless-Cingular merger won't severely affect Qwest unless they decide to seriously enter the wireless industry. The Verizon acquisition of MCI is daunting news for Qwest since they both operate in wireline services. The acquisition will also mean that Verizon will become more efficient since costs will be cheaper due to the increased availability of MCI wirelines. Since Verizon has the option to offer cheaper prices, it could start a price war between the RBOCs. Price wars happen when competitors lower prices in order to attract customers, but when prices get too low, everyone loses. Qwest cannot afford to become a part of a price war, which is why mergers and acquisitions are bad news.
| Company | Total Revenue | Qrtly Revenue Growth | Operating Margin | No. of Employees | No. of Access Lines (000s) |
|---|---|---|---|---|---|
| Qwest Communications | $13.89 B | -0.90% | 12.93% | 38,383 | 14,283 |
| AT&T (T) | $76.27 B | 83.9% | 17.9% | 302,000 | 68,786 |
| Sprint Nextel (S) | $41.05 B | 0.20% | 6.77% | 64,600 | |
| Verizon Communications (VZ) | $89.5 B | 6.4% | 16.48% | 242,000 | 46.950 |
Source: Company data and reports
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