From tomorrow's WSJ, here's an article on telecommunications with a fine discussion on wireless.
Hold things together while I'm gone. I leave tomorrow for Ottawa and will be back on Sunday. Besides attending the AGM and analyst conference, I'll be visiting CrossKeys, Vienna Systems, and Cambrian. Full report when I return.
Later --
Pat
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The Wall Street Journal Interactive Edition -- September 21, 1998
Consultant's Call
Lawrence Vanston Makes Some Pretty Bold Predictions for the Future of Telecoms. He's Been Right Before
By G. CHRISTIAN HILL
Some people are born to sing, some to run; Lawrence K. Vanston was born to predict.
Mr. Vanston, 44 years old, is president of Technology Futures Inc., an Austin, Texas, consulting firm that specializes in forecasting the impact of technology change, particularly on the telephone companies. His father, John, founded the firm in 1978 to predict energy trends, and taught a technology forecasting seminar at the University of Texas, where he was a professor of nuclear engineering.
<Picture: Lawrence K. Vanston>
Lawrence K. Vanston
While the younger Mr. Vanston didn't exactly grow up discussing Gompertz and Fisher-Pry forecasting models around the dinner table, he did take his dad's seminar while completing a doctorate in operations research, a field that involves modeling and optimizing business processes. After four years at Bell Laboratories, he decided the forecasting game was in his blood too, and joined his father at the research firm.
"I saw a need for a perspective that fit between dealing with day-to-day problems with a short-term focus and blue-sky speculation about the distant future," he says. "This perspective requires balancing realism and imagination.... In other words, you have to have one foot firmly planted on the ground and the other in the clouds. That was me, so I decided to go for it."
Mr. Vanston's work involves a lot of sophisticated statistical modeling based on how new technologies have replaced old ones in the past, and a canny recognition of all the variables and assumptions that might throw the model off. But he's careful to point out that some of his forecasts are based partly on somewhat simplistic "everything else stays the same" scenarios.
For example, Mr. Vanston might look at what would happen in the market if wireless prices plunge while assuming that the Bells' prices and costs for providing voice service remain the same. These simplistic analyses aren't necessarily unrealistic, though. While they try to compete with wireless providers, the phone companies may in fact have trouble lowering both prices and costs while financing major investments in new technology.
Based on such assumptions, Mr. Vanston's forecasts can be breathtaking: Local telephone carriers could lose 50% of their calling revenue to wireless providers by 2005; unless they co-opt wireless technology, grab much of the data traffic and successfully enter other new businesses, their annual cash flow will turn negative by 2010.
He also foresees nearly 90% of the nation's households being able to buy some sort of digital data pipeline -- a cable modem, digital phone line or direct connection to a fiber-optic network -- by 2020, and being able to download video and other information at the amazing speed of 100 million bits a second. That's enough capacity for each home to simultaneously receive three or four high-definition television shows, conduct several video-telephone conversations and still have room to download other data or graphics at more than 10 million bits a second.
But Mr. Vanston isn't regarded as some loose-tongued dreamer. His clients include most of the Baby Bells, GTE Corp. and Sprint Corp. They belong to a joint research effort, the Telecommunications Technology Forecasting Group, and have been paying for the Vanstons' research for about a dozen years. They have used it to, among other things, help persuade regulators to let them write off older cable and switching equipment much more quickly, on the theory that rapid technological changes were rendering the assets obsolete more quickly.
"In categories where you can have a quantitative track record, his record is very good," says Robert N. Welsh, manager for capital recovery at Bell Atlantic Corp. and the forecasting group's chairman. "A classic example is the analog switch. Larry's company forecast the demise of the analog switch investment long before it showed up in the [actual] data." However, Mr. Walsh warns, "you have to be careful when you look at studies in which a lot of things are being held equal. It is a very simplistic model of a very complex set of things."
Bell Atlantic is already aggressively pursuing countermeasures advised by Mr. Vanston, a spokesman for the company says. It has the largest wireless operation among the Bells and plans to deploy seven million high-speed digital data lines to customers by the end of next year.
If anything, Mr. Vanston tries to err on the conservative side. For example, some of his forecasts aren't adjusted to reflect the potential "multiplier" effect of several complementary technologies, such as fiber optics and advanced digital switches, being adopted at the same time. A forecast he made in 1995, of 48.9 million cellular-phone users by 1997, fell short of the actual number, 55.3 million, although it was still a lot closer to the mark than most other predictions.
Recently Mr. Vanston sat down with The Wall Street Journal to discuss his outlook for competition in the telecommunications industry -- in particular, whether the Bells' lock on the "last mile" of connections to the nation's households would retard market changes, or whether it would be circumvented by new technology.
Competition Afoot
WSJ: It has been more than 2æ years since the passage of the telecommunications deregulation act, but not much local competition has occurred. There seems to be a pessimism that the Bells have this death grip on the last mile of connections to the nation's homes. Is this going to change soon?
