Broadband networks: Returns on invested capital stink

Broadband networks: Returns on invested capital stink

Summary: The last decade has been golden for telecom user, but network providers have barely broke even on their broadband buildouts.


The last decade has been golden for telecom user, but network providers have barely broke even on their broadband buildouts.

That's the crux of a recent research note by Bernstein analyst Craig Moffett. His data, published in a book called "Capital Punishment," shows how it’s hard to build networks and even harder to get returns.

Moffett notes that the last 10 years have been great for consumers. Big phones have become small computers. Internet access is faster than ever and there are more television choices than ever. He writes:

As the decade of the 2000s drew to a close, the iPhone was already four years old, more than nine out of 10 Americans (including infants and the infirm) had a wireless phone, and smartphones — what had been "the next big thing" — were ramping toward ubiquity. Cable had captured one-quarter of the nation's residential phone business, broadband had soared to more than 60% household penetration, and the TelCos were delivering video to more than five million households.

And yet for all the technological strides the industry has made, the returns on invested capital, or ROIC, during the decade have been, at best, anemic. Even before considering the atrocious deals that mark the past decade of telecommunications, the business of building networks is so capital intensive that economic value creation by the group we cover here has been, in aggregate, barely positive.

Wireline networks have the weakest returns on invested capital with a 1.5 percent gain over the last decade. Wireless networks had a meager return of 0.3 percent. Cable garnered a 2.5 percent return. Satellite networks had the best return on invested capital at 5.5 percent. It's no wonder that DirecTV shares have trounced other companies in 8-year returns. Others stocks---AT&T, Comcast, Dish, Sprint and Verizon---have negative returns.

But here's where the returns get tricky. Once you add up the costs of various telecom deals---MCI, AT&T, BellSouth etc.---the returns look much worse.

This chart illustrates the returns on invested capital once you include goodwill related to acquisitions.

Topics: Broadband, Networking, Telcos

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  • how did they come up with the figures?

    considering they have overlapped one another in many areas, it's pretty understandable. Wireless has three networks in place if not more in many cities. Does this figure include the money they make providing content? (tv, phone, etc) or just the amount they make from broadband?
    sparkle farkle
  • Sorry, you jumped to the wrong conclusion

    "it?s hard to build networks and even harder to get returns"

    The telcos and cablecos have huge management and organization problems that have nothing to do with capital investments for building networks. Much of their "investments" got squandered on buying poorly-run business units, not on infrastructure itself. Looking at AT&T and Comcast in particular, the amount of money dumped down the toilet for middle management, redundant fiefdoms and bureacratic waste is enormous.

    AT&T spends as much money being anti-competitive as they do on anything else. Lobbying for slanted legislation, arcane legalese in contracts, questionable sales tactics are just a part of it. And the iPhone deal was a Pyrrhic victory for them, costing the company on all fronts: the infrastructure overload, atrocious customer satisfaction, and (don't forget) the kickback payments to Apple for the "privilege".

    There is no doubt that the broadband business requires a lot more capital investment than many other IT industries, but it's not the sole (or even main) reason for poor performance of the companies you named. It has a lot more to do with the names on the current org charts than anything else.
    terry flores
  • RE: Broadband networks: Returns on invested capital stink

    So,what are you suggesting?
    We feel sorry for them and voluntarily
    double our own payments...
    Or,you think they have reason to..
    good luck with that......
    Give me a break...they will give their CEOs
    bonuses that "they" wont feel bad about......
  • More analysis please

    So consumers bought all the equipment at home. paid a connection fee for a basic modem ... the providers re-used (RE-USED) the land line installed 50-100 years ago, upgraded core equipment shared by millions ... and made no profit.<br><br>CFO and shareholders here:<br><br>1. Where did the money go?<br>2. Who didn't stop it going there, that I now fire?<br>3. What plans have we in place to take advantage of CISCO's announcement last year of 10x throughput? Or do I need to fire even more people?<br><br>On my desk tomorrow will be fine.

    Consumer here ...
    ... my heart bleeds for you greedy, inefficient dinosaurs.
    • RE: Broadband networks: Returns on invested capital stink


      Yeah...I'm not buying that either. There are significant investments on their side for network equipment, but many of these companies operate like financial institutions rolling in cash rather than communications companies.

      Poor planning and poor communication within the ranks is their primary issue. As another poster noted, the past decade or two has been spent gobbling up and assimilating smaller companies....that's where all the money went.
  • RE: Broadband networks: Returns on invested capital stink

    I think it's high time we de-regulated the Internet. It worked for the airlines and it will work for the Internet too.
    • If by deregulate, you mean allow anti-competitive behavior

      If by deregulate, you mean allow anti-competitive behavior, we already have that. If I come up with $1M in venture capital and try to install a modern fiber to the door internet in your town, the local cable company is guaranteed to lower the price of their service, just long enough to drive me from the market, then the prices go back to $60/month one week later.

      Look to Europe and South Korea. The ISPs there provide 4x the speed for 0.5 the price.

      And the irony is that the cable companies currently squeezing the consumer wouldn't even exist without the use of the publicly owned right of ways. Towns and cities should operate their own last mile internet access the way they run municipal water systems.
    • RE: Broadband networks: Returns on invested capital stink

      @ThoughtFollower <br>The airlines have been consolidating as the telcos and cable companies did. As to its success, customer service is worse. Price comparison is nearly impossible because now the airlines add on unpublicized ancillary charges that are a significant part of the costs. Airlines are also still very much regulated.<br><br>Deregulation is touted, not as an ends in itself (well there are some, but they overlook how regulation, such as rules for eligibility for deposit insurance, provide stability to a market), but as a means to increasing competition by lowering barriers of entry. For the internet, it's too late, it's already an oligopoly and about the best the consumer may expect is that cable provides a counter to telcos. That's pretty thin gruel.<br><br>Meanwhile the middle-men of the internet are literally licking their chops over adding tariffs for the use of popular services, such a posts to Facebook, though I think the practical effect will be to strangle innovation. I don't care about Facebook, but I care about the next things and investors who will not fund, seeing how the backbone providers have put a ceiling on success or may use their control of the wires to price unaffiliated services out of the market.
  • RE: Broadband networks: Returns on invested capital stink

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