Industry Profiles: Communications Services

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Industry Profiles: Communications Services

Overview

Mid-1990's deregulation in the United States brought about tumultuous change in the communications industry as companies began to diversify and merge, and traditional functional barriers began to erode. Consolidation and diversification continued in the early 2000s. Historically, the main divisions of the communications industry included local telephone service, long distance telephone service, wireless telephone service, cable television, radio broadcasting, and television broadcasting. While broadcast television and radio have remained for the most part in separate hands from the other services, providers across all other service categories have started to branch into one or more new fields since the mid-1990s.

By the early 2000s, communications services that centered on data transmission were beginning to take precedence over voice services. Additionally, the long distance segment of the industry, led by AT&T Corporation, WorldCom, Inc., and Sprint Corporation, was declining. The volume of long-distance calls was decreasing as other communication mediums like chat rooms and e-mail were being used instead of voice communications. Additionally, cut-throat competition resulted in drastically reduced earnings for industry players. Consequently, many industry leaders were shifting their focus away from long distance and on to other, more profitable sectors.

Part of the competition faced by long distance carriers comes from wireless phone providers, which offer wireless long distance calling as part of their service packages. Unlike long distance, the wireless phone segment of the industry was experiencing explosive growth in the early 2000s. Revenues, which amounted to almost $24 billion in 1996, more than doubled by 2000, reaching $53 billion. Prior to 1995, annual growth rates of 40 to 50 percent were realized when the market was not as mature. From 1996 through 2000, this rate leveled off, averaging about 27 percent. In terms of market share, Verizon, Cingular, AT&T, and Sprint PCS dominated the industry, accounting for almost 77 percent of the market in 2001.

Not surprisingly, AT&T, the United States' historical communications monopoly, has been one of the biggest forces reshaping the industry. Since the dismantling of its monopoly in 1984, AT&T had remained the dominant long distance carrier. But in the wake of technological advances and deregulation in the 1990s, it began to forge a major presence in the cellular phone and wireless communications market as well as local phone service following the passage of the Telecommunications Act of 1996, the cornerstone of telecom deregulation. AT&T launched a consumer Internet service in 1996, and in 1998 acquired Tele-Communications, Inc. (TCI), then the largest U.S. cable service. Cable presented an ideal means for AT&T to disseminate a comprehensive communications package to subscribers: local and long distance phone service, cable television, and Internet access all simultaneously from the same line.

Other players in the industry didn't sit by idly as AT&T scrambled to become a universal service. Although they continued to provide most of the United States with local phone service, the regional Bells (RBOC) began to offer increasingly diverse services, including wireless communications and Internet access. Additionally, some RBOCs were engaging AT&T and other industry giants in the long distance market. More noticeably, local phone companies began to consolidate and the industry was rocked by a string of mergers. By 2001, RBOC mergers had resulted in four remaining players: BellSouth Corporation; Verizon Communications, Inc., which resulted from the merger of Bell Atlantic Corporation and GTE Corporation; SBC Communications, Inc., which included Southwestern Bell, Pacific Telesis, Cellular One, Southern New England Telecommunications, and Ameritech; and Qwest Communications International, Inc., which acquired U.S. West.


History of the Industry

Telecommunications The first attempts at an electrical telegraphing system occurred in the mid-eighteenth century in Europe. American Samuel F.B. Morse introduced the first commercially successful telegraph in 1844. "What hath God wrought?" were the first words transmitted on the 37-mile pole line between Baltimore, Maryland, and Washington, D.C.

Alexander Graham Bell is credited with inventing the telephone in 1876, although fellow American Elisha Gray's work closely paralleled Bell's efforts up to that time. The technology was immediately put to use in sophisticated telephone systems by the National Bell Telephone Company (originally the Bell Telephone Company). The public embraced Bell's phone service immediately. By March of 1880, there were over 30,000 U.S. telephone subscribers and 138 telephone exchanges. By 1887, just 10 years after the commercial introduction of the telephone, there were over 150,000 subscribers.

As telephone services proliferated, a demand for long distance services arose. Bell established the American Telephone and Telegraph Company (AT&T) in 1885 as its long distance subsidiary. AT&T became the parent company of the Bell system in 1899. Subscriber-ship ballooned to 3.12 million by 1907, boosted by an overwhelming demand for phone service from isolated rural Americans. Moreover, new management during the 1910s was able to drastically improve the company's performance. AT&T adopted a strategy of expansion, centralized management, and increased research and development.

