Faced with shrinking profits in their core local and long distance voice businesses, most of the nation's largest communications firms are building state-of-the-art networks or consolidating to take advantage of the growing demand for Internet and data services.
Now those multimillion-dollar investments are finally starting to pay off.
MCI WorldCom yesterday reported strong third-quarter profits that were bolstered by a 28-percent boost in data revenue, which now totals $1.9 billion. MCI said revenue from its Internet assets also increased by 57 percent during the quarter.
MCI's data revenue numbers follow similarly strong results from Qwest Communications International, which Wednesday reported a 200-percent jump in Internet and data revenue--now the company's fastest growing business segment.
AT&T also saw an uptick in its cable and Internet business--the centerpiece of Ma Bell's strategy--of 6.7 percent. Similarly, Cox Communications, a smaller cable operator and partner with AT&T in the Net-over-cable firm Excite@Home, posted third-quarter data revenue of $15.1 million, up from $5.9 million last year, based on the growth of its cable modem service.
"This is a fundamental shift in the business," said Tom Friedberg, a telecommunications equity analyst at Janco Partners. "I hesitate to say it will be a loss leader, but the voice business is of marginal profitability."
Not only are voice profits falling, but business customers are clamoring for additional data services and new high-speed Net-based applications--a combination that has encouraged companies to invest heavily in developing and marketing their new offerings.
Qwest said its strong Internet and data services growth was fueled by high demand for dedicated Internet connections and so-called broadband applications and services. And Cox increased marketing expenses in part to generate interest in its new data services.
"I'm very impressed with the data revenues. Qwest beat my communications revenue projections by about $150 million," Friedberg said. "The way profits have fallen in the switched voice business, I'm sure that [the increase] incrementally came from the data business."
Analysts say that data revenue figures will continue to grow at explosive rates as the business is just starting to pick up. But, they said, the overall trend is a good sign that telephone companies are positioning themselves for the future.
"Data revenues at this point are so small that there's no way the gains in data are going to offset the weakness in voice," said Hank Riehl, a telecommunications financial analyst with American Fronteer, a Denver-based brokerage firm. "But the reason why these numbers are being viewed favorably is that's where the future is. Voice is history."
Investors have reacted positively to industry earnings announcements, which some say is partially due to the stronger data figures.
Stock in MCI WorldCom yesterday gained nearly 8 percent while Qwest gained nearly 9 percent. AT&T shares also received a boost after reporting earnings earlier in the week.
"The industry was getting some pressure because margins were falling. But this last [collective quarterly] report made people feel comfortable that the focus of these companies is not moving voice," Riehl said.