Telecommunication Services Industry

INTRODUCTION

About this Report

The Telecommunication Services Industry Report includes news, opinions, commentary, analysis, data, and statistics on the U.S. telecommunications industry. This report has been prepared in an easy to use format for the reader to drill down to key sections. This report covers industry sectors such as wireline, wireless, long distance, and data services. In addition, this report covers regulatory issues that impact the entire industry. In addition, we have offered an appendix with a new tables section which should help the reader quickly grasp key concepts.

Publishing Services Group
U.S. Business Reporter

INDUSTRY ENVIRONMENT

Weakness Persists With Telecom Service Providers.

The U.S. telecommunication service is continuing to experience economic weakness throughout year 2001. As a result, some are announcing headcount reductions while others are emphasizing cost containment measures.

The Wireless Sector.

The wireless sector continues to grow but at a much slower pace than in prior years. The issue that plagues wireless service providers the most is intensive price competition. This is hurting profitability and slowing expansion of new data services. All wireless providers are focused on providing upgraded networks to advanced 2.5 generation technology for greater speed and more diverse data applications.

Regional wireless carriers (e.g. Centennial Communications, Telephone & Data Systems) have a distinct competitive disadvantage. This is because of their dependence on roaming revenues and pressures driving down the rates the national players pay to the regional operators for roaming services. Regional operators also have a heavy appetite for debt funding which puts their financial portfolios at considerable risk.

Wireless Phone Industry: Competition Heats Up.

The wireless industry is virtually an oligopoly. The wireless phone business is primarily dominated by three major firms which consists of AT&T Wireless, Sprint PCs Group, and Nextel. The field recently expanded with the addition of Verizon Wireless and Cingular Wireless. Verizon Wireless is an alliance of Bell Atlantic and Vodafone Air Touch plc. Verizon Wireless (created in April 2000) is now the largest wireless provider with 16 million voce/data customers and 4 million paging customers. Cingular Wireless is a national wireless joint venture launched in October 2000 with revenues of $12 billion. Cingular serves 19 million customers and 190 potential customers across 38 states. Cingular Wireless serves 42 of the nations top 50 markets but is less comprehensive coverage than AT&T and Verizon Wireless.

In May 2000, AT&T sold 360 million shares in AT&T Wireless at an initial IPO price of $29.50 which raised $10.62 billion. These funds will likely be used for expanding their cellular phone network and building infrastructure into data retrieval services.

Cellular Pricing Competition Heats Up.

The business is heavily concentrating its efforts on offering consumers service at a variety of price points. AT&T launched One Rate Plan in mid-1998 Market penetration and affordability will lower prices and thus, attract more users. Per minute voice calls continue to fall. Speed to market is becoming increasingly important as is brand name. Companies must pool resources together to build national networks. It would be to time and cost ineffective to build their own national networks.

Consumers are increasingly demanding more new features with their cellular phone service. Many consumers now request data retrieval functionality. Some cellular phone companies have responded by increasing their capital spending budgets on data-based infrastructure equipment to build up brand preference.

Consolidation Continues in Wireline Business.

The U.S. telecommunications services industry, which serves more than 90 million households and 25 million businesses nationwide. The industry is broadly divided into providers serving the communications markets for local exchange, long distance (toll), international, cellular and mobile radio, satellite, and data communications, including value-added network services (VANs). More than 2,000 companies employing about 875,000 persons that serve these markets are both regulated common carriers and unregulated private network providers.

The telecommunications industry has witnessed a flurry of merger activity as companies rush to position themselves in a rapidly changing marketplace. The Telecommunications Act of 1996 set the stage for enhanced competition. This act enables large companies to become end-to-end providers of telecommunication services that cover the entire U.S. and world. It's important for these companies to find a merger partner because of the high cost of establishing new territories. Further, there are significant barriers to entry for local telecommunication services. Most telephone companies are consolidating to offer and bundle disparate services together.

AT&T Sets Strategic Partnership with Time Warner.

