Business managers and industry analysts must anticipate a range of possible scenarios, from favorable robust growth and market position to radical restructuring of the status quo, based on feasible market and economic conditions. A what if “brain salad surgery” extreme extrapolation can lead to a possible Armageddon business scenario for incumbents.

The incumbents have a huge advantage: massive cash flows and market position, which also lead to volume efficiencies for networks and services; a winning situation currently.

But let's face it, the American economic juggernaut has gone from one bubble to the next based on worldwide expansion of markets that soak up the irrational exuberance of an ever more lofty derivative economy. Following close behind, and in some cases out-besting the walk to the edge of the economic precipice, the UK and some other economies are in equal if not more vulnerable circumstances. Consumers of goods and services have become detached from producing like value. Derivative financial instruments, the point of the pyramid scheme, hardly create usable value and no longer have the ability to absorb international float that has grown into the trillions of US dollars. The economic stimulus plans, however well calculated they might be, add to deficits and perhaps prevent some of the realignments to a less top-heavy economic structure. Only Bernie Madoff could pass off the current situation as sustainable.

The Shoe is yet to Fall for Incumbent Operators as the US Economy is Restructured

The Set Up:

Major international mobile telecommunications companies have developed into highly debt leveraged enterprises that are precipitously dependent on the huge cash flows generated from mobile phone subscription and services revenues. Debt coverage ratios that business schools would have once ruled as borderline insanity have become commonplace, if not the norm. This has seemed tolerable given the leverage that licensed operators have on critical mobile phone capability.

However, much of the control over cash flows stems from control over consumer spending that derives from the mobile phone ecosystem that is now changing hands from operators to the combined device-OS-apps suppliers. Even that lock-in can be viewed as a transition to a flat open supply environment now depicted by Google Android. Open apps on iPhone, like open access devices (unlocked, Android and other open OS/apps phones that can be used on any network without contract lock-ins), become the norm. This continues to shift the control of services to the user and apps-Internet, and away from operators.

The Incumbent Demand vs. Revenue Vise Hypothesis:

 
Source: Maravedis 2009



Verizon, AT&T, BT and other debt-leveraged operators find their mainstream revenues evaporating into thin air... into the cloud. Within 3-5 years, the incumbents witness a game changing set of events that they are powerless to avert: users flee packaged services to open source a-la-carte over-the-top alternatives offered by flat-rate broadband operators, including their own deleveraged broadband pipe services.

VERIZON 6/30/2009:

Current Liabilities (in 000s $US)
Accounts Payable: 14,685,000
Short/Current Long Term Debt: 5,440,000
Other Current Liabilities: 6,243,000

Total Current Liabilities: 26,368,000
Long Term Debt: 59,469,000
Other Liabilities: 38,604,000
Deferred Long Term Liability Charges: 17,737,000
Minority Interest:40,149,000
Negative Goodwill -

Total Liabilities: $182,327,000,000

AT&T 6/30/2009:
Current Liabilities (in 000s $US)
Accounts Payable: 26,064,000
Short/Current Long Term Debt: 10,155,000
Other Current Liabilities -

Total Current Liabilities: 36,219,000
Long Term Debt: 66,565,000
Other Liabilities: 45,768,000
Deferred Long Term Liability Charges: 20,354,000
Minority Interest: 403,000
Negative Goodwill -

Total Liabilities: $169,309,000,000
The resulting calamity is they would be sitting on costly infrastructure and operations that their revenues can no longer support. Burdened by heavy debt loads that require them to drastically restructure, some are forced to off-load network operations to all but strategic capabilities and core spectrum assets (sound familiar? - e.g. Sprint).

Given this scenario, looking back in five years, WiMAX and LTE will have been the disruptive “all-IP” wireless Ethernet services in the hands of the new operators and open services segments within incumbents. These next generation low cost infrastructure and services capabilities become not just competitive but they cause a drastic restructuring of the incumbent operators. Even though WiMAX and LTE extended operators do not reap similar fat ARPUs as the beleaguered incumbents, they grow lean but healthy businesses based on lower costs and a more efficient structure that is welcomed in the new economy of post economic bubble restructuring.

Corporate Tombstone Epitaph:
AT&T and Verizon are broken up under bankruptcy proceedings. The shells of the former companies cater to key markets: AT&T to their closest constituents - government, and fortune 500 corporations. Verizon, hunkered down to streamlined packaged services as a 1/5th sized shell of its former self.

Is This Scenario Possible?
If the U.S. derivatives economy is forced to achieve economic adjustments that bring trade and government deficits into modest levels of accommodation, then yes, this scenario is within the range of possibilities. It is not at all outside the realm of possibilities that the financial structures of AT&T and Verizon will require dramatic restructuring to prevent collapse.

This drastic “Armageddon” scenario is unlikely. But a degree of restructuring due to economic deleveraging and changes in the competitive structure of the telecommunications services industry is very likely indeed.

For more information you can contact the author at robert@maravedis-bwa.com

Copyright © 2009 by Maravedis Inc. All Rights Reserved.
No reproduction without consent.



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