MR. VANSTON: To me, the fundamental problem has been that the local residential telephone service right now is a great deal, money-wise, for the consumer. It's subsidized [by long-distance fees]. Therefore, it is priced, in terms of the monthly bill, well below cost, using the existing technology. Even if the Bell companies had embraced competition with open arms, you still have this basic problem that residential telephone service is cheap.
WSJ: How long will that barrier last?
MR. VANSTON: When you get technologies that will come below that price floor, in terms of cost, only then will you see facilities-based local competition [with new competitors using their own networks, rather than leasing the Bells']. And we're getting that now, in the form of wireless personal communications services and "cable voice" [where phone calls are carried over cable-TV lines].
WSJ: The cable companies stopped talking about offering telephone service after the Bell Atlantic/TCI deal fell through five years ago. Now AT&T obviously has made a big bet on cable voice by agreeing to acquire TCI. But why would cable voice be economical enough for the cable companies to get around that price barrier you noted?
MR. VANSTON: The main reason is that they can basically add voice as an ancillary service to their basic cable service. What they're adding is electronics [for high-speed Internet access and Internet-based phone service] to their existing access facilities that are being paid for by cable-TV fees. Add some switches, and off you go.
WSJ: So how would AT&T use TCI to bridge the last mile?
MR. VANSTON: It's way too soon to say whether the AT&T/TCI thing is going to be a stroke of genius or something else. I think the real question is whether AT&T is going to use its existing narrowband, circuit-switched telephone network [to connect cable customers to its network] or go to Internet-protocol voice immediately. [With IP telephony, voice calls are carried over the Internet or similar public or private networks normally used for data.] I've heard them say different things. It sounds like they're very uncertain.
The Case for Wireless
WSJ: What's the case for wireless technology taking market share away from the Bells' wireline business?
MR. VANSTON: I think a lot of mobile wireless comes with people, just by default, shifting usage from wireline as wireless prices continue to fall sharply. The other [inroad] comes as more suppliers decide to offer local service through fixed-wireless systems. [Unlike mobile-phone systems, fixed-wireless systems, or wireless local loops, provide a wireless link between a fixed location -- a home, for instance -- and the broader phone network, essentially taking the place of the phone wiring to the house.]
WSJ: Are you particularly optimistic about fixed wireless being able to bridge the last mile for AT&T or other Bell competitors?
MR. VANSTON: Yes, I am. There are some technological advantages to doing it that way. The capacity of the system is significantly greater if you have fixed wireless [than on a mobile system, because a lot of mobile network capacity is wasted trying to pinpoint the moving signal and passing it off to the next link in the network]. And the thing about any wireless solution is that you don't have to know where the customers are and you don't have to have a high penetration rate.
The classical paradigm for cable and especially wireline telephony is that you have to have a very high market share, or it doesn't work eventually. Even if it were economical to run cable or wire to 10% of the houses, you don't know which 10% they're going to be [so you can't predict the costs].
With wireless you can count on a certain percentage of customers and don't have to know where they are [because you don't have to run any wires to the house]. That's why wireless companies do great with 5% of the population, whereas the telephone companies would go out of business with 5%, as would the cable companies.
WSJ: How much market share can wireless take away from the Bells in voice phone service?
MR. VANSTON: We'll probably see about 30% to 40% market-share loss within 10 years.
WSJ: What about cable voice? I believe the British cable companies took close to 15% to 20% of the voice market after they were allowed to offer telephone service over their systems. Do you think it would be more or less in the U.S.?
MR. VANSTON: Wireless will take away from both cable voice and the Bells. Of whatever's left, I would say maybe another 30% to 40% would go to cable. The problem with the cable and telephone companies fighting for the rest is that the economics start getting lousy when you start losing a lot of customers [to wireless].
The Pricing Future
WSJ: How do you see the price per minute of wireless going over the next five to seven years?
MR. VANSTON: In five years or so, we're looking for a nickel a minute or [even] free local calling. Or so cheap that you don't think about it.
WSJ: If you were forced to rank all of the competitors out there as major threats to the Bells' revenues, where would you rank the long-distance companies, the cable companies, the satellite companies, the wireless companies, the competitive local-exchange carriers and the Internet service providers?
MR. VANSTON: They're all threats. In terms of the last-mile barrier and local competition, the long-distance companies in cooperation with the wireless sector or the cable sector are certainly a threat. By themselves, I don't think they're that big a threat, but in cooperation with somebody else, for the residential [market], they certainly are. Sprint's strategy [of bundling long-distance service with local service from national wireless affiliate Sprint PCS] seems like such a neat strategy, and one that AT&T could adopt in a heartbeat.
Let's go back to the fundamental point that the local business itself isn't all that lucrative. The real lucrative part of the business is either data or long distance. Sprint and AT&T, both with wireless and long distance, are in a really good position to take advantage of that.
