It’s Spring for Telecom, and Change Is in the Air
Predictions are folly. Anybody surveying the changing telecommunications field today should keep in mind that in the 1920s it was solemnly predicted that railroads and barge canal companies would dominate the coming air transport industry. And that radio had no future because people were mad about phonographs.
Now there are predictions that seven or eight large telephone companies or telephone-cable combinations will emerge to dominate the communications industry. Or that there will be chaotic competition, with the poor losing their phone service.
Those dire predictions are made as legislation to allow long-distance and local phone companies to compete in each others’ business moves toward passage in Washington and state regulators--as in California last week--issue independent rulings to deregulate local phone service.
But the odds are slim that any dire prediction will come true. Even the legislation is no sure thing--powerful adversaries have slowed its progress--and the pace of technology changes the business almost daily.
Free telephone calls over the Internet--connecting ordinary telephones worldwide--are the latest enthusiasm among the technology knowledgeable. Nearer to everyday reality, cellular phone calls are coming down to the cost of standard wired calls in some locales. And cable television companies plan to link their systems to offer telephone service completely independent of phone company equipment.
“We’ll look back on 1995 as the year future development of the phone industry began,” says analyst Berge Ayvazian of the Yankee Group research firm in Boston.
That sounds exciting and important--for consumers; for the 90-year-old universal service principle, which holds that telephones should be available to all Americans, and for investors. AT&T; and the regional Bell operating companies--Ameritech, Bell Atlantic, BellSouth, Nynex, Pacific Telesis, Southwestern Bell and US West--are among the most widely held stocks in the world. Everybody has a stake in their future.
What’s likely to happen?
Great wealth will be created, yet most change will be slower than predicted, because people don’t move quickly. Look at long distance: Despite years of loud competition, more than half the customers have never switched long-distance carriers. AT&T; retains 60% of the market, MCI has 15%, Sprint 10% and other small providers hold the rest.
And long distance remains a highly profitable business, giving AT&T; more than half its nearly $5 billion in profit. That’s why regional Bells want to get into long distance--as soon as the government agrees on terms by which competition can enter local service.
Competitors will be many. Sprint is linking with three cable companies to get into local service; Time Warner is already partnered with US West, a regional Bell with ambitions to go national. “Cable companies could have an advantage, because they already have fiber optic lines and can offer more services,” says Jonathan Kramer, head of Communications Support Corp., a Tarzana consulting firm.
Phone companies have a lot of cash and will install fiber lines or acquire cable companies. The upshot is likely to be erosion of Bell company profits, just as occurred to AT&T; or Ma Bell after it was split off from the Baby Bells in 1984.
But the point to keep in mind is that “the impulse behind this competition is fear of attack, not vision of conquest,” notes Peter Bernstein, president of Infonautics Consulting, a Ramsey, N.J. firm. Not a lot of wealth will be created by a defensive battle for territory.
The real profit, as always, will be created by innovation, as happened in the first decade of telephone deregulation.
Craig McCaw, who had a cable TV company with $5 million revenues in the early 1980s, heard about the new cellular phones. So he bought some licenses, built a company and sold it two years ago to AT&T; for $12.6 billion.
Last month, McCaw, now 45 years old, turned around and invested $1.1 billion in Nextel Inc., a maker of mobile systems that offer phone, paging and data transmission services. So once again he is betting on the future of wireless, portable communications.
And he’s not alone: The federal government recently auctioned $7 billion in licenses for wireless systems. Costs for such services are coming down, too. Wireless phone calls in Kauai, Hawaii, are now cheaper than the wired variety.
Providers of telecommunications equipment will do well, says William Davidson, a professor of information technology at USC and head of Mesa Research in Redondo Beach. He mentions ADC Telecomm of Minneapolis, Qualcomm of San Diego and Pairgain Technologies of Cerritos.
Scientific Atlanta, which supplies equipment for networks, should benefit. Global networks are envisioned by McCaw, Bill Gates of Microsoft, Motorola Inc. and others.
There will be many networks--an unpredictable number. The latest breakthrough is that Cai-Qing Yang, a professor of computer science at North Texas University, has created software connecting ordinary telephones with the Internet. Pick up your phone, and you’ll call around the world for much less than you can today.
The public benefit of all this? “We’ll have phone service similar to what we have now--but with a lot of change as entrepreneurs step in to offer new services, such as phone numbers that follow us around,” says Paul Saffo, technology analyst at the Institute for the Future in Menlo Park.
Higher capacity phone lines will be needed to receive masses of data and pictures. That’s an expensive prospect today, but costs will come down as traffic increases.
Social issues will have to be addressed. To ensure universal phone service, rural phone lines today are subsidized by added tariffs on more populous areas. We may soon see special companies set up for such service into which the many new phone competitors can contribute. That’s already happening in Rochester, N.Y.
Ultimately, if we’re truly interested in universal service--whether to educate the population or to keep all Americans tied into the national conversation--an incentive program similar to the government’s recent wireless auction could be used to extend high capacity telecommunication lines as a universal service. That would be a variant on House Speaker Newt Gingrich’s suggestion of a laptop computer for every American.
Possibilities will multiply, because the telecommunications business--defined for 90 years by monopolies set up to maintain expensive switching systems and miles of telephone lines--is now defined by people going into business with a PC and a modem.
A business grounded in heavy assets is being transformed to a business as unpredictable as the wind.
