Posted: 09/1998
Behemoth Integrated Service Providers to Dominate U.S. Long Distance Market
By Chris Cho
The U.S. long distance services market is in for a dramatic transformation in 1998 and 1999. Industry consolidation and the entry of the Bell companies will create a completely new environment in which behemoth integrated service providers will dominate the local, long distance, data, wireless and cable markets.
Image: Interexchange Service Revenues (1984-1997)
Drastic shifts in the playing field will be the result of several factors. First, the number of competitors continues to grow even as shrinking reseller margins raise barriers to entry. Second, both old and new competitors are rapidly increasing revenues and gaining market share by consolidating. Third, carriers are shifting their focus away from plain vanilla long distance toward a buffet of integrated products and services. Traditional carriers have employed an "If you can't beat them, feed them" strategy, which leverages their networks by selling wholesale capacity as well as bundled voice and data services to resellers.
The long distance market is getting crowded as more than 1,000 competitors vie for customers. Since the Telecommunications Act of 1996, categories distinguishing service providers have been virtually eliminated as incumbent local exchange carriers (ILECs), competitive LECs (CLECs), Internet service providers (ISPs), wireless providers, cable television companies and electric utility companies all offer long distance services.
The success of the prepaid calling card and dial-around industries indicates that customers are using multiple service providers to meet their different communications needs, and many of these niche providers continue to flood the market. The pending entry of the regional Bell operating companies (RBOCs) and well-capitalized international PTTs (government-owned telecom companies) also will clutter the market with even more sizeable competitors.
Consolidation also is reshaping the competitive landscape in the United States and creating large multiservice providers. Within Tier I, AT&T Corp. plans to add local and cable service to its product portfolio by acquiring Teleport Communica-tions Group Inc. (TCG) and Tele-Communications Inc., respectively. WorldCom Inc. is rapidly building a voice and data powerhouse with its acquisitions of Brooks Fiber Properties Inc., CompuServe Interactive Services Inc. and MCI Communications Corp. Other companies have launched themselves into Tier I status through large acquisitions. The combinations of Qwest Communications Interna-tional Inc. and LCI International Inc., Teleglobe Inc. and Excel Communications Inc. as well as STAR Telecommunications Inc. and PT-1 Communications Inc. have enabled lesser-known carriers to compete head-to-head against AT&T, WorldCom/MCI and Sprint Communications Co.
Through consolidation, partnerships, alliances and joint ventures, telecommunications companies have broadened their product portfolios to include an entire array of services such as local, long distance, data, Internet, wireless, cable and utilities. The convergence of these markets has enabled some carriers to provide a "one-stop shop" to its customers for all their communications needs.
Image: Retail Switched Services Revenue Share Analysis (1996-1997)
Market Growth
New research by ATLANTIC-ACM shows that the U.S. long distance market has thrived since divestiture and grown at an average annual rate of 7 percent from 1984 to 1997. In 1997, total interexchange service revenues reached $92.1 billion (see graph).
Although the four largest carriers--AT&T, MCI, Sprint and WorldCom--account for 78 percent of the total long distance industry revenues, their market share has been falling due to intense competition from smaller carriers. The traditional Big Three increased their total long distance revenues but, as a group, lost market share in 1997. WorldCom managed to increase its market share, but combined with MCI's losses, showed little growth.
A combination of consumer churn, competitive pricing and access charge reform led to a drop in retail revenues for the Big Three carriers in 1997 for the first time ever. The most noticeable drop was in residential revenues, where market share fell from 88 percent in 1996 to 82 percent in 1997. As smaller companies aggressively target business and residential customers with discount flat-rate 1+ plans, dial-around products, prepaid cards and low-cost Internet telephony, the Big Three retail market share is expected to erode from 74 percent in 1997 to less than 61 percent by 2000.
As larger carriers defend their position in the retail markets, many have begun to compensate their lost market share by concentrating their efforts on the lucrative wholesale and data markets. The wholesale switched services market in the United States has grown at an average annual rate of 31 percent over the past three years and reached $9.8 billion in 1997. Wholesale revenue growth can be attributed to the growth of resellers and their increasing need for capacity.
The private line and data market also has experienced tremendous growth. In 1997, private line and data revenues grew 34 percent and exceeded $13.5 billion. Increasing demand for Internet, asynchronous transfer mode (ATM) and frame relay services will drive double-digit growth in this market over the next few years.
Chris Cho is a senior analyst with the Boston-based strategy consulting firm ATLANTIC-ACM. He can be reached by phone at +1 617 720 3700 or by e-mail: atlantic@atlantic-acm.com