WSJ: Because they can meld their long-distance pricing structure with their wireless pricing structure?
MR. VANSTON: Right. Plus, they're not paying the Bells fees for access [to the local networks]. The long-distance companies pay about half their revenues for access charges.
WSJ: That's a huge incentive. There's no bigger incentive in this competition.
MR. VANSTON: The cable companies, perhaps not by themselves but in league with the long-distance carriers or out-of-territory Bells, are certainly a threat. But again, it's a question of being together with somebody else.
The satellite systems [mobile-phone networks such as Iridium LLC and data networks such as Teledesic LLC] frankly don't seem much of a threat. I have a tough time seeing them as a mass-market model when there are terrestrial alternatives that are very attractive.
Local-Exchange Rivals
WSJ: What about competitive local-exchange carriers, the new-technology companies that have received FCC approval to offer local phone service in competition with the Bells? I'm thinking here of both young high-speed data companies like Covad Communications and wireless providers like Teligent. I also wonder if Internet service providers can become local telephone carriers.
MR. VANSTON: I think ISPs could go the route of being acquired by the long-distance companies. The local ISPs don't have the expertise or the capital [to set up local networks]. For the CLECs, the question is whether they want to go beyond serving primarily larger businesses. It's one step to go from an inner-city fiber network; it's a totally different step to provide facilities-based access to residential and small-business customers.
WSJ: They'll form partnerships, then?
MR. VANSTON: That's what I would expect them to do. These companies are trying to be very aggressive and move very fast. By the very nature of trying to provide a service to millions of households, making a major investment in the ground, it would divert their attention from what they need to be doing. If I were them, I'd be very cautious about getting their ankles too deep in the mud of the local exchange.
WSJ: If you were going to guess, when will one or two of the long-distance companies have substantially bypassed the Bell local loops and bypassed access fees to achieve direct contact with residential customers?
MR. VANSTON: Well, it's a continuous process, but both in our forecasts and others, 2002 seems to be the time where things really seem to be coming together.
Bye, Bye, Bells?
WSJ: You've made some dire forecasts about the Bells' future. In your most recent study, you forecast their net income from voice operations would be wiped out within 10 years, assuming their prices and costs remain the same. How would you characterize the response to your presentations among the Bells?
MR. VANSTON: I think we've always been taken seriously. I think the burden of proof we accept is less stringent than what they're looking for.
WSJ: They wanted to see actual competitors installing equipment -- is that what you're saying?
MR. VANSTON: Not only that, but actually being successful at it.
WSJ: When did you begin to see some urgency among the Bells to adopt digital, high-speed data technologies [to lower costs and enter new businesses]?
MR. VANSTON: It's been like a slow-moving train coming up on the horizon. You know it's moving reasonably slowly, but you know it's big. And you know your clients have lots of time to prepare and are in a very advantageous position if they just start reacting to it. And it keeps coming and coming and coming.... I think certainly in the last year or two, the train is right on top of us now, and there are some real questions as to whether [some companies] will get out of the way in time.
WSJ: Why has it taken them so long to hear the message?
MR. VANSTON: It's nothing unusual. Usually, the established players in a major business have a tough time reacting to change. There are some underlying reasons for it that are complex. But it basically comes down to this: You're doing well and you've been doing well for a long time; you understand your business, within its confines, very well. And under those circumstances, it's hard to change.
The problem is that the change, when it finally comes, comes very quickly and at that point, it's very hard to react, and you stop doing well very quickly. That's why an IBM can be caught by surprise by a DEC, and how Microsoft can pop up out of nowhere. This happens over and over again, that established companies get into trouble very quickly.
WSJ: What is the best-case scenario for the Bells, looking at all of these different threats?
MR. VANSTON: The first thing you have to do is differentiate the local-exchange business from the Bells' overall business. A [typical] Bell holding company owns a local-exchange carrier, or several carriers. But they also own wireless operations and assets overseas [and a promising technology, asymmetric digital subscriber line or ADSL, for high-speed data delivery]. The local-exchange business per se doesn't have a best-case scenario. The best-case scenario, to me, is for the existing companies to continue to make a transition away from the local-exchange business to the other businesses, to achieve significant success for ADSL, where they can ride that technology for maybe a 10- to 15-year window and make the transition to fiber optics, which they are well-positioned to do, to successfully blend their [voice service] with data or video [service].
WSJ: In terms of that best-case scenario, how optimistic are you that the majority of the Bells are going to pull that off?
MR. VANSTON: I think the tools are there for them to do it. It comes down to the great intangibles of culture and will. Do they have the will to do it? History, I'm afraid, will probably be on the side of a lot of them not making it. On the other hand, I think there's a lot of awareness of the problem and the opportunities, and so if they can pull it together, I think at least several will be successful.>>>> |
