Qwest Communications (Q) announced yesterday the discountinuation of its wireless operation (Qwest Wireless) effective October 31, 2009. The Denver-based telecom operator has reportedly started to circulate a 60-day notice to its susbsribers to migrate to alternative service providers. Customers can switch networks without paying any contract termination fees while retaining there existing contact numbers.

Since 2004, Qwest has been marketing Sprint Nextel’s (S) products and services under its own brand by operating as a mobile virtual network operator (MVNO) on Sprint’s CDMA wireless network and recognized revenue on gross basis.
However, the company ended its partnership with Sprint (effective February 2009) and entered into a five-year agreement with Verizon (VZ) in May 2008. Under this new arrangement, Qwest started reselling Verizon Wireless’s products and services (under the Verizon brand) from the third-quarter 2008 and books revenue on net basis.

The company is currently in the process of transferring its wireless subscriber base to Verizon Wireless. At the end of the second quarter 2009, Qwest has switched 75% of its customers to Verizon’s network platform.   

Qwest’s transition from an MVNO to wireless reseller has resulted in fewer cellular subscribers as well as lower wireless revenue as the company does not register subscriber fees as revenue. Qwest recognizes revenue on every customer switch to Verizon’s network.
Qwest is one of the existing three regional bell operating companies (RBOCs), commonly known as “Baby Bells.” The company remains more challenged than the other Baby Bells, Verizon and AT&T (T), given the lack of its own wireless and satellite TV networks. This has prevented Qwest from achieving meaningful penetration in these lucrative markets while its bigger peers continue to gain market share.

The company’s traditional local phone operation remains under pressure due to the growing presence of competitive offerings. In addition to cable competition, Qwest contends with the ongoing fixed-to-wireless substitution coupled with other alternative services such as the Voice-over-Internet Protocol (VoIP). Access line losses continue to impact the company’s mass market segment and represent the base reason for a persistent decline in overall revenues.   

While we are encouraged by Qwest’s aggressive bundled service strategy — combining DirectTV (DTV) video with Internet and voice — to fend off cable competition, our primary concern remains the significant debt burden which impedes the company’s ability to invest in growth initiatives.

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