After seeing the reference to Hawaiian Telcom’s stock in one of the news articles cited here yesterday, I turned to recent reports filed with the Securities and Exchange Commission for more details about the company that might shed light on its problems and prospects.
I turned to their latest annual report (Form 10-K) filed in March 2013 for a good overview.
Here’s a concise description of the main part of the business. The company has been losing residential land line business while attempting to offset the loss of that traditional business by building out its data network services primarily targeting business clients, while also ramping up its fiber optic network for delivering television services in direct competition with Oceanic Time Warner, at least on Oahu.
Wireline Services. This segment provides local telephone service including voice and data transport, enhanced custom calling features, network access, directory assistance and private lines. In addition, the Wireline Services segment provides high-speed Internet, long distance services, next-generation television service, next-generation Internet protocol (IP)-based network services, customer premises equipment, data solutions, billing and collection, and pay telephone services. Our services are offered on all of Hawaii’s major islands, except for our next-generation television service, which currently is available only on parts of the island of Oahu. As of March 1, 2013, our telecommunications operations served approximately 390,300 local access lines, of which 51% served residential customers and 48% served business customers, with the remaining 1% serving other customers; 199,700 long distance lines, of which 63% served residential customers and 37% served business customers; and 108,800 high-speed Internet lines, which served 89,100 retail residential lines, 18,700 retail business lines, and 1,000 wholesale business and resale lines.
Competition? You bet.
Oceanic, a subsidiary of Time Warner Cable Inc., the second largest cable operator in the United States, is one of our most significant competitors. Approximately 89% of the households in Hawaii (93% of households on Oahu) subscribe to Oceanic’s cable television service. Oceanic also has the majority share of the high-speed Internet market in Hawaii, which it uses as a platform to offer voice services utilizing VoIP technology, and markets its cable, high-speed Internet, and voice services through competitive bundled offerings. In addition, Oceanic has targeted communications service offerings to small and medium-sized businesses.
Wireless communications services continue to constitute a significant source of competition, especially as wireless carriers expand and improve their network coverage and continue to lower their prices. As a result, some customers have chosen to completely forego use of traditional wireline phone service and instead rely solely on wireless services. We anticipate the wireless substitution trend will continue, and could pose additional threat to our high-speed Internet product, particularly if wireless service rates continue to decline and the wireless service providers upgrade their networks to 4G technology and are able to deliver faster data speeds. Over-the-top hybrid providers, such as Skype and Magic Jack, also offer the capability to provide local voice and long distance calls using an Internet-equipped personal computer. (emphasis added)
I suppose Oceanic’s dramatic dominance cuts both ways. If Hawaiian Telcom can successfully establish a foothold in high speed broadband service and television services, it would appear to have lots of room to grow by shaving away customers from Oceanic. On the other hand, a 93% market penetration in cable is a huge base for selling Oceanic’s other services.
Here’s how Hawaiian Telcom describes its response to competition in these services.
We employ a number of strategies to combat the competitive pressures. Our strategies are focused on preserving and generating new revenues through customer retention, upgrading and upselling services to existing customers, new customer growth, winbacks of former customers, new product and feature deployment, and by managing our profitability and cash flow through targeted reductions in operating expenses and efficient deployment of capital. Key to success in these strategies is continued enhancement and expansion in the speed and reach of our broadband network, which we believe will enable us to offer new products and services that will generate growth in our business and allow us to compete more effectively in the marketplace. Another key is a focus on enhancing the customer experience, as we believe exceptional customer service will differentiate us from our competition. Customers expect industry leading service from their service providers. As technologies and services evolve, the requirement of the carrier to excel in this area is crucial for customer retention.
I flagged one sentence: “Another key is a focus on enhancing the customer experience, as we believe exceptional customer service will differentiate us from our competition.”
No doubt that enhanced customer service would differentiate it from Oceanic.
But from the various comments on the company’s customer service posted here, it looks like this is going to be a challenge, and those “enhancements” to customer service had best come sooner rather than later.
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Over 60% of Americans now own smartphones since the iPhone was introduced in 2007. That’s a 10% per year adoption rate.
http://www.asymco.com/2013/10/07/when-will-the-us-reach-smartphone-saturation/
Nevertheless, the average monthly cell phone bill (per unit, not per family) remains about $47. It has remained under $50/month since 1996 after falling precipitously.
http://www.tatango.com/blog/what-is-the-average-cell-phone-bill/
If one extrapolates from this, emergent technology may eventually render cable services (TV, Internet) as irrelevant as landlines are today.
Wasn’t it Hawaiian Telcom that once had a monopoly in Hawaii?
I have always been impressed with the profit given to Oceanic Time Warner. With essentially no competition, a 90% penetration of the market and each of our household giving them around $100.00 a month for a largely invisible product the money they earn is immense. don’t know exact subscriber numbers so I won’t throw out a figure. An amazing gift from our State Government and its citizens.
