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CenturyTel (s CTL) said today that it’s agreed to buy Qwest Communications (s q) in a deal valued at $22.4 billion, continuing the consolidation of rural telephone companies and ending speculation as to when and how Qwest would manage to sell portions of its business. CenturyTel will spend $10.3 billion buying Qwest stock and will assume $11.8 billion in debt. The deal comes two years after CenturyTel’s predecessor company purchased Embarq Telecommunications for $11.6 billion to become CenturyTel, and vaults it into the realm of the Big Bells Verizon (s vz) and AT&T (s T).
The combined Qwest and CenturyTel will have 5 million broadband customers, 17 million access lines, 1.4 million video subscribers and 850,000 wireless consumers (through a Qwest partnership with Verizon). For reference, AT&T has 17.5 million broadband customers (16 million are wireline), 4.5 million video subscribers and 26.6 million voice subscribers. The consolidation in the landline market is driven by a few factors, many of which spell bad news for consumer subscribers unless the winners of this consolidation fest are prepared to spend like mad.
The demand for wireline telephone and DSL services is on the wane, but at the same time, the need to spend money to maintain old lines and invest in new technologies like fiber is on the rise. Unlike Verizon and AT&T, CenturyTel and Qwest don’t have a corresponding wireless business to offset the losses and increased infrastructure costs. AT&T, for example, saw its wireline business provided just 24 percent of its fiscal first-quarter sales, down 3 percent from the year before, but 45 percent came from its wireless business — a business that also provided operating margins of 45 percent.
In addition to the wireline squeeze, these businesses are also located in areas where the population is spread out, making it more costly to maintain and invest in network upgrades. Verizon for example, has been selling its rural lines where it can and it doesn’t currently have plans to continue extending its FiOS fiber-to- the-home buildout to more of its subscribers, most of whom are located in less populated areas.
There’s also the competition with cable, which can deliver faster speeds with a simple DOCSIS 3.0 upgrade that can cost a few hundred dollars per home, as compared to the higher cost of delivering fiber.
Adding to this grim mix is the coming reform of the Universal Service Fund, a government subsidy program aimed at offsetting the costs of providing rural telephone service. The program is being shifted away from telephone subsidies and toward paying for broadband expansions. The Federal Communications Commission is also trying to rein in some of the waste associated with the program. Within five years the FCC hopes to stop paying companies like CenturyTel for voice lines with USF money. Some of that loss will be made up through new USF broadband subsidies, however, so this deal may be a way for CenturyLink to reap a larger portion of those fees.
CenturyLink executives emphasized the potential for stronger business relationships that it will win thanks to its acquisition of Qwest (it serves 95 percent of the Fortune 500), rather than the consumers. Qwest also has an emerging cloud computing product, which leads me to wonder if CenturyLink might eventually split the consumer and enterprise businesses further down the road. On the conference call executives said they may keep the Qwest name for business and use CenturyLink for the consumer markets.
Historically, these telecom consolidation deals have been a loss for consumers and even the firms who make them. Verizon has sold many of its rural assets, leaving its purchasers to file for bankruptcy. Taking on the burden of costly assets and a lot of debt doesn’t seem to be a winning strategy for telephone companies, but maybe the hope is to become something that’s just too big to fail. Given the government’s current focus on boosting broadband, perhaps such a strategy isn’t such a bad idea.