In February 1999, AT&T announced an aggressive plan to become the dominant telecommunications company in the world by partnering with Time Warner's cable service to provide local telephone access to consumers. The partnering deal will allow AT&T to provide at least 40% of U.S. households with the local telephone service. The deal will invariably put more pressure on local and regional bell operating companies to partner with other companies to block further inroads by AT& T into the lucrative local phone market.

AT&T Acquires TCI Cable.

AT&T acquired TCI cable to address their need to entering the local telephone service market once again. In addition, the purchase gives AT&T better access to provide internet services to consumers because TCI Cable owns a part of @Home, Inc, a provider of fast internet connections into the home through cable modems.

Long Distance Telephone Business Perks Up.

Revenue growth averaged 10.3% for the top three long distance providers. This can be attributed to increased industry consolidation, fewer promotional deals, and enhanced services.

FCC Carries a Big Stick.

FCC continues to analyze the GTE/ Bell Atlantic merger. A decision should be made by the end of year 2000. The key issue with this merger is apparently how it could reduce competition within the north Atlantic region. It's believed this merger has many overlapping pitfalls for consumers. The FCC canceled the MCI Worldcom/Sprint merger which would have created an extremely dominate internet data network and cellular phone network throughout the world. This merger would have put the combined company in the two fastest growing sectors of the telecommunications services industry.

The main issue was market dominance. Worldcom is the premiere provider of end-to-end communications in the U.S. while Sprint is the third largest long distance company and the leading wireless provider in the U.S.

MARKET OVERVIEW

Current Pricing Environment

The quarterly Producer Price Index (PPI) below shows that telecommunication services pricing is relatively flat for both residential and business customers. This is due to regulation that affects pricing. Therefore, telecommunication service providers have no ability to raise prices unless they receive approval from the Public Utility Commission (PUC). However, the wireless segment shows declining prices due to intense competitive pressure from telecommunication providers to win new customers.

INDUSTRY ISSUES

The telecommunications services industry faces many issues concerning regulation and competition in the domestic market. The FCC must rule local Bell Operating Companies (BOC) access fee charges to long distance companies. Though access fee rates have come down significantly over the years, long distance companies are still at a competitive disadvantage.

The Telecommunications Act of 1996.

The Telecommunications Act of 1996 allows local telecommunication companies, long distance, and cable TV operators to enter each others markets. This act enables these operators to gain new revenue sources by providing extra services which have traditionally been unavailable because of local monopoly barriers. This increased competition will result in lower profit margins for all industry companies.

Local Telephone Access Privileges.

Companies that wish to provide local telephone service face heavy barriers to entry. Construction is expensive, the process is time-consuming, and is highly regulated by the FCC

FCC's Changing Role.

The FCC will eventually become a market facilitator rather than a market regulator when all mergers become finalized. Vigorous competition should reduce the need for direct regulation by the FCC.

INDUSTRY TRENDS

Wireless Data Communications.

Wireless data communications will be the next battle ground for wireless phone companies. With the demand for mobile data communications such as internet services, wireless companies have redirected much of their capital expenditures towards building up their data based infrastructure.

Switch from GSM to CDMA Technology.

The industry is slowly shifting from Global System for Mobile Communications (GSM) to Code Division Multiple Access (CDMA). GSM remains the most widely installed system. However, CDMA is a better technology .Currently CDMA has 50 million subscribers. Pacific Rim countries (e.g. Japan, Thailand, Philippines) have chosen CDMA as their standard technology. South American countries are adopting CDMA technology as well. But GSM is widely installed in European countries such as Poland, Russia , and Finland.

Industry Consolidation.

The Telecommunications Act has brought about a flurry of merger activity in the industry. This metamorphosis process should continue as companies jockey for position in a growing but crowded industry. The most significant mergers in 1998 was SBC Communications $62 billion merger with Ameritech. The merger further solidifies SBC 's goal of a national telephone network to offer increased voice and data services.

