Qwest Wireless to shutter in 60 days

The Denver, Colo. telecom, Qwest, announced today that it would stop providing wireless services in October and would offer its customer an option of switching over to Verizon Wireless. Customers would pay no termination fees in either case. Qwest's move comes as no surprise. Qwest (Q) and other carriers that are reselling wireless services, have struggled mightily to gain a critical mass of customers. Qwest, which was founded in 1996 by billionaire Philip Anschutz, operates its wireless business as a Mobile Virtual Network Operator (or MVNO). This means Qwest did not actually have its own network. Rather, the operator leased space on Verizon's (VZ) network and used Verizon's services. (Correction: Qwest leased space on Sprint' Nextel's (S) network, not Verizon's).

The idea was that Qwest could then sell a bundle of services including wireless, long distance, and residential, to customers. Bundles are more lucrative for phone and cable companies because the marginal cost of selling an additional service to an existing customer is very small. But bundling has not gained as much traction as the telcos and cablecos had hoped, in part due to the strength of national wireless brands like Verizon and AT&T (T). Verizon and AT&T have heavy retail presences that are expensive to maintain but essential for building foot traffic. Qwest had lagged in this department.
In May 2008 Qwest and Verizon announced a five-year deal to provide wireless services to Qwest customers and give them bundling discounts and a single bill. But as of the second quarter of 2009, according to GigaOm, Qwest had only signed up 185,000 wireless subscribers on its own branded MVNO service. The MVNO arrangement only contributed $10 million in revenue to Qwest during the second quarter of 2009, and Qwest was probably losing money on the deal. While Qwest could and did fall back on its Verizon deal, the company is probably getting a less advantageous revenue share for reselling Verizon branded wireless services. (Verizon is known for driving extremely hard bargains -- witness its dealings with Apple).

For long distance and residential carriers like Qwest, a wireless MVNO failure is a very bad omen. The wireless part of the picture is the fastest growing segment in the telecom universe. Provision of high-speed wireless broadband is expected to continue to drive growth in the segment as more people buy netbooks and smart phones that make it much easier to use the mobile Internet. While Qwest is still offering some bundled discounts to customers - including up to $25 off a bundle with wireless, TV (from DirecTV), broadband, and voice services - relying on another brand name for wireless could make it harder to hold onto those customers over time and in the face of hard competition from cable companies for other parts of the Qwest bundle.

Qwest can take some solace in the fact that it owns a host of other businesses including a Content Delivery Network that helps speed delivery of chunks of Internet data and its own fiber optic network. But without a wireless future, the future for Qwest appears considerably dimmer. Looming over the horizon are national WiMax services which will provide high-speed wireless broadband everywhere and cause even more problems for Qwest in the still lucrative residential broadband space. Without its own brand of wireless, the firm will struggle to hold onto existing retail customers in an increasingly competitive telecom landscape.
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