Ali and thread,
Telecom Forecast for 1999
Business Week, January 11, 1998
Remember all that talk of deregulating the U.S. telecom
industry? The Telecommunications Act of 1996 was
supposed to tear control of the industry from the regulators
and let freewheeling rivals go after each other with abandon.
AT&T and a host of new competitors would burst into the
local telephone markets, Baby Bells would finally get a
chance to sell long-distance service, and cable companies
would offer phone service. Consumers would end up with
more choice, lower prices, and better service.
Forget about it. This will be the year of the regulator. The
Federal Communications Commission and state regulators
will play the central role in how telecom companies fare in
1999, as the competition envisioned by the Telecom Act
remains more promise than reality. ''Basically, nothing has
happened for three years,'' says Robert Fox, vice-president at
Mercer Management Consulting.
Regulators will have a hand in most of the key decisions to
be made in the telecom industry over the next year. Take
Ameritech Corp. The Chicago-based Bell wants to merge with
SBC Communications Inc., but the deal is subject to approval
by the FCC. Ameritech would like to offer long-distance
service to its customers; again, the FCC will decide if that
happens in 1999 or later. The company is hoping to build a
national data network--and even considered buying IBM's
Global Network, for which AT&T just ponied up $5 billion--but
it's barred from doing so by current regulations. Even
Ameritech's plans to expand its security monitoring business
may be limited by the FCC. ''I think [regulators] are trying to
pick winners and losers,'' says Richard C. Notebaert,
Ameritech's chairman and CEO.
LOCAL NEWS. And they will, make no mistake about it.
Phone companies now are jostling for position before a long
race. Each carrier is trying to gain a slight edge by insisting
on certain conditions that it finds favorable before the
competition begins. The companies that prevail in this year's
regulatory debates will have a strong shot at becoming the
telecom titans of the 21st century.
Probably the most significant regulatory decisions of 1999 will
be on the two proposed mergers between local phone
companies. SBC Communications and Ameritech want to
combine, they contend, because only together will they have
the financial muscle to take on other giants such as AT&T
and MCI WorldCom. When the two local companies
announced their $62 billion merger proposal last May, they
promised to start offering local service in 30 markets outside
their own territory. In July, Bell Atlantic Corp. and GTE Corp.
announced plans to merge, also arguing that they needed to
bulk up--although they made no specific promises about
invading the turf of other local phone companies.
Much has been made of the fact that the FCC's staff is
reluctant to approve the two megamergers--but don't bet that
the deals will be blocked. The FCC has much to gain if it
uses approval of the deals to pry open local markets around
the country. For example, the commission could insist that the
wholesale discounts at which competitors buy access to the
local phone companies' networks be increased from the
current 18% or so to 40% or 50%. That would allow AT&T,
MCI WorldCom, and others to offer local residential service at
competitive prices without losing their shirts. ''I think the FCC
is going to push very hard to use [the proposed mergers] to
open up the local markets,'' says Fox.
''DEAL-BREAKER.'' Of course, the local phone companies
may push back. It was state regulators who determined the
current wholesale discounts--and courts have repeatedly
ruled that state, not federal, regulators are entitled to set
these rates. Rather than agree to the FCC's demands, some
analysts speculate that Bell Atlantic, GTE, SBC, and
Ameritech may simply call their deals off.
AT&T's fate is also inextricably linked to the FCC. The reason
it proposed the $48 billion merger with Tele-Communications
Inc. in June is to use the cable company's network to offer
local phone service and high-speed Internet access to
residential customers. But now there's a catch. America
Online Inc. wants regulators to require that AT&T-TCI carry
AOL's content. AT&T Chairman and CEO C. Michael
Armstrong has said that condition would be ''a deal-breaker.''
The FCC has generally supported the AT&T-TCI merger
because it thinks the deal will bring competition to the local
phone markets, so the early betting is that AOL will lose out.
Even telecom's technological developments will be snarled in
red tape in 1999. One of the most promising applications in
the industry is making voice calls over the Internet using a
technology called Internet Protocol, or IP. The companies that
sell IP-based long-distance service avoid paying 3 cents to 4
cents a minute to the Bells because data calls aren't subject
to the access fees levied on voice calls. That allows Qwest
Communications International Inc., for example, to offer IP
long distance at a rock-bottom 9 cents a minute.
This loophole has the local phone companies up in arms.
They think IP voice calls should be treated like any other
phone traffic. BellSouth Corp. and U S West Inc. have started
charging access fees for IP calls even though regulators have
yet to set any. ''We can identify a lot of these companies, and
we plan to bill them,'' says BellSouth CEO F. Duane
Ackerman. The FCC is leaning toward imposing some kind of
access fee on IP voice, but Congress is strongly against any
kind of tax on the Internet.
GOING TO COURT. The telecom players that do best in the
year ahead will be the companies that can stay out of the
regulatory quagmire and start the race to offer a full suite of
integrated services to their customers. MCI WorldCom Inc. is
a prime example. With its merger complete, the company is
starting to market voice and data services over a network
that's entirely its own. Besides its long-distance network, it
has local facilities in 81 markets. That means it can avoid
tangling with the Bells and offer big discounts to its
customers. ''The cost savings are enormous,'' says Timothy
F. Price, president of MCI WorldCom's U.S. communications
subsidiary.
Look for wireless, another unregulated service, to continue to
explode this year. With four, five, and even six carriers in
many markets, prices are falling 20% yearly--more, for
high-end users. Carriers are kicking in a host of snazzy new
services, like voice dialing and E-mail. And AT&T, Sprint
Corp., and others are offering free roaming and long distance
with their wireless minutes. All those goodies should help
drive the number of U.S. subscribers up 18%, to 79 million, in
1999.
Satellite services should become more popular in 1999 as
well. Iridium is marketing its service aggressively, and other
players are expected to follow this year. The service is
expensive: Iridium's handsets go for $3,000, and talk time
costs $3 a minute or more. Still, the phones can be used
anyplace in the world, and their makers are betting that
globe-trotters will find them indispensable. Iridium's
performance is likely to determine whether other satellite
operators get up and running. ''The whole [satellite] industry
is absolutely subject to the outcome at Iridium,'' says
Lawrence Kenny, a partner at the consulting firm
PriceWaterhouseCoopers.
And the telecom industry will be absolutely subject to the
regulators in 1999--or the courts. Virtually every facet of the
Telecom Reform Act has faced legal challenges from local or
long-distance carriers. ''Every decision can be challenged in
every state and with every regulator,'' says Sir Peter Bonfield,
CEO of British Telecommunications PLC, which has gone
through a more successful deregulation in Britain. So when it
comes to local and long-distance service, look for a little more
competition and a lot more litigation in 1999. |
