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Switched Voice Market Gets a Makeover

The U.S. long-distance industrys switched voice segment is undergoing a significant transformation. New or preferred technologies, regulatory developments and competitive pressures are conspiring factors collectively driving compounded shrinkage in excess of nine percent, nearly halving switched voice revenue by 2010 (see figure below). Beyond top-line shrinkage, however, is a reshuffling of market share within the voice segment as a result of RBOC longdistance entry and pending megamergers.

The single largest factor in switched voice revenue shrinkage is the migration of retail voice revenue to VoIP. As the quality of VoIP services has improved, so has its viability as a substitute to traditional, switched voice revenue. Further, the emergence of VoIP as a potential alternative to traditional telephony services has been embraced by regulators while, at the same time, rules regarding UNE-P have been relaxed. These technological and regulatory factors are effectively driving competitors in certain segments the consumer segment in particular toward VoIP.

It also is important to recognize that wireless substitution, which is playing a factor in shrinkage at all levels of telephony, disproportionately affects the long-distance segment due to built-in long-distance pricing as well as the popularity of free in-network calling plans.

The complete entry of the RBOCs into the long-distance space also is an important factor in industry shrinkage as RBOC offerings have contributed considerably to price pressure. Here again, there is a significantly disproportionate impact in the consumer space as the RBOCs seek to provide super-bundles of wireline, broadband, wireless and, looking forward, entertainment-oriented video programming to residential customers. The Bells shift from playing defense to offense is forcing cable firms to step up their telephony efforts, which will create sustained price pressure and VoIP migration in the consumer space.


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At the business level, significant switched voice shrinkage is occurring as a result of both competitive pressures and computertelephony convergence. Simply put, corporations will continue to roll services onto data networks as a means of cost control. These expense-oriented migrations will drive greater overall shrinkage in the business segment than the consumer segment as retail business switched voice revenue declines at nearly 12 percent per year through 2010.

Wholesale switched voice revenue will decline at considerably slower rates than retail revenue, with greater shrinkage weighted toward international revenue.

All of these factors, as well as consolidation, are driving shifts in market share. The pending mergers of SBC with AT&T and Verizon with MCI, will allow the RBOCs as a group to leap-frog forward in market share, collectively controlling more than half of switched voice longdistance industry revenue.

This shifting of share offers issues as well as opportunities for planning of investment strategies for each companys future. Where there is shrinkage in one market, there are openings in others, with understanding of these patterns being key to identifying an effective strategic direction.

Dr. Judy Reed Smith is CEO of Boston-based ATLANTIC-ACM, a research consultancy serving the telecommunications and information industries. She can be reached at jrs@atlantic-acm.com.

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ATLANTIC-ACM www.atlantic-acm.com

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