Interview with Scott Daniels: Navigating Regulatory Reform

Scott Daniels, CPA is an Aldrich partner with over 20 years of experience as a business advisor for strategic planning, financial analysis, and system assessments. He also consults on a variety of regulatory matters and provides oversight of assurance services. Scott offers the following insights based on his read of today’s market conditions.

As you know, rural telcos have a limited customer base spread across a broad geographic territory, so it costs more to provide service than in higher density population areas. The Communications Act of 1934 provides for subsidies as a means to ensure that all U.S. residents have access to affordable phone service. The Telecommunications Act of 1996 broadens the definition of basic services to include broadband and calls for a redistribution of subsidies to encourage its deployment.

Understandably, there has been a great deal of tension throughout the industry given impending adjustments to this vital revenue stream. Fortunately, recent FCC rulings have eased that tension by instituting a 10-year period during which carriers will receive specific and predictable support using either a model-based or a cost-based compensation structure. So while this regulatory change is daunting, they have a somewhat lengthy period during which they can make the appropriate adjustments.

At present, most telcos are working with regulatory experts to determine whether the model-based or cost-based system provides the most advantageous treatment. Once companies make the call, they’ll need to get very serious about the business strategy that will equip them to meet their customers’ demands while maintaining their fiscal integrity.

Telcos have a range of services they must provide along with constraints on the rates they are able to charge. So they’ll need to explore ways in which they can deliver basic services at the lowest possible cost. Some options to consider include automating labor-intensive processes, sharing technology and resources with other carriers, and leveraging third party service providers to address support functions (e.g., IT). For example, we’ve been involved in the formation of a multi-company administrative services company to provide accounting, human resources, and IT services at substantial savings for all parties.

To augment revenue, they’ll need to sell additional services to the existing base, with broadband being an obvious candidate. To that end, they’ll need to determine which of their customer segments is most receptive to that capability and make the appropriate technology and associated services available to meet the demand. Once implemented, the challenge becomes figuring out how to make customers want the service at ever-increasing speeds.

Telcos also need to deploy broadband capacity cost effectively. They’ve got to get really clear on the economics of service delivery by customer type and by geographic area. Fiber may not always prove in as a viable option, but that doesn’t have to impose limits on their service offering. They may be able to leverage other technology in selected areas – e.g., microwave – or they may be able to forge business partnerships to mitigate the cost of going it alone. For example, we’re seeing joint ventures between telcos and public utilities. The latter need bandwidth to implement the smart electric grid, and partners can help offset the high cost of bandwidth.

Owners and Board members know that the world is changing radically, and they need to stay in business long enough to respond. So I can appreciate the temptation to play it safe with their resources. That being said, they can’t avoid capital investment. Baseline technologies reach end-of-life and need to be upgraded or replaced. Broadband and other services require investment in new technology. So they’ll need to make good business decisions and focus on opportunities that yield a strong return while conserving on their all-important cash.

Absolutely! They’ve spent years forging strong relationships with their customers and have a demonstrated history of providing good service. They can build on those relationships as they introduce new service offerings. Moreover, their relatively small size also works in their favor as they can be far more agile than larger companies. And there is a range of innovative strategies from an operations, technology, and/or business perspective that can help them diversify their revenue streams while scaling back on costs. So I’d encourage them to be open to new ideas and take advantage of expert advice as they find a way forward that best suits their circumstances.