Management Briefing From CIMI May 99
cimicorp.com
There is every indication that the competitive kick-in of the Telecom Act is finally going to come in late 1999 or early 2000?only three plus years after signing!
There is also every indication that the SBC/Ameritech and Bell Atlantic/GTE mergers will be approved. AT&T is buying cable companies. It?s clear that lots of
interesting stuff is happening, and it?s worth taking a moment to consider what the long-term implications might be on the competitive landscape.
To summarize what we think the issues are by class of carrier:
1.Incumbent LECs will be looking to protect their access connections to their key customers, and to expand their service set as far as current regulatory
largess permits, so as to cement themselves as full-service national players.
2.CLECs will be looking for a defensible niche in the near term, one with a high enough revenue margin to finance infrastructure growth and sustain stock
price or effective market cap.
3.Incumbent IXCs will be looking first to protect their current customers from competitive predation, and then to create high-bandwidth access
relationships with key customers to gain and maintain account control.
4.New-Gen IXCs will be looking to garner revenue in nearly any legal form to maintain their access to capital and their credibility.
5.ISPs will be seeking profitability, primarily through increased business offerings like VPNs, and to formalize interconnect with other ISPs to eliminate
problems with performance (see Strategies in this issue).
M&A has been the focus of activity since the Act was passed, and there are still some events left on that dance card. Both BellSouth and US West remain unallied,
and neither is likely to be able to sustain itself in the long run without a partner or two.
Once they have complied with the Act, a merger between either player and an IXC partner would be logical. BellSouth is a plum that any IXC would love to pluck;
US West is probably interesting more to a new-gen player. It?s possible that US West and BellSouth might come together to form a third giant ILEC. It?s unlikely
that either will merge with one of the two existing ILEC giants?SBC or Bell Atlantic.
The massing up of the ILECs is the greatest competitive threat to the IXCs, because it means that any of the new giants could offer highly credible national services
to its customers and be sure of enough of a ready audience to justify the investment in infrastructure.
On the other hand, the ILEC M&A doesn?t force them to offer regional and national toll services, it only facilitates it. We expect to see the IXCs hold off on a lot of
highly competitive actions (though not on posturing) until there?s really an indication that the ILECs are poised on the edge of entering the national market. FCC
approval is required for at least regional toll, so it?s likely that when such approval seems imminent, the IXCs will move.
Of the IXCs, AT&T and Sprint both seem to have a strategy of at least partial facility bypass through PCS. While PCS won?t solve their business service problems,
it will certainly be a viable way to address the upper end of the residential market, the "yuppie" play.
MCI Worldcom is lacking in PCS service options, and their local access activity is still small by their own recent admission. They are the ones most likely to view
with interest the acquiring of an ILEC. That would give them at least a core region where they could offer full services to everyone.
MCI also seems to be relying on data services, particularly the UUNET Internet service. That reliance may make them vulnerable, because it?s highly unlikely that
revenue growth on the Internet or on data services in general will be nearly as high as predicted. We expect to see some retrenchment of MCI by this time next year,
reflecting a more realistic (if late-coming) projection of the data opportunity.
AT&T will clearly be holding their cable play in reserve as a means of guaranteeing customer access to at least a large portion of their market. We don?t think they?ll
actually play a cable voice card for now, though. They can gain nearly the same benefit without the investment and risk by bundling conventional long-distance
services with their cable and Internet/cable offerings, relying on continued delivery via the ILEC. Until the ILECs? xDSL offerings are very mature, at the very least,
IXCs can rely on the ILEC having to preserve the current long-distance carrier relationships if the customer wants. With xDSL access, it?s possible the ILEC would
bundle the service with their own long-distance offering, as indeed they do today with most of their ILEC PCS/cellular offerings.
Sprint probably can?t rely on its PCS strategy alone, and it appears to be hoping to attract a larger-than-usual piece of the integrated high-end corporate market with
its ION. That doesn?t appear to be a viable approach, given the poor job the company has done with ION. On the other hand, there?s plenty of time for them to
buff up their ION offering as the year wears on. Still, they may try an acquisition in the LEC space themselves.
The next-gen players are caught. The media has made these guys into IP-based competitors to the IXCs, which position has been pretty much a non-starter in a
revenue sense. The players must get some dollars flowing soon or risk losing the market?s adulation.
Williams is realistic, seeking to develop bulk deals with big ILEC players like SBC. BellSouth took a stake in Qwest to help duplicate that play. Level 3 is looking to
international networking (they plan a terabit cable, for example) to give them a unique market position. We think Williams has the best chance overall, because it?s
not saddled with as much retail service baggage. The RBOCs are all interested in broader service footprints, but they don?t want to validate a competitor to get it.
Ironically, there is an opportunity for a small-scale IXC player to create both a business and consumer niche based on IP services and VPNs. The former would
require at least access through RBOCs, but they could hope to develop their own CLEC position to cover the VPN space, given the small number of large business
sites to address. It?s just that the current new-gen players have been overhyped in a financial positioning sense, and something as limited as this (we estimate the
opportunity to be about two-thirds the size of Sprint) just won?t play on Wall Street.
In the ISP space, we think that there?s a dramatic consolidation and change coming. First, it?s clear that even peering agreements and options (again see Strategies)
will save the smaller players. We also think that the facility players, particularly the RBOCs, will play a much larger role in the future. Because these guys know how
to do interconnect among carriers (and in many cases are obligated to do it), they?ll solve the peering problem in a stroke.
That, of course, will finally spur the Internet community into taking rational action. It may be too late to save the smaller players, but it will keep the major parties in
business. In the long run, though, expect all ISPs that survive to either become broad-based facility carriers at least as an adjunct to their Internet offerings, or be
acquired by the big facility players.
Well, that?s a summary of where we think things are heading competitively. We?ll keep you advised of changes and progress. |