They would tell you that large portion of the fees that they collect go to pay for content, not to mention maintenance of the distribution network. Personally I think much of the content is crap. When I had Oceanic service I regularly watched less than half a dozen of more than 100 channels offered. I would have been much happier if they had offered channels ala cart. But, I think the reality is that content providers bundle the crap with the desirable channels and the cable providers don’t have a choice but to carry all. Unfortunately, or fortunately depending on your perspective, I think that this business model is doomed. As noted by EC above, many, particularly younger folks, have bypassed cable altogether are getting their video content wirelessly off the internet via smartphones or tablets. This will eventually send cable down the same path to extinction as the telephone landline.
Five years ago, a big and blustery Walter Dods bragged about all the local talent he was recruiting to turn Hawaiian Telcom around.
http://www.hawaiibusiness.com/Hawaii-Business/October-2008/Hawaiian-Telcom/
Well, that didn’t happen, and they have brought in a roster of mainland folks to get the company moving in the right direction.
I read the article on this effort to remake Hawaiian Telcom, and found it tragic.
It seems like Bank of Hawaii president Walter Dodds and others were quite shaken by the failure of Aloha Airlines, Hawaii’s flagship airline. Dodds did not want to see some massive multinational corporation like Time Warner coming in and monopolizing Hawaii’s telecommunications, so he managed to get investors to pour in over $1 billion into HawaiianTel (at least, that was the plan). This seems to have been an emotional and altruistic decision. Dodds and his colleagues seem, from this article, to be the local equivalent of patriots. But it seems like their mission is both doomed and unnecessary from the start.
First, their inspiration was Aloha Airlines. It’s gone, but that does not seem to consign Hawaii to price gauging by outside airlines. Dodds’ model implicitly seems to be that of a benign company store providing affordable goods and services for a captive market; the threat to the folks who live in this benevolent company town are the heartless outside corporations who “just don’t know or understand our ways”. But Aloha Airlines was disliked by many locals — that’s one reason why it failed. Now Hawaiian Air has not only taken the place of Aloha, but won international accolades and is thriving internationally. So the real problem might not have been keeping a local monopoly, but having a local monopoly.
Second, Dodd’s business model seems to be based on small-town banking. Small-town banking comes with a personal touch. If you have a problem, you go to the bank and they help you with a certain reassuring bedside manner. They remember your name and offer you free coffee. They send you a Christmas card.
Banking isn’t like that in the Big City. I heard a story from someone who worked in a suburban bank in California. The tellers looked like supermodels. The walls were like 50-feet high and covered in oak paneling (the tellers were not allowed to carry pencils or pens in case they tripped and scratched the paneling). One day during a meeting someone pointed out that the bank’s services were inferior to a typical hole-in-the-wall credit union; how could they compete? The manager put his hand up and said “This is California. Image is everything.”
But now there is online banking. It’s free. If you have a problem, you get on your cell phone or computer and fix it. It’s inferior to brick-and-mortar banks, but cheaper and more convenient — and it will improve in the future. That’s the nature of disruptive innovation. So both the small-town banks and the city-slicker banks are in for a challenge.
Third, telecommunications has nothing to do with either a small-town cultural style or fancy Big City style. Dealing with cable or the Internet connection is like taking out the garbage: It’s a chore no one wants to think about. It’s not something that can be sugar-coated with either warmth or elegance.
Fourth, there is the possibility that wireless rates are falling or are going to fall. Once the cellular infrastructure is built up and paid for, then competition should drive down prices.
Fifth, Hawaiian Telcom’s hope is to challenge Oceanic’s TV monopoly. But this WSJ article from August, “Future of Cable Might Not Include TV”, shows how problematic that is.
http://online.wsj.com/news/articles/SB10001424127887323420604578647961424594702
My point is that we often look at elite insiders like Walter Dodds when we read “Land and Power in Hawaii” and imagine that they are evil. More likely, those like Dodds see themselves as public servants who get stuff done for the people. The real problem is that they come from a world that largely disappeared in the 1970s (or even before then), and they do not know that.
Much thanks to Mr. Dodds for his life of effort (and I mean that).
Hmmmm. The exception proves the rule, of course. And yet my experience with Hawaiian Tel is that the folks who are legacy employees pre-Verizon, pre-Carlyle, etc. are the most knowledgeable and very customer-oriented.
Contrast that with a call I made recently about the behavior of the offshore high-speed optics installers/subs Hawaiian Tel is using. I mentioned road safety issues and some other things and asked if Company ____ was affiliated with Hawaiian Tel (this was the sign on the trucks). The customer-service rep said, no, Hawaiian Tel didn’t have any work in our area. When I told her that the box cover the workers taken off when I went to find out what was going on was labeled “Verizon” she said, “Well, we’re not Verizon. That must be something else.”
The workers had knocked out our internet, so I couldn’t search on the Verizon time period in Hawaii (the sale to Carlyle was final in 2005).