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BusinessWeek: January 11, 1993 |
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Industry Outlook: TELECOMMUNICATIONS
INTO THE `UNTETHERED' AGE Although it's still being negotiated, the deal between American Telephone & Telegraph Co. and McCaw Cellular Communications Inc. illustrates a truth that stands out even more this year: Technology is reshaping telecommunications. It's giving birth to new businesses, such as wireless communications, which in turn are sapping the vitality of others, such as plain old local phone service. So companies will be redefining themselves. They'll start or acquire businesses, form partnerships or break them up. Pacific Telesis Group, the regional phone company based in San Francisco, announced in December that it would spin off its $1 billion wireless business--the biggest restructuring of a Baby Bell since the seven companies were formed in 1984. The goal of the jockeying is to find room to prosper in a competitive industry, where the twin mantras are growth and efficiency. As in the computer business, prices are falling fast, and costs must come down faster. So, even with healthy growth in volume, U.S. revenue from telecommunications products and services should tick up just 3.7% this year, after a 3.5% increase in 1992. Leading the growth will be wireless communications. Northern Business Information (NBI), a unit of business week publisher McGraw-Hill Inc., predicts that service and equipment revenue for cellular, paging, wireless data transmission, and other such businesses will hit $13.5 billion, up 13% from 1992. AT&T already sells cellular equipment. If its new deal goes through, it will spend $3.8 billion for a one-third stake in McCaw and an option to assume voting control later. McCaw's cellular service will be marketed exclusively under AT&T's powerful brand name. CROWDED FIELD. AT&T's rivals also have wireless strategies. Sprint Corp., the No.3 long-distance carrier, is completing its acquisition of Centel Corp., which owns substantial cellular properties as well as local phone companies. No.2 MCI Communications Corp. is hoping that the Federal Communications Commission will award it and some partners a national license to provide a new kind of wireless communication called Personal Communications Service. The fcc plans to issue licenses by early 1994 for pcs--a system of pocket-size wireless phones that costs less to use than conventional cellular phones. Unfortunately for MCI, nearly every major phone company wants a piece of PCS, which is expected to have wide appeal. Observes Charles R. Lee, chairman of GTE Corp.: "People love being untethered." The traditional wired-phone business isn't dead, of course. NBI projects that the improved economy will contribute to a healthy growth of 4.8% in long-distance revenue, to $59.1 billion, up from 4.6% growth in 1992. Analysts project earnings growth of roughly 11% for AT&T, 15% for MCI, and 14% for Sprint. The most hotly contested long-distance sector will be 800-number services, which should grow about 6%, to $6 billion. The reason: Around May, new switch software will allow owners of 800 numbers to change long-distance carriers without having to get a new number. That creates options for hotels, airlines, and others that heavily publicize 800 numbers to attract customers. AT&T has the most to lose because it's the oldest and biggest 800-number provider, with a market share estimated by others at perhaps 75%. Still, it's fighting back with hard-hitting advertising and price cuts. SLOW BOMB. The weakling of the telecom service business in 1993 looks to be local phone service, which usually gets less of a cyclical lift from a recovery. Revenue should grow a slight 3%, to $96.6 billion, the same increase as in 1992, estimates nbi's Courtney Munroe. By holding the line on costs, the Baby Bells and GTE should achieve average earnings growth of around 7.5%, estimates Daniel P. Reingold of Morgan Stanley & Co. But competition, one of the biggest worries of the Baby Bells, is arising, first, from new fiber-optic networks and, next, from cable-tv systems. Says Southwestern Bell Corp. Chairman Edward E. Whitacre Jr.: "You won't see any atom bomb in '93, in my judgment. But it's coming. It's going to come big time." As local phone companies tighten their belts, they're squeezing the companies that sell them equipment. In 1993, sales of central-office switches to U.S. phone companies should fall nearly 10%, to $4.98 billion, their first dip below the $5 billion mark since 1984, says NBI analyst Michael Arellano. President Michael J. Birck of Tellabs Inc., a Lisle (Ill.) transmission-gear supplier, thinks phone companies aren't sure where technology is headed: "When people are uneasy, they don't spend a lot of money." Overall, 1993 looks to be a reasonably good year for telecommunications, with a reviving economy and a new Administration committed to improving the nation's communications infrastructure. But within that outlook are plenty of ups and downs. Only companies that react as fast as the changes in technology require will win out. | |
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