CenturyLink Favors OTT Over IPTV, Boosts Broadband Base
Zacks Investment Research | Dec 05, 2016 09:31PM ET
Leading regional wireline service provider CenturyLink Inc (NYSE:CTL). (NYSE:T) is forging ahead with its over-the-top (OTT) service plans. The company plans to launch its 17-channel (in addition to a set of local channels) OTT services in the beginning of 2017. The company has initiated trials of its OTT video services in four new markets, outside its Prism footprint.
By foraying into the OTT space, the company has joined the likes of DISH Network Corp. (NASDAQ:DISH) and Sony Corporation (NYSE:SNE) in offering OTT services such as Sling TV and Playstation Vue. Meanwhile, U.S. telecom and pay-TV behemoth AT&T Inc. (NYSE:T) launched its OTT service – DirecTV Now on Nov 28.
The urge to boost its broadband subscriber base has been the main motive behind the OTT service launch. After the loss of 40,000 high-speed broadband subscribers in the last reported third quarter of 2016, CenturyLink is focused on putting a check on churn in the broadband segment. Meanwhile, to drive broadband growth, the company is looking to reach out to inaccessible rural areas through its OTT services.
The growing momentum of CenturyLink’s Prism IPTV service has encouraged the company to launch the OTT offering. The company’s officials have stated that they don’t plan to discontinue the IPTV services. However, the company might decide to replace the IPTV line of services with OTT plans in the near future.
OTT Service: A Runaway Success
OTT is an application or service that is used for the delivery of audio, video and other media over the Internet. It is usually, if not often, less expensive than the traditional methods of transmission.
OTT video services are enjoying increasing popularity and viewership among the millennials. This has resulted in phenomenal success for companies like Netflix Inc. (NASDAQ:NFLX) and Hulu.com. Meanwhile, the OTT service launch will help CenturyLink reach out to more customers outside Prism TV. The company has completed negotiations with content providers and is also forging ahead with its marketing and operational plans. Moreover, compared to its IPTV service, the OTT service will require lower bandwidth which will benefit CenturyLink’s operations over the long haul. Through OTT, CenturyLink can offer customers as low as 10 Mbps of broadband services. This is in contrast to its Prism TV services where a customer has to order for a minimum speed of 25 Mbps to avail the service.
Price Performance
Year to date, CenturyLink has lost 3.86%, comparing unfavorably with the Zacks categorized U.S. wireless national industry's impressive growth of 14.56%.
The dismal performance of the stock may be due to the persistent losses in the company's access lines and legacy voice services, on an organic basis. As of Sep 30, 2016, total access lines were 11.231 million, down 5.7% year over year and high-speed broadband customer count was 5.95 million, down 2%. The loss can be attributed to the substitution of traditional wireline telephone services with wireless and other competitive offerings and lower long distance minutes of use.
However, CenturyLink’s decision to acquire Level 3 Communications Inc. (NYSE:T) through a cash and stock transaction of $34 billion (including debt) will help the company expand its near-net and on-net fiber presence. The equity value of this deal is approximately $25 billion.
If the proposed merger materializes, it will expand CenturyLink's network by 200,000 route miles of fiber, including 64,000 route miles in 350 metropolitan areas and 33,000 subsea route miles connecting multiple continents. CenturyLink's on-net buildings are expected to increase by nearly 75% to approximately 75,000, including 10,000 buildings in EMEA (Europe, the Middle East and Africa) and Latin America. Therefore, a merged CenturyLink and Level 3 Communications will become a formidable challenger to their large counterparts. We believe this is the primary reason behind CenturyLink carrying a Zacks Rank #3 (Hold). You can see Zacks Investment Research
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