You Thought Ma Bell’s Demise Was Big?
The telecommunications business, MCI founder Bill McGowan used to say, is “just like any other business, only with a lot more zeros.”
That’s still true, and there are even more zeros now. But these days people in the telecommunications field seem to wake up every day to face a new world. There are new regulations and legislation, court decisions that overturn legislation, big and small mergers and acquisitions, and, of course, new technologies that threaten to turn everything upside-down.
Even people in the industry, which is notorious for its jargon and acronym-packed vernacular, have a hard time following what’s happening from day to day. So it’s nearly impossible for the public to grasp what’s going on.
But there are some big trends emerging that point to a profound shift in telecommunications in the United States and elsewhere--and for reasons not yet widely covered in the media. We may be on the leading edge of a paradigm change as significant as the breakup of AT&T; in the early 1980s.
So far, public attention to this industry has tended to focus on the new environment of deregulation introduced by the Telecommunications Act of 1996 and on the subsequent wave of mergers, such as the marriage of Pacific Telesis and SBC Communications, or that of Bell Atlantic and Nynex, all formerly regional Bell corporations.
The Telecom Act was supposed to foster competition in services, but the mergers and the legalistic stonewalling of the Bell companies have alarmed critics who think that competition in local markets is being forestalled. This has produced countless droning editorials about the need to speed up the process of competition in telephone service.
But meanwhile, in the background and beneath the radar of most editorial writers, new companies and new technologies are emerging that are likely to be the most important players in any future arrangement of telecommunications. In fact, the larger and more well-known companies, particularly AT&T;, are beginning to look somewhat desperate in the face of competition from new names that most of the general public has never heard of.
The paradigmatic example is WorldCom, a company based in an unlikely location for the headquarters of a telecom empire: Jackson, Miss. WorldCom was pretty much unknown to most people outside the industry until it stunned everyone by offering $29.4 billion in stock to buy MCI, which everyone has heard of. (GTE promptly matched that offer, but with cash.)
WorldCom was in the news briefly before the MCI bid when it bought out CompuServe, handed that service’s customers to America Online and then kept CompuServe’s networking facilities. WorldCom is now the largest Internet service provider in the world.
WorldCom President John Sidgmore was a featured speaker at the Technology Summit, a Wall Street Journal-sponsored conference I attended recently in New York.
“Where is telecom headed?” Sidgmore was asked. His reply: “Internet, Internet, Internet.”
Sidgmore pointed out that Internet traffic is growing at about 1,000% a year, while voice traffic is growing at only 10% a year, a figure that hasn’t changed in decades.
Sidgmore then surprised the audience with this prediction: “In 10 years,” he said, “when you look at what’s being carried by telecom lines, you won’t even know voice is in there.”
Consider the fact that the U.S. market for voice-based services is $125 billion a year now, and his prediction takes your breath away. Sidgmore believes that the telecom industry will be a trillion-dollar industry early in the next century worldwide and that all the signs point to the Internet as the key to its expansion.
Sidgmore noted, for example, that more than half of all international calls are faxes, and once Internet-based faxing becomes widespread, which should happen soon, that will punch a huge hole in the market of conventional telecom carriers.
So will Internet telephony. The capability of the Internet to carry voice phone calls is limited now but likely to improve dramatically in the near term. New Internet telephony companies are springing up all over, mostly to capture the new business model of using corporate intranets to replace voicemail systems and PBX switchboards.
Reed Hundt, who recently stepped down as chairman of the Federal Communications Commission, believes that “there will be a war between the circuit-switch business and the packet-switch businesses,” as he told Red Herring magazine recently. Circuit switches are what telephone companies use; packet switching, a different technology, is what Internet companies use.
The outcome of this war “will make or break numerous fortune seekers,” Hundt said.
The older telecom companies are saddled with a large number of liabilities: dated technology; corporate cultures far slower than the entrepreneurial cultures of the upstarts; and an investor base that depends on safe, reliable growth instead of the hell-bent riskiness of the newer ventures. The older giants have tended to focus their strategies for protecting market share on the techniques they know best, such as fighting in the courts and lobbying legislators.
But the new companies, such as WorldCom, Qwest, Frontier, Brooks Fiber (recently purchased by WorldCom) and perhaps a reoriented MCI, will be big challengers--and not chiefly because of changes in regulation but because of immense changes in technology. If the Internet paradigm wins out, if packet-switched networks begin to succeed the circuit-switched infrastructure of the telephone network, then we may see several very familiar names become extinct. And several new names will be part of our household conversations.
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Gary Chapman can be reached at gary.chapman@mail.utexas.edu
