Strong Broadband Results, Tough Market

By Gary Kim

SureWest Communications turned in a strong “broadband” performance in its most recent quarter. And showed in the process how tough it is to make money selling broadband products.

In the second quarter of 2007 consolidated revenues increased two percent to $52.4 million. The broadband-based products grew 14 percent year-over-year, to $17.1 million. Data and video revenues grew at even-higher rates. That’s all good news, of course.

But one has to take stock. Included in SureWest’s “broadband” segment are lots of things one might not intuitively think of as “broadband” services. High speed access is a given, as are revenues from video entertainment. But SureWest also includes voice revenues in the broadband segment, presumably because voice delivered over a fiber link is an application riding on a broadband access pipe.

The other thing is that the broadband segment also included high-capacity revenues and “business access” lines. To be sure, if we are talking about 2,574 business “lines” and nearly 979,000 voice grade equivalents (64 kbps equivalents), then we are looking at 367 to 368 VGEs for each access line. That’s something like 15 T1 circuits per line, or about 23 Mbps per line, or about a half-DS3 per line. That’s broadband, no question.

SureWest also notes that average revenue per unit for the broadband segment products is $77 a month. That’s an average of a basket of services ranging from a single voice line to a single video account to a single high-speed-access account or a business high-capacity account.

Or, look at it another way. SureWest has a bit more than 62,000 broadband consumer accounts. That works out to about 1.6 revenue-generating units (RGU) per customer. Basically that means each household buys high-speed access, and then six out of ten buy one additional product (voice or video).

In the business space, SureWest has 2,574 business “lines.” In all likelihood, that means it has a few very-large high-capacity enterprise customers and then the usual distribution of other mid-sized and small businesses one would expect in a suburban area surrounding a tier-two city, with some of the VGEs coming from business customers “off network” (SureWest has “CLEC” operations in Sacramento). Normally that would mean a fairly good number of T1 and dual-T customers.

Altogether, business and consumer broadband revenues now account for about a third of total revenue (SureWest also sells wireless service). That’s not shabby. Also, SureWest has consumer broadband penetration of about 29 percent where it is able to market fiber-based services (excluding copper-based Digital Subscriber Line services) to customers.

Keep in mind that SureWest sells copper-based DSL access services in 3 Mbps, 6 Mbps and 10 Mbps speeds, as well as symmetrical fiber-based access in 10 Mbps, 20 Mbps and 50 Mbps speed ranges. “Over 37 percent of SureWest data customers are taking 10 Mbps or higher data speeds,” says Steve Oldham, SureWest CEO.

SureWest, in other words, is way ahead of national norms in terms of access bandwidth products it can offer consumer customers. It arguably can claim to be the national leader where it comes to customer purchases of high-speed access products, in terms of bandwidth.

Still, SureWest has a long ways to go, as do other similarly-situated providers. At a 1.6 RGU average, it is a long way from a situation where the “triple play” is the normal way consumers buy.

In other words, when you are a service provider with good management, a state-of-the-art network and a long-standing commitment to good customer service, broadband is still a tough way to make a living.

Data RGUs increased 17 percent year-over-year to 59,792 in the second quarter of 2007 from 51,038 in the second quarter of 2006. But SureWest, like other providers, has to work to get every one of those new RGUs.

Video RGUs increased 19 percent year-over-year to 21,118 in the second quarter of 2007 from 17,759 in the second quarter of 2006.

Business access lines increased 10 percent year-over-year to 2,574 in the second quarter of 2007 from 2,345 in the second quarter of 2006.

Broadband-based voice RGUs increased 15 percent year-over-year to 19,747 at the end of the second quarter of 2007 from 17,110 at the end of the second quarter 2006.

Competitive cable VoIP offerings in the SureWest service area began in the second quarter of this year and as yet have had minimal impact on revenue, the company says.

The point is that even a well-managed, fiber to customer network offering the full triple play services suite, with strong fiber-to-home penetration in the early going, has to work pretty hard at growing broadband revenues enough to compensate for still-declining legacy voice access lines. IP