Businessweek Archives

Telecommunications


Industry Outlook -- INFORMATION

TELECOMMUNICATIONS

Predicting what's going to happen in the telecommunications industry these days is something of a fool's errand. Just think back on the tumult of 1997: Who could have guessed that World-Com Inc. would strike a deal to buy MCI Communications Corp. for $37 billion? John Walter had a contract that guaranteed him the CEO title at AT&T, but now he's out of a job and former Hughes Electronics Corp. chief C. Michael Armstrong sits in the post. No fewer than three Baby Bells--Ameritech, SBC Communications, and BellSouth--were betting they were going to get into the long-distance business within their regions. So far, none has succeeded.

The only certainty in 1998 is that the seismic change will continue. With the industry's urge to merge, expect at least one major long-distance or local telecom company to disappear by the end of the year through merger or acquisition. The most likely candidates are U S West, BellSouth, Ameritech, and GTE. With growing telecom giants such as AT&T and the proposed MCI-WorldCom combination, many executives think greater size is the only protection against extinction. "It would surprise me if further mergers, alliances, and partnerships didn't take place," says Richard C. Notebaert, Ameritech Corp.'s CEO.

Consolidation is a reaction to what's sure to be intensifying competition across all segments of the telecom industry. The Telecommunications Act of 1996 has so far failed to spur competition between long-distance and local telephone companies. But that will change in 1998. With a reconstituted Federal Communications Commission and clearer interpretation of the act from regulators and the courts, several of the Bells are likely to win approval to offer long-distance service in a handful of states within their territories. By the fourth quarter, look for Bell Atlantic Corp. to be let into the business in New York, and Ameritech in Michigan or Illinois.

EXTREME PRESSURE. The loosened restraints are the result of a key court decision that is forcing the FCC to give up more control to the states. Under former Chairman Reed E. Hundt, the FCC kept the hurdle extremely high for the Bells to be let into the long-distance business--they had to first prove that their regions were open to competition. But a federal court dealt a major setback to the FCC in September, 1997--it ruled that the commission had overstepped its bounds under the Telecom Act and that states have control over key deregulation issues, including the prices at which the Bells must give long-distance carriers access to their local networks. Under pressure from the courts, state regulators, and the Bells, the FCC will have to back off in 1998. "The FCC is exercising authority that it no longer has," says Scott C. Cleland, an analyst with Legg Mason Wood Walker Inc.

The speed-up of competition will continue to put extreme pressure on prices. Local calling revenues are expected to dip slightly to $92.3 billion in 1998 from $92.6 billion this year, according to industry consultant Northern Business Information. The only bright spot is nonregulated services, such as caller ID and voice mail, where revenues are expected to grow 13%, to $7 billion. Revenues from long-distance calling, more sensitive to price competition than local calling, should rise 9%, to $101.8 billion.

Who will benefit from additional telecom competition? Corporate America, primarily. Competitive local phone companies, such as Teleport Communications and WorldCom's MFS Communications Group, are targeting business customers because local business rates have been artificially inflated over the years in order to subsidize consumer rates. Companies that switch their local business to these new competitors will reap 10% to 25% savings--and finally be able to buy local, long-distance, and Internet access from a single provider. "Customers want us to deliver integrated solutions," said WorldCom CEO Bernard J. Ebbers, explaining in November why he decided to buy MCI.

Consumers won't be completely left out of the deregulation party. Very few will have more than one choice for a local carrier in 1998, but they will be able to benefit from competition among wireless operators. After government auctions of radio spectrum in 1995 and 1996, there are now at least four wireless operators in most metropolitan markets. The benefits to customers are evident: It's no longer necessary to sign up for a year-long contract, features like caller ID and voice mail are usually free, the first minute of an incoming call is free, and calling rates are down 25% or more. That should help push the number of U.S. wireless subscribers to 67 million at the end of 1998 from 56 million now, according to BankAmerica Robertson Stephens estimates. "The revolution in wireless is just beginning," says Andrew Sukawaty, CEO of Sprint PCS.

Consumers' gain will be operators' pain, however. What's driving penetration is a decline in the price of wireless minutes that's expected to average 5% annually for the next few years. Such pressure is hurting many small wireless operators that hoped to snag a share of the growing market. Several are likely to go out of business, and many will have to dramatically reduce their expansion plans. One example of wireless enthusiasm turned sour is NextWave Telecom Inc., which bid $4.7 billion for wireless licenses but is struggling to find a way to pay for them. "I think we're going to see a shakeout among the small players," says Ameritech's Notebaert. Still, "it's a great opportunity."

"EXPLODING AREA." And just one among many for telecom equipment companies. As both new entrants and existing operators struggle to stay competitive, Lucent Technologies Inc., Northern Telecom Ltd., and others are benefiting from strong demand for the wireless, local infrastructure, and data networking equipment. The telecom equipment market is expected to grow 14%, to $230 billion, in 1998, according to Northern Telecom. "This is an absolutely exploding area," says Lucent Technologies Inc. CEO Richard A. McGinn.

But again, what's good for the equipment makers only makes life tougher for the operators. The new, more efficient data networks that are being built will start siphoning off calling volume from older networks this year. In late January, Qwest Communications International Inc. plans to offer long-distance service using Internet technology for 7.5 cents a minute--about half the going rate for business-hour calls. WorldCom's UUNet Technologies Inc. is offering Internet fax services at about half the price of traditional phone lines. "The Internet is the endgame," says industry consultant David Hill. "Internet applications are going to change the telecom world." The Net will swipe close to $1 billion in revenues in 1998 and $3.5 billion by 2001, according to Action Information Services.

Whether telecom operators can capitalize on the Internet boom remains to be seen. So far, most customers link up with the Internet through their telephone lines, but few phone companies have been successful at selling faster access, such as integrated service digital network, or ISDN, service to the Net. Plenty of competitors will be vying for that business in the future. Cable-TV companies in particular want to provide access via superfast cable modems. "The battle in 1998 is going to be about whether the cable companies can ramp up fast enough and gear up to offer services in a high quality way," says Robert Fox, vice-president at Mercer Management Consulting Inc.

So, the new year will provide telecom companies with plenty of new opportunities, particularly in wireless and Internet access. But competition will intensify and put pressure on prices in the long-distance and local markets. The winners will be those companies that figure out how to negotiate between this rock and a hard place.By Peter Elstrom in New YorkReturn to top


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus