Will 2004 be an important year for telecom?
Will 2004 become another year we will look back on as just another year in telecom? Or will it be significant and memorable as other years in the recent history of telephony—such as 1984, 1989 and 1996, when direction-changing events dominated the news. While we might not remember the events or those years, the results are still with us.For those telecom history buffs, 1984 marked the breakup of AT&T and the Bell System after a prolonged government antitrust case—forming the seven RBOCs and AT&T. The year 1989 marked the “discovery” of the World Wide Web, the beginning of the Internet and its transformational effect on telecom and society as a whole. Finally, 1996 saw the first major telecom legislation since 1934.
The 1984 divestiture, carried out by the Federal Court and AT&T, created the RBOCs, but restricted them from offering long-distance (interLATA) services. The 1996 TRA (Telecommunications Reform Act) allowed the RBOCs to enter the long-distance arena after they proved that their local markets were open to competition; a battle still underway. The year 2003 marked the watershed for the RBOCs, when they achieved Section 271 (long-distance) relief in all states. (Qwest received approval for the last of its 14 states earlier this month).
Let’s begin consideration of 2004 by suggesting what might happen that could make it another telecom year to remember. Could there be an industry-changing merger or acquisition in 2004? Will the capital investment climate clear in 2004 and the telecom industry re-enter a cycle of growth and expansion? Will a significant new technology come forward that spurs investment and transforms communications? Will there be legislation, a court ruling, regulatory decision or settlement of longstanding significance?
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There is likely to be much significant regulatory and judicial activity affecting telephony in 2004. |
Starting with the last question, 2004 is a presidential election year. As such, many pundits believe there is little probability of telecom legislation. The only exceptions might be to resolve a narrow issue coming from a court or regulatory body. Remember, though, that 1996 was also a presidential election year and in that year the first major telecom legislation in more than 50 years was passed. There is some likelihood that given enough continued resistance to unpopular FCC decisions such as the station ownership debacle, Congress may be stimulated into taking action. There is likely to be much significant regulatory and judicial activity affecting telephony in 2004.
Resolution of the FCC’s Triennial Review Order (TRO) will receive significant attention from state and federal regulators, courts and industry standard-bearers. This will largely focus on the decisions about whether unbundled network elements (UNEs) will continue to be required to support local competition and for how long. As the industry tries to recover, uncertainty about what network elements will continue to be resold, for how long and under what conditions, continues to slow investment. Especially interesting is the question of FTTx—what fiber to the customer technology will be considered as deregulated? The TRO appears to allow only fiber deployed directly to the customer premise to be exempt from resale requirements. This, too, will be debated during 2004 and may significantly affect the continually changing plans of the RBOCs to deploy FTTx.
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...it is clear that IP-based networks allowing anywhere, anytime, any-device access to desirable content (for business or entertainment) will grow significantly in 2004. |
Voice over IP will also be a focus of much regulatory activity. The essence of the question is whether or not VoIP is a telecom service and whether it should it be regulated as such. Part of the regulatory burden includes some significant fees and taxes. These include: contributions to the Universal Service Fund (which subsidizes the provision of telecommunications services to higher cost, largely rural locations); access charges, including subscriber line charges, where the local telephone company is compensated for the use of its local facilities to originate or terminate telephone calls; 911, local number portability (LNP) and wireless LNP (WLNP) charges; plus various federal, state and local sales and use taxes. In aggregate, these charges amount to several double-digit billions of dollars.
There are many technologies entering or expanding into the market, from the growing deployment of VoIP either as IP-capable PBXs or as hosted solutions from service providers, to the spreading of Wi-Fi (802.11a/b/g) in public and private configurations and potential integration with 2.5 or 3G wireless networks. In any case, it is clear that IP-based networks allowing anywhere, anytime, any-device access to desirable content (for business or entertainment) will grow significantly in 2004. If early indications of holiday shopping 2003 are any indication, video communications via wireless also will dramatically change device, usage and network topologies.
There has been much opinion offered about the need for further significant industry consolidation and removal of excess capacity. That six national wireless competitors are too many is one popular belief. The owners of one of these six—SBC and BellSouth—have reportedly given Cingular, their joint venture, permission to stalk and perhaps acquire one of the two providers with compatible technology (AT&T Wireless and Deutsche Telekom’s T-Mobile).
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...the RBOCs' thrusts beyond their home turf into each other’s territories may be the major industry sleeper of 2004. |
Another broadly voiced consolidation opportunity is that now that the RBOCs
have blanket authority to sell long-distance service, the large IXCs—AT&T, MCI
and Sprint—are not likely to continue as stand-alone businesses and at least one
will be acquired, perhaps by an RBOC. The rationale for an RBOC acquisition is
that the IXCs have long controlled the telecom purchases of large multi-state,
multi-regional and multinational enterprises. The large entities are a growth
market for the RBOCs but growing organically is likely to be very slow. An
acquisition would achieve these results much faster if the price were right.
Valuation was reportedly the reason why BellSouth broke off negotiations to
acquire AT&T. When MCI exits bankruptcy, a new price level may be set and
acquisition activity could rapidly resurface.
In addition, several CLECs are exiting their own Chapter 11
reorganizations and also will be candidates for acquisition. At least one RBOC,
Qwest, has indicated some interest here, with Allegiance as a target. This move
would instantly provide Qwest with local network presence in key cities outside
of its operating territory.
This latter trend—the RBOCs' thrusts beyond their home turf into each other’s territories—may be the major industry sleeper of 2004. Already the RBOCs have pieced together national IP-based core networks, initially to follow their customers (those with HQs in their territory) wherever they do business. And they have also announced VoIP offerings to provide service wherever these businesses operate. With the RBOCs established in these new locations, all enterprises and then medium and small businesses in these expanded territories will become targets. Eventually, competition will become open and across the board, with integrated mega-carriers competing against other integrated mega-carriers. How many are needed? How many can be profitable? What will the transformed industry structure be?
These are questions that will begin to be answered as the industry moves into 2004 and beyond. Reasonable people can disagree about which trend will dominate the year. One way or another, 2004 should be a memorable year.
David H. Yedwab is Executive Vice President of The Eastern Management Group, Bedminster, NJ. He can be reached at dyedwab@easternmanagement.com.
