Posted: 10/2003

Outlook Hinges on Segment, Competitive Position
By Joyce Lo and Taher Bouzayen

RBOC entry into the long-distance market
coupled with overall declining retail voice revenue will create a challenging
environment for longdistance players over the next several years, according to
new research from Boston-based Atlantic-ACM. While all long-distance players
will combat shrinkage in the retail voice segment, major interexchange players
especially those with residential customers are most vulnerable to Bell
bundles, which may or may not include wireless, DSL and entertainment services
but always incorporate long-distance services. Nonetheless, growth opportunities exist in the private line,
data and wholesale voice segments.

Sizing Trends. The overall size of
the long-distance industry was $81.4 billion in 2002 a 14 percent
contraction from the previous year. The net size of the industry will be the result of opposing
growth and shrinkage forces within industry subsegments.

Digging into the numbers, all segments of the retail
long-distance voice market will decline at a compound annual growth rate (CAGR)
of -5.6 percent from 2002 to 2008. This decline is the result of several factors
including significant migration to voice over IP (VoIP) services, bankruptcies
and restructurings among major telecommunications firms, macroeconomic
conditions and increased price compression caused by RBOC entry.

On the other hand, while RBOC entry will drive down rates at
the retail level, it will push the wholesale switched-voice market to grow by
3.8 percent annually. Within the wholesale market, AT&Ts share will
skyrocket from 20.2 percent in 2002 to nearly 33 percent in 2008, reflecting
large contracts it captured from MCI and other carriers facing financial

Image: Total Interexchange Services Share Analysis – 2001-2008

Concurrently, private line and data revenue will grow at a
CAGR of 5.7 percent. Private line and data is the only area expected to be
consistent in its growth curve over the next several years.

When all these factors are combined, growth in data and
private line services and fixed bottoms in bundles will offset losses from
the retail voice side. The net result is the industry will shrink at an overall
CAGR of 0.4 percent to $79.5 billion by 2008.

Packet Migration Continues. Long-distance
players continue to aggressively pursue IP opportunities. As discussed above,
VoIP is at the center of this migration as it helps customers cut costs while at
the same time simplifying carrier networks by running voice traffic over new or
existing IP and frame relay links. The predictability of this trend has been
underscored by equipment purchases. Large carriers, including Verizon
Communications Inc. and Qwest Communications International Inc., have inked
billion-dollar deals with equipment makers such as Nortel Networks to add
packet-switching capabilities to their networks. All significant carriers are
acting accordingly to add packet switching to their networks.

Convergence and Bundling. The
blurring of long-distance, local, data and wireless services will continue as
innovative bundling strategies are deployed to increase average revenue per user
and improve customer retention. It is widely recognized that the RBOCs are
wellpositioned to capture significant market share as they wrap up approval to
offer long distance in the states they have not yet cracked. The Big Three
are the most vulnerable to RBOC competition particularly on the residential
front since the RBOCs already have captured significant revenue since 1999.

Between 1999 and 2002, the collective market share of
residential minutes for AT&T Corp., MCI and Sprint Corp. declined by 22.4
percent. At the same time, the RBOCs leapfrogged to double-digit
penetration, generating 10.6 percent of residential interLATA minutes in 2002.
All told, the Big Threes market share, which was 67.5 percent in 2002,
will shrink to 53.7 percent by 2008.

Significant pricing pressure also has begun as a result of
bundles, primarily for residential and small business services. Aggressive price cuts in the highspeed Internet access market,
and discounted packages for local and longdistance services already have led MCI
to adjust its 2003 2005 growth forecast, predicting a 15 percent decline in
sales to $24.5 billion in 2003, flat revenue in 2004 and a 2 percent increase to
$25 billion in 2005.

Outlook. So the bad news is the
once-lucrative voice market is shrinking. The good news is the data market expects healthy growth in all
segments. From the low revenue, one-line residence to the multimillion,
multilocation businesses, data is becoming an increasingly essential part of
communications. In addition to broadband, customers are learning to use an
expanding array of services.

These trends should serve as a wake-up call to competitive
telecommunications players that have not yet developed plans, partnerships or
investments in their own product and service choices. While targeting growth
areas can provide some respite from declining revenue streams in core products,
single-service solutions especially in the longdistance arena are
insufficient for sustaining growth and providing hedges against lost revenue.
Providers should be aggressively pursuing multiservice solutions to inculcate
their customer bases against competitive bundles and as a means of offsetting
lost customers and declining revenue.

Joyce Lo is an analyst and Taher Bouzayen is a vice president
for Boston-based research firm Atlantic-ACM. Information for this report was
derived from the latest version of Atlantic-ACMs U.S. Long Distance Sizing
and Share Analysis. For information on this report, visit

AT&T Corp.
Qwest Communications International Inc.
Sprint Corp.
Verizon Communications Inc.

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