It’s a Bird, It’s a Plane, It’s Super LEC!

A New Breed of Rural Mega-Carriers Is Rising

The FCC is expected to approve the merger between Tier 2 telcos CenturyTel and EMBARQ later this week, which will create the fourth-largest ILEC in the nation, with 7.7 million access lines in 33 states. The deal is part of a bigger mergers and acquisitions wave that is creating a breed of rural super-LECs — and it’s a trend that has big ramifications for customers and competition.

“Clearly there is movement in the Tier 2s to consolidate, corresponding on the other side with the RBOCs jettisoning some of their rural properties,” said John Celentano, president of research group Skyline Marketing Group. “The big phone companies, as they move on to grander schemes via fiber to the x, haven't put money into rural properties — only to the extent they're told they have to. And the IOCs are often contiguous to the Bell footprint, making taking that business an easy addition.”

The RBOC Factor

There is ongoing consolidation among the independent operating companies (IOCs) themselves, but the RBOCs play a part too. Verizon Communications Inc. for one has made no bones about the fact it wants to divest its rural wireline properties. When it sold rural wireline businesses in 14 states to Frontier Communications earlier this year, it referred to them as “non-strategic” assets. Spokespeople were quick to explain that the RBOC is choosing instead to focus on wireless, FiOS and global IP. AT&T Inc. meanwhile has not made any public statements as to its stance on rural wireline, but it’s clear from financial statements where it’s making money: U-verse and wireless.

“AT&T and Verizon are motivated to focus in on its most profitable markets,” said Celentano. “And so aside from a few major centers, they are not going to stay in those Tier 2/Tier 3 areas. It makes sense for them to divest them and turn them over to a better caretaker, essentially — and everyone wins.”

Enter the IOCs, which stand to gain everything from the scale. They can gain economies of scale in their operations, and it enables them to end up a larger organization with a larger revenue stream and better margins than it had before — making upgrades and investments more feasible.

“The mid-tier are at a point where they need to do more than what they've done and they need to upgrade,” Celentano said. “There’s a lot of market movement and they now have an opportunity to grow via M&A It's going to be a process, but from here on out all of these companies are looking for more opportunities.”

Better Services Than Ma Bell

What that means for customers is that these burgeoning rural super-LECs will bring more broadband and more advanced services to areas the RBOCs aren’t willing to, and do in fact represent a large chunk of capex spending in the market. These Tier 2 companies are planning a new investment wave to upgrade and modernize their amalgamated networks in order to deliver new broadband services and to drive new revenue streams.

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