Another significant deal was the $53 billion merger between Bell Atlantic and GTE. Pending approval, this merger will provide substantial economies of scale in providing voice and data services in their respective regions of service.

Bundling Telecommunication Services.

The passage of the Telecommunications Act of 1996 will allow companies to offer shopping of telecommunication services by consumers and business. Since operators can enter each others business, bundled services can include local , long distance, wireless, internet, and cable TV services. These companies may also segment their markets to offer enhanced services to loyal customers. Telecommunication operators may even use some form of price discrimination by offering multiple packages to different market segments. This strategy is based on simplified billing to customers which reduces the telecommunication providers overall cost. Telecommunication operators who are not full service providers could be at a substantial disadvantage. However, there will always be niche players that serve a particular geographic area , customer, or market segment.

Wireless Technology used in Global Markets.

Global penetration of wireless technology should assist growing economies in developing their telecommunications infrastructure. Wireless technology is likely to replace wireline networks because of the portability of voice and data.

Direct Selling of Wireless Services.

Companies are setting up their own distribution channels to sell equipment and services to consumers. This is an expensive proposition but gives those direct sellers more exclusivity with the search-sale- service-support process to consumers. Other cellular service providers are using independent retail stores to sell such equipment and services. This can include agents, resellers, electronic stores, and even telemarketing. With the industry growing so fast, it may make sense to use multiple distribution channels.

INTERNATIONAL ENVIRONMENT

The World Trade Organization (WTO) adopted an agreement to open markets in February 1997 which were previously state-run monopolies. This agreement was implemented in February1998. Overseas revenues are derived primarily from basic voice services. U.S. telecommunication companies are looking overseas for additional growth since the U.S. market is slow growing.

Korea and China have good potential for substantial growth. Korea has two cellular companies that used CDMA technology and then added three companies that used PCS companies. China has relied on outdated GSM technology. GSM technology is less efficient because it cannot handle both voice and data. CDMA is a better technology for these types of applications. Japan uses CDMA technology and has not fully embraced PCS technology.

To have a growing economy, a telecommunications infrastructure is a must. This is why we expect tremendous growth in the Pacific Rim region relative to the rest of the world. A telecommunications infrastructure is needed for stock market activity, mass media, and production/manufacturing activity to handle data and voice systems.

INDUSTRY FORECAST

USBR expects wireless usage to grow 15 percent a year through 2006 due primarily to lower prices and intense competition. USBR forecast calls for wireless revenues to increase 12 percent in 2002 to $48 billion.

The wireline business is mature and stable but growth will slow due to increased market penetration of wireless usage. We expect wireline usage to fall 4 percent in 2002. We also see some reductions in the long distance revenues as a result of increases in cellular phone use since consumers can communicate over a broad geographic region with no additional charges.

Over the long term, 2005 -2009, look for data services to increase on wireless networks. Cell phone service companies are finding many new uses for these devices. This will require more network equipment capacity as well.

INDUSTRY OUTLOOK

We look for continued growth in wireless networks and adoption. Over the long run, we expect data services to eventually become a significant market with the advent of mobile e-commerce technologies. However, currently, a lack of industry standards is preventing its adoption among consumers. In addition, increasing importance will be placed on wireless telephone usage which will replace some wireline usage. Wireless service price pressures will force prices down and eventually lead to industry consolidation.

INDUSTRY CHARACTERISTICS

The Federal Communications Commission (FCC) regulates interstate common carrier communications, and individual state public utility commissions (PUCs) regulate communications within their jurisdictions. The FCC also regulates the use of radio frequencies by the U.S. telecommunications(telecom) industry through a system of spectrum allocation and licensing. Since the breakup of AT&T in 1984, the U.S. common carrier network has been divided into 161 local access transport areas (LATAs).

