Connecting with Qwest's CEO

Qwest Communications International (Q), the oft-forgotten Baby Bell that's still the dominant phone service provider in 14 Western states, has seen better times. A sharp stock decline since last autumn has left Qwest's shares at their lowest level since late 2005. And on May 6, the company reported its first-quarter profit slid 35% to $157 million compared with the same period a year earlier, missing analysts' forecasts.

First-quarter revenue fell 1.4% to $3.4 billion as the company's core phone business continued to lose customers to rival providers including cable TV companies, wireless carriers, and Internet calling services. At the end of March, Qwest had roughly 8.5 million residential and small business phone lines in service, a loss of about 200,000 since the end of 2007 and 772,000 fewer than a year ago.

On the positive side, Qwest's broadband Internet subscribers increased by 90,000 in the quarter to reach 2.7 million customers. The company also signed on 50,000 more homes for DirecTV (DTV), bringing the number of customers who subscribe to the satellite television service through Qwest to 700,000. As a result, the average monthly customer bill was $55, up from $51 in the first quarter of 2007. The company's shares fell 32%, or 6%, to 5.04 after the results were released.

While some critics have urged Qwest to launch its own cable TV service much like AT&T (T) and Verizon (VZ), new Chief Executive Officer Edward Mueller remains committed to the partnership whereby Qwest sells DirecTV programming to customers. Mueller showed his affinity for partnerships May 5, announcing that Qwest will start selling Verizon Wireless service [BusinessWeek.com, 5/5/08] instead of a Qwest-branded cellular offering over the Sprint (S) network.

Mueller spoke with BusinessWeek.com Deputy Technology Editor Bruce Meyerson after the first-quarter report. He fielded questions on Qwest's video and cellular strategies, as well as a project to boost broadband speeds by extending the company's fiber-optic lines more deeply into communities, to what's called a network node at the edge of a neighborhood.

Wall Street isn't reacting too warmly to your first-quarter results. Is there more trouble ahead?

The overhang of [declining] access lines is probably the largest concern, but we reiterated our guidance, which is powerful, so we're not changing our outlook for the year. I'm really happy with the rest of our business. We have early signs that our fiber to the node, even though it's early in the game, is successful. We had 13,000 customer adds for high-speed Internet [in those markets].

Why are you quitting Sprint? Did it have anything to do with that company's customer service issues, or was it more about a faulty nature to that deal?

We have concluded that we don't want to market [cell phones] under the Qwest brand. We want a retail partner as we have with TV. It helps us not only in our 14 states, but nationally with our enterprise business. We can come out and say we have Verizon even if they don't know who we are. In addition, Verizon will help us with our wireline products in their stores. If you go into a Verizon store [in Qwest's territory], they would have our newest and latest services.

From the look of it, the structure of the Verizon deal is pretty similar to the DirecTV partnership, where you bundle another brand into your menu rather than rebranding or building in-house. Is this a pretty good sign that DirecTV will be the short and the long of your TV strategy?

We've done really well with DirecTV and we believe [the Verizon partnership] will really work. DirecTV is our video effort. Pillar would be a good word. Our strategy is triangulated between a wireless offering, a broadband offer, and a video offering.

Qwest stock has lost about half its value in the past 12 months. What's going to come of this business?

We're optimistic we'll bring it back. We won't comment on the particulars that took it down. We're comfortable with where we're heading.

It's been a while since Qwest tried to acquire MCI. With a market cap below $10 billion, has the company become takeover bait?

We don't comment on any M&A work. We have a fiduciary responsibility to pursue anything that would be accretive to shareholder value. Any offer you get you have to take a look at it. But we're trying to run this business, and the way we're putting out our strategy is to run the business attractively.