» Embarq move raises questions about quad-play model
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Embarq move raises questions about quad-play model
By Ed Gubbins

May 15, 2008 4:02 PM

Embarq’s severance of its partnership with Sprint Nextel for the wireless portion of its bundled offerings raises questions about to what extent the company will remain true to the strategy of fixed mobile convergence laid out by former CEO (now Sprint CEO) Dan Hesse. But viewed in combination with similar moves from cable operators (which dissolved their Sprint partnership) and SureWest Communications (which exited the wireless business this year), it also raises questions about the business models surrounding wireless and wireline bundles.

“AT&T and Verizon are really the only ones that can offer the quad-play bundle,” said David Coleman, an analyst with RBC Capital Markets. “Cable has not been successful with the Pivot joint venture. It remains to be seen what Cox could do with its 700 MHz spectrum. I’m hesitant to say it’s mandatory to succeed. We’ve lived many years without getting all four applications from one provider.”

For Embarq, perhaps the most immediate impetus for reselling the wireless service of its former parent was a defense against access line loss. That erosion was a problem even before the company was spun off from Sprint two years ago. But Embarq’s track record thus far may indicate that a wireless partnership hasn’t been much help in that fight. In this year’s first quarter, the company lost 120,000 access lines, an increase of 47,000 over its losses a year earlier. And after two years, the Sprint partnership has only yielded 112,000 subscribers to the resold mobile service.

“Given that as a percentage of their subscriber base [of more than 6 million], I would suggest that they haven’t been successful at using the wireless element to reduce churn,” said Lawrence Hettick, an analyst with Current Analysis. “Barely over 100,000 subscribers after two years -- that’s not really a productive relationship.”

In Embarq’s new strategy, customers will choose their own wireless provider, but they’re unlikely to get a discounted bundle for doing so, unless Embarq signs deals with all the major providers. That means wireless substitution will likely continue to threaten the company in the long term.

“It’s sort of damned-if-you-do and damned-if-you-don’t,” Coleman said. “I don’t think offering wireless is really going to reduce access line loss. If [a customer] is going to cut the cord, they’re going to cut the cord.”

To stem access line loss now, Embarq will have to add as much value as it can to the landlines themselves, something it had already begun doing by introducing new phones and features such as find-me-follow-me applications, enhanced landline phone directories and handoffs of voice calls from mobile to landline networks.

Part of Hesse’s quest was to establish a seamless flow between mobile and fixed networks, something that could be harder to do without a close wireless partner. Embarq could pursue femtocell technology as a means to fixed-mobile convergence, but if it does, and still hopes to let users choose their own wireless provider, it would need to carry both GSM- and CDMA-based femtocells to accommodate different carrier network technologies. If the company opts for a WiFi-based solution, it would require users to have dual-mode handsets.

Theoretically, the company could embrace a WiMax partner, but such a plan could entail some of the same uncertainties inherent in Embarq’s relationship with Sprint. For example, coverage could be an issue for Embarq, as WiMax is rolled out first in major metros.

“Embarq does have an opportunity with Clearwire or other high-speed mobile data networks in the future, but that’s two years out,” Hettick said. “Is it worth them investing all the time and expense for 112,000 customers? Cable companies and Embarq are saying, ‘Look, maybe adding a wireless service is not the best use of corporate resources right now.’”

Hesse had said that the best weapon with which to fight access line erosion was not by partnering with a wireless player but by offering compelling data services, arguing that wireless data speeds will never catch up with wirelines. SureWest has been following a similar philosophy, adding a remote-monitoring home-security application to its fiber broadband bundle. But in general, US providers lag behind European carriers when it comes to innovating fixed-line broadband services, according to Teresa Mastrangelo, principal analyst with BroadbandTrends.com.

“No one in the US has done anything to increase the value of their landline, with the possible exception of Embarq,” she said.

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