US Telecom Is Preparing for Big Shakeout : Expects to Gain Edge With Own Network
The newly competitive long-distance telephone industry--currently swarming with more than 400 companies--will likely shrink through bankruptcies, mergers and acquisitions to a mere handful of national networks during the next few years, according to industry estimates.
But little-known US Telecom expects to be among the major survivors, said Charles M. Skibo, president of the Kansas City, Mo.-based subsidiary of United Telecommunications, one of the nation’s largest purveyors of local telephone service. Skibo’s optimism is not universally shared by analysts, however.
“The trend will be toward oligopoly,” Skibo said in an interview, meaning that long-distance service will eventually be furnished by only a few major providers. Surviving carriers, he said, will have to control their own transmission networks and, therefore, their costs.
Bigger Share of Market
That analysis coincides with thinking within the industry, according to a spokesman for the Competitive Telecommunications Assn., or Comptel, a Washington-based trade association whose members include about 100 of these companies. “Unless you own your own facilities, you’re not going to stick around,” the spokesman said.
At stake for a company like US Telecom is an enlarged share of the nation’s $45-billion long-distance telecommunications market, which is expected to grow rapidly as integration of telephones and computers develops. Long-distance was historically a tightly regulated American Telephone & Telegraph monopoly. In recent years, however, such competitors as MCI, GTE Sprint, SBS Skyline (recently acquired by MCI) and Allnet have been nibbling away at AT&T;’s still predominant market share, which remains as high as 90%, according to some definitions of the market.
US Telecom expects to “stick around,” Skibo said, because it is building from scratch its own state-of-the-art network--a $1.45-billion system whose 23,000 miles of fiber optic cable will be crisscrossing the country, the company expects, by 1988.
“We started off with a clean sheet of paper about 2 1/2 years ago,” he said. “We caught the technology at just the right point in time when we decided to get into this.” It plans a network that will be uniquely 100% fiber optics.
Most Lease Networks
AT&T; Communications, MCI and GTE Sprint are all installing fiber optic links--but selectively, and not exclusively--where they think the volume requires it, said analyst Robert B. Morris III, who follows telecommunications for Montgomery Securities in San Francisco.
By far the majority of companies now offering long-distance telecommunications services lease their networks from AT&T; Communications and one or two other companies offering land lines or microwave and satellite transmissions. Such companies buy transmission capacity wholesale and resell it at a profit, much as AT&T; does with its own Wide Area Telephone Service (WATS).
They can undersell AT&T; today because the Federal Communications Commission now requires AT&T; to pay far more for its local connections than do its current competitors. This is because AT&T;’s long-distance calls are switched to the local network over equipment designed for the integrated Bell System, and it offers features only now becoming available to its competitors. When this so-called equal-access program is completed over the next few years, all carriers will pay the same connection charges.
As equal-access switching spreads, these “resellers” are finding their profit margins shrinking. “That’s where the big consolidation is going to take place,” said Brad Peery, who heads a telecommunications-oriented investment banking firm in Tiburon, Calif.
Drag on Earnings
US Telecom’s ambitious construction program is bankrolled by its parent, United Telecommunications, whose subsidiaries provide local telephone service in parts of 19 states and generated $2.5 billion in revenue last year. Not surprisingly, the long-distance service has been a substantial drag on United’s earnings--accounting for 8% of 1984 revenue but a $68.1-million operating loss. Nonetheless, United’s nine local phone companies, which provided 75% of the parent’s revenue, reported net income of $300.3 million last year, yielding net income of $216 million for the parent firm.
All the same, Skibo said, US Telecom did $222 million in business last year, and it expects that to increase to $300 million this year. Its loss for the six months ended June 30 narrowed slightly to $33.7 million from $35.4 million.
“They’ve got the bucks (for construction),” Peery said. “The question will be whether they can get the magnitude of revenues” needed to pay the bill.
Analyst Morris said he is skeptical of US Telecom’s ability to realize its project as scheduled and conceived, partly because its parent had tried and failed to attract an industry partner to help finance the venture before turning to its own public offering of stock and debentures last summer.
In addition, Morris said, there are some indications that a “fiber optic glut” is emerging in a number of communications centers as scores of companies install local and regional fiber optic links. If that glut materializes, he said, existing carriers will find it very inexpensive to increase their carrying capacity, enabling them to slash rates to keep out such competitors as US Telecom.
“You wonder if it isn’t too much, too late,” Morris concluded.
So far, the fiber optic portion of US Telecom’s network stretches about 6,000 miles; it reaches from Miami to New York City, west to Chicago and south through its home of Kansas City to Fort Worth. Nationwide coverage is filled in by leasing transmission facilities--”short-term leases,” Skibo emphasized.
Fiber optic links are scheduled to reach the West Coast by way of three routes by 1988: via Phoenix, Cheyenne, Wyo., and Butte, Mont. This will establish its “backbone” network to be fleshed out later with short connecting fiber optic links reaching into each of the nation’s 184 local service areas.
In California, US Telecom has negotiated a long-term swap with GTE Sprint to use the fiber optic link built by GTE Sprint, based in Burlingame, Calif., between Los Angeles and San Francisco, in exchange for use of US Telecom links elsewhere. Morris said US Telecom may find itself entering into more of these shared-facility arrangements to contain construction costs.
US Telecom’s share of the nation’s $45-billion long-distance market amounted to about 0.5% at the end of 1984, Skibo said. But in areas where local connections have been equalized for all long-distance carriers--reducing the numbers that their customers must dial to reach long-distance--US Telecom is signing up 3% of the commercial market and 1% of the residential, he said.
The company plans a major marketing campaign in January, Skibo added.