AT&T began buying up independent operators in the 1910s and 1920s. In 1915, AT&T completed the first telephone line that connected the east and west coasts of the United States. By 1921, AT&T served 64 percent of the 21 million phones installed in the U.S. and owned many of the networks used by its independent competitors. By 1929, the company was generating annual revenues of more than $1 billion dollars. Despite setbacks during the Great Depression, AT&T service continued to expand at a rate of more than 1 million new customers every year during the late 1930s and 1940s. In 1955, AT&T laid the first transatlantic cable, linking its customers to Europe.

AT&T grew quickly during the 1950s and 1960s, meeting surging demand with an influx of new products, services, and technological breakthroughs. By 1966, the company had over 1 million employees and served about 85 percent of the households in the areas in which it operated. Despite pressure by antitrust regulators to cede its market dominance, AT&T continued to grow during the 1960s and 1970s, becoming the largest company in the world. By the early 1970s, it was serving roughly 80 percent of the phone users in the United States and providing 90 percent of all long distance service. However, antitrust suits filed separately by MCI and the Justice Department in 1974 signaled an end to the company's unfettered reign.

In the 1970s, antitrust pressures began to change regulators' attitudes toward AT&T. Many people felt that AT&T and its Bell companies did not have enough incentive to install new technology and improve efficiency. Furthermore, potential industry competitors were pressing for permission to compete with AT&T using proprietary technologies. MCI Communications Corporation, for example, wanted to compete using its microwave long distance technology. Although MCI received permission to offer limited service during the early 1970s, its 1974 suit was the regulatory turning point.

In 1982, after a lengthy court battle, AT&T agreed to divest its operations. The monopoly was broken in 1984, when AT&T was divided into eight "pieces." Under the Modification of Final Judgement (MFJ), AT&T became a regulated long distance carrier, and its 22 Bell Operating Companies (BOCs) were organized into seven regional holding companies: Ameritech, Bell Atlantic, Bell South, NYNEX, Pacific Telesis, Southwestern Bell, and US West. Among other results of industry deregulation, competitors were allowed to enter the long distance service industry.

Television and Radio Radio was the first broadcasting medium. The first U.S. radio station was KDKA in Pittsburgh, which began operating in 1919. The concept of using radio waves to broadcast information and entertainment spread quickly, and by 1922, 570 licensed stations operated in America. With this emerged the idea of networking, in which stations form affiliations to broadcast programs simultaneously. In 1926, the National Broadcasting Company (NBC) was established with two networks of 24 radio stations under its parent company RCA. By 1928, Columbia Broadcasting Systems (CBS) had established a network of 16 stations.

The next decades continued with a slow and steady increase in the number of radio stations operating, and by 1945, 95 percent of all homes in America had radio. The end of the 1940s saw an emerging interest in television, however, which began to erode radio's audience.

Television evolved almost directly out of the radio industry, and many of the same companies that had stakes in the radio business were early players in television. Nonetheless, television's presence had a negative impact on the radio industry's expectations for growth and the formats of radio programs. Across America, many radio stations owners sold their stations. Others kept their stations but sold their large studios intended for staged performances. Radio stations changed their format during the 1950s from presenting story and news programs, which were more graphically presented on television, to mostly music. The 1950s also saw the development of smaller and more portable radios that helped sustain audiences.

The 1970s and 1980s saw a change from AM to FM stations, as FM stations started to offer programming similar to AM and had better sound quality. By the mid-1980s, FM radio had taken over much of AM's audiences and held 70 percent of the nation's radio listeners.

Also beginning in the 1970s and flourishing in the 1980s were cable television services, which featured alternative programming to the broadcast networks and, in some places, clearer picture transmission. By the mid-1980s, cable began to take a measurable share of the big three broadcast networks' business. During the 1978/79 season, ABC, CBS, and NBC had a 91 percent share of the prime time television audience, but by 1986/87, that figure had dropped to 75 percent, and it fell further to 61 percent in 1993/1994.


