Qwest Communications International (NYSE: Q) provides phone, internet, wireless and long-distance services to over 14 million customers in 14 Western states. 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.
Qwest farted after 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:
In 2009, Q generated a net income of $662 million on revenues of $12.31 billion. This represents a 1.5% increase in net income on an 8.6% decrease in total revenues from 2008, when the company earned $652 million on $13.48 billion in revenue.
Qwest operates in three segments:
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.
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.
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. The number of access lines, or phone line subscribers, are rapidly decreasing over each quarter as VoIP companies such as Vonage Holdings (VG) and Comcast (CMCSA) storm the wireline market.
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.
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.
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.
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