Communications among LATAs are handled by long distance carriers, although intra-LATA telecommunications (both local and toll calling) are the responsibility of the local exchange carriers (LECs). Private telecommunications networks, which serve only specific customers rather than offering services to the public at large, are not regulated as common carriers. Since most U.S. long distance carriers are judged not to possess market power, they are not subject to FCC regulation. The largest company, AT&T, is subject to price-cap regulation, and in some business markets, where the FCC has determined that AT&T lacks market power, its services are subject to streamlined regulation under which its tariffs are presumed lawful and need not be justified by cost support materials. The FCC allows unlimited resale of long distance facilities and services, although the degree of intrastate resale competition varies from state to state. Local telephone services are provided by about 1,325 local telephone companies, including 22 local Bell Operating Companies (BOCs), telcommunication companies owned by GTE, Sprint (United Telecom and Centel franchises), and independent local telephone companies. Many of these small, local companies operate as rural telephone cooperatives. Long distance service is provided by AT&T, MCI, Sprint, WilTel, Metromedia Communications, Litel Telecommunications, Allnet, and more than 475 smaller carriers.

Telephone service continues to be a valuable and cost-effective service for American consumers and businesses. During the last several years, local service rates have been increasing at a slower rate than overall inflation. During 1992, the consumer price index (CPI) rose 2.9 percent for all goods and services. By contrast, the CPI for local services rose 0.5 percent, while the CPI for intrastate toll services declined 2.4 percent and interstate toll services declined 1.3 percent. As of late 1992, average monthly residential rates for a single party access line were $13.08, an amount only 50 cents higher than the average 6 years earlier. Even adding increases for access charges and taxes, the total average monthly cost of touch tone service increased only $2 between 1986 and 1992. According to a recent survey, average monthly household expenditures for telephone service totaled $55.10 in 1991, of which about one-half was for toll services and nearly 20 percent for discretionary services (such as touch tone calling, call waiting, directory listing charges, etc.), or additional local lines and cellular service. Business customers pay a significantly higher local rate than residential customers, about$42 in total monthly charges for a single telephone line, compared with an average rate for a home telephone line of less than $20. In the United States, 2.1 percent of annual household expenditures nationwide went for telephone service, but research has indicated there is a strong relationship between income and telephone expenditures.

Many states have programs that help promote universal telephone service by subsidizing monthly service charges for the poor. Thus, basic local service is available to needy households for an average price of less than $11 per month.

Data for 1997 show that 93.9 percent of U.S. households have telephone service. Since 1984, domestic interstate long distance charges have dropped 31 percent while the CPI for the same period rose 35 percent. The nine-year trend of overall declining prices for long distance service was halted in July 1993 when AT&T filed for overall long distance rate increases of 1.2 percent valued at nearly $500 million. MCI and Sprint also raised their prices slightly. Such small increases should not slow down the continuing5 percent annual growth in residential toll traffic. Declining prices have also characterized international communications.

U.S. billed revenue per minute was $1.34 in 1980, but only $1.01 in 1991. However, revenue totals continue to grow impressively, with international billed revenues exceeding $13 billion in 1993. Telephone traffic accounts for more than 90 percent of billed revenue per minute. Growth in international telecommunications traffic and revenues continues to increase at a faster pace than in the domestic market.

Telephone traffic volume generally moves in rhythm with the nation's economic pulse, so that improvement in the U.S. economy in 1994 should help stimulate increases in long distance and international calls.

Long distance networks now are nearly 100 percent fiber, although the carriers utilize satellite and microwave circuits for backup and special facilities applications. Both local and long distance carriers are either investing in or evaluating applications using digital technologies for wireless communications networks, including point-to-point microwave links and wireless access technologies such as cellular.

Local markets are ruled by the Bell operating companies which are subsidiaries of the five baby bells.

WIRELESS SEGMENT

The wireless telecommunications industry is comprised of both analog and digital providers of wireless services. The wireless segment is growing at about 20% per year. The main industry participants are also many of the same companies that provide wireline services to consumers and business. Wireless participants are cellular wireless providers and broadband personal communications services (PCS) providers which operate networks based on a system of geographic cells and enhanced specialized mobile radio (ESMR) operators which concentrate their channels on dispatch services.

RESOURCES

Federal Communications Commission

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