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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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MARCH 2, 2004
Tearing Down the Walls in Telecom In a few years, it "will be a sectorless industry," with phone, cable, and even power companies all selling the same communications services Just four years ago, the world of communications was reassuringly compartmentalized: Customers bought cell-phone service from a wireless phone carrier. Pay TV came from a cable or a satellite company. Local-phone service was provided by -- what else? -- a local-phone company. And Internet access came from an Internet service provider. Those boundaries have all changed faster than Howard Dean's political career. Local-phone companies now sell long-distance. Long-distance companies sell wireless and Internet access. The situation will only get more confused this year, as cable companies and ISPs such as Earthlink (ELNK ) roll out voice services based on VoIP (voice over Internet protocol) in a big way, and as phone companies begin reselling satellite TV. Even electric utilities are getting into the act, selling Internet access via wireless technologies or using something called poweline communications technology -- which sends data traffic over electric wires. HUGE SHIFT. Suddenly, there's no limit to the number or types of companies that can compete for the attention of customers who used to belong to the phone industry. And just as suddenly, phone companies can go after customers who once were captives of some other medium. It all adds up to the most fundamental evolution of the telecommunications business since the breakup of Ma Bell two decades ago, one that will benefit consumers, at least until a shakeout leads to renewed concentration. But that won't happen until after service providers in a variety of communications industries have gone through a wrenching revolution. Within five years, a relative handful of players might provide TV, phone service, and Net connections -- and some of them may even bill for those along with your electricity, water, and garbage fees, says Jeff Kagan, an independent telecom analyst in Marietta, Ga. Telecom "will be a sectorless industry," he predicts. Industry names like "cable" and "telecom" could eventually be replaced by terms such as CET -- for the cable, entertainment, and telecom industry. This will be a huge shift -- on par with the sweeping consolidation of car manufacturers and railroads years ago, says Rich Nespola, CEO of The Management Network Group (TMNG ), a telecom consultancy in Overland Park, Kan. The survivors likely will win a huge prize: Control the $200 billion phone business and the $55 billion cable-TV business -- plus associated entertainment businesses. QUEST FOR GROWTH. This transformation won't happen overnight, of course. But it's starting to look unavoidable, these experts say. It'll be driven partly by shareholders in search of high-growth companies. And it'll be supported by consumers, 80% of whom, according to studies by service providers, now prefer the convenience of buying their TV, phone, and entertainment services from one source -- if the price is right. At the simplest level, these trends will be the result of a quest for growth. For the past several years, local-phone service providers have seen negative revenue growth vs. single-digit sales increases as recently as the year 2000. In cable TV, growth in subscribers has been stuck at about 1% a year, according to market researcher Gartner -- and it shows no signs of speeding up now that nearly 70% of U.S. households already have pay TV. And cable margins could slip as programming costs creep up. What's a phone or cable company to do? Increasingly, they're eyeing related businesses, either to hitch a ride on such fast-growing services as broadband access to the Net (where revenues are rising at more than 25% a year) or to add offerings that involve a small incremental cost but have the potential to attract large numbers of new customers at a decent margin. As faster-growing wireless services add up to a larger chunk of their revenues, local-phone giants Verizon (VZ ), SBC (SBC ), and BellSouth (BLS ) will record sales increases of 2% to 4% this year vs. a drop of 1.3% in 2003, estimates Greg Gorbatenko, an analyst with Marquis Investment Research in Chicago. CROSSOVERS GALORE. Another example is cable operator Cox Communications (COX ) in Atlanta, which is aiming to deliver annual revenue growth in the low double digits by boosting sales from phone service and broadband 10 percentage points, to 45%, of its revenues over the next 18 months, estimates David Mantell, an analyst with Loop Capital Markets in Chicago. In the dozen markets where it sells phone service, Cox has grabbed a 30% share over the past eight years by undercutting local-phone carriers prices by 10% or more, says Patti Reali, principal analyst at Gartner in Philadelphia. Meanwhile, Verizon has begun reselling DirecTV satellite service to its local and long-distance customers at a $6 monthly discount -- and they're snapping it up, says Marilyn O'Connell, Verizon's senior vice-president for broadband. A big advantage of selling such bundled services is that it can reduce customer churn by 35% to 50%, according to TMNG. And cutting churn translates into savings of hundreds of dollars per head that would otherwise be spent to acquire new customers. Selling bundles also tends to blunt price competition on individual services, says Maribel Lopez, an analyst with tech consultancy Forrester Research in Cambridge, Mass.
BW MALL
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