CEO Says Qwest Will Focus on Partnerships, Not IPTV

Qwest will “deepen current partnerships and forge new ones” to reach “beyond core products” and expand bundles, Mueller said, citing “current successful partnerships in video, wireless and the enterprise markets.” Qwest is looking at how to use partners “even in the home” to broaden its portfolio, Mueller said. Collaboration will be central to a fixed mobile convergence (FMC) product due for late 2008 release, he said.

Qwest expects to keep working with Hewlett-Packard, which runs hosting aspects of Qwest’s enterprise business, Mueller said. “HP has helped us a bunch there and will probably help us more,” he said.

Qwest probably wants wireless partners, Janco analyst Donna Jaegers said in an interview. The Bell has a joint venture with Sprint Nextel, but reception on Sprint’s 1.9 GHz spectrum is lacking, Jaegers said. Qwest probably won’t dump Sprint for a new wireless partner but might add one, she said. Qwest could move to WiMAX through a partnership with Clearwire for its FMC product, she said. It also may talk with Alltel, which has “good overlay” in the Qwest region, “maybe more than Sprint,” she said.

Qwest could team up with a 700 MHz auction winner, Jaegers said. The carrier hasn’t said whether it will bid, but the Bell historically hasn’t taken part in FCC auctions. Leap Wireless’ service area overlaps Qwest’s and would be an attractive partner if it wins 700 MHz spectrum, she said, particularly since Leap CEO Doug Hutcheson said last Friday that his company is open to “collaborative alternatives” (CD Dec 17 p5). Leap’s spectrum is “constrained,” with only 10 MHz available for customers, a drawback that would be eliminated with a major auction victory, she said. But a joint venture with Leap is doubtful because Leap doesn’t have excess network capacity to lend Qwest, said Stanford Group’s Michael Nelson. The 700 MHz auction won’t change that, since Leap probably won’t be a major bidder, instead seeking “incremental” spectrum for existing markets, the analyst said.

Mueller expects industry consolidation, he said, declining to predict Qwest merger and acquisition activity. “We like the assets we have today,” the CEO said. “Whatever happens in industry consolidation, where we are today is a very powerful place to be.”

Mueller confirmed that Qwest won’t pursue IPTV but said it will “accelerate investment” in fiber-to-the-node buildout. In 2008, Qwest will invest “just under” $300 million to reach 1.5 million additional homes with access up to 20 Mbps, Mueller said, increasing total 2008 capital spending guidance to $1.8 billion. Deployment will deepen Qwest’s high-speed Internet product penetration 17 percentage points to 40 percent in 2011, Mueller said. Qwest expects deployment to pay for itself in five years, a “super conservative” projection based on an expected $10 increase in revenue per user, he said. The fiber deployment is “not intended as a deployment of IPTV,” Mueller said. “We do not believe that our scale and the current capital and labor requirements of this type of product support this approach.”

Qwest may extend its DirecTV relationship rather than pursue IPTV, Jaegers said. A proposed stock swap between News Corp. and Liberty Media that would give Liberty control of DirecTV would help, she said. Qwest and Liberty are based in Denver and their managers know each other, she said. The Liberty-News Corp. deal awaits FCC approval, but the Commission hasn’t set a date in its circulation list.

Qwest isn’t pursuing IPTV or other “fancy” products but is considering the videogame market, Mueller said. “Gaming is surpassing Hollywood’s revenue right now,” he said. Pursuing gamers could trigger a “network effect,” winning Qwest many new subscribers, Jaegers said, citing World of Warcraft’s 9.3 million players.

Mueller seeks to cut “unproductive” spending, he said, without giving specifics. Qwest will “minimize” network buildouts that “may just be for growth,” and “scrub our IT budgets,” leaving only IT plans that “make a difference” on company strategy, he said. The Bell also plans to “set aside success capital” from enterprise and other “good-return” businesses, he said.

Mueller put off supplying details of his strategic review to a Feb. 25 analyst day, but the Monday investor call was a step toward quelling Wall Street fears about the Bell’s new management. In a Qwest Q3 earnings call, Mueller faced tough questions for ordering a six-month strategic review (CD Oct 31 p8). Mueller’s IPTV comments and 2008 spending projection gave investors “a little more certainty,” Jaegers said. The call marked an “unclenching on key risk issues, most prominently spending under a new management regime,” Bank of America said, predicting that Mueller’s review will conclude in a “reaffirmation of the prior management’s strategy rather than a divergence.”