Significant Events Affecting the Industry

The 1996 Telecommunications Act heralded the most sweeping changes to affect the industry since the 1984 divestiture of AT&T. The legislation impacted virtually every corner of the communications industry, including local and long distance phone service, the Internet, and broadcasting. The major provisions of the legislation were to promote healthy competition in the broader industry in order to reduce prices and improve the quality of services. In effect, it ended the formal separation between local phone services, long distance services, and cable system operators, although companies still needed to meet certain criteria in order to participate in all markets. Restrictions on radio station ownership were also eased, and in a separate measure around the same time, the FCC began to allow television networks to engage in program syndication, a business they weren't allowed to enter previously. The wireless industry was relatively unregulated from the start, allowing local and long distance firms to also offer cellular, paging, and personal communications services (PCS), and thus deregulation had minimal impact on that segment.

By the early 2000s, the legislation's effects were still being felt as industry consolidation and diversification continued. While the act made it possible for firms within the industry to branch out and generate revenue in new segments, it also has resulted in smaller market shares and lower profit margins across the board.


Key Competitors

AT&T Corporation AT&T Corporation, originally the American Telephone & Telegraph Company, was the heir to the Bell monopoly founded by Alexander Graham Bell. Historically, AT&T participated in all aspects of the telecommunications industry, including local and long distance service, equipment manufacturing, network management, and phone directory publishing. After the spinoff of the Baby Bells in 1984, AT&T remained the country's largest long distance carrier, a title it never relinquished as of the early 2000s despite encroachments on its market share by competitors like Sprint and WorldCom.

Following a brief stint at computer manufacturing in the early 1990s with its acquisition of NCR, AT&T refocused in the mid-1990s on telecommunications services business. Under the aegis of AT&T Wireless, it acquired McCaw Cellular Communications, the largest U.S. cellular service, in 1994. This purchase gave AT&T a strong position in the rapidly growing wireless communications market. In 1996, it launched its WorldNet Internet access service and spun off NCR and its equipment arm, Lucent Technologies. Under the leadership of a new CEO, AT&T stunned the industry when it announced in 1998 its plans to bring Tele-Communications, Inc. (TCI) into the fold for $48 billion. In October 2000, the company announced a major restructuring plan in which AT&T would be split into four separate, publicly-held companies operating under the AT&T brand name. The initiative was expected to be complete in 2002. By July of 2001, the firm had spun off AT&T Wireless. Early in 2002, plans were in place to sell AT&T Broadband to Comcast as part of the restructuring. In 2001, AT&T generated $52.6 billion in revenues, the largest percentage of which ($28.0 billion) came from its AT&T Business unit, followed by AT&T Consumer ($15.1 billion), and AT&T Broadband ($9.8 billion).


SBC Communications, Inc. SBC Communications, Inc. is a direct result of the mid-1990s deregulation. It was formed when Southwestern Bell, one of the seven RBOCs formed at AT&T's break-up, went on a buying spree to acquire a diverse set of communications businesses. Its highest-profile acquisitions included Pacific Telesis and Ameritech, two fellow Baby Bells serving the West Coast and the Midwest respectively. In addition to being a local service giant, SBC also has holdings through its various subsidiaries in cable television, Internet access, and wireless services. As the nation's number-one provider, SBC leads the way in the area of high-speed (DSL) Internet access. The company's Cingular Wireless subsidiary, a joint venture with BellSouth in which SBC holds a 60 percent interest, is the United States' second-largest cellular phone service after Verizon Wireless. In 2001, the company had revenues of $45.9 billion.

Verizon Communications, Inc. Verizon Communications, Inc. is the result of Bell Atlantic's 2000 merger with GTE Corporation. Prior to that purchase, Bell Atlantic was the active suitor to several of the industry's largest companies. The company explored a merger with TCI as early as 1994, but it never happened. Bell Atlantic merged with fellow Baby Bell NYNEX in 1997. With 2001 revenues of $67 billion, Verizon is the nation's top local phone service provider and the leading global provider of both printed and online telephone directory data. Additionally, the company's Verizon Wireless subsidiary is the top U.S. wireless phone company with more than 29 million subscribers and coverage that reaches 90 percent of the U.S. population.


Industry Projections

Some of the fastest growth will be felt in newer technology segments where data transmission is the focal point. While this applies to fixed wire-line broadband services, some of the strongest potential exists within the wireless segment, where third-generation (3G) wireless will allow for the transmission of data and video to and from a wide range of wireless devices including phones and personal digital assistants. According to Standard & Poor's, most of the U.S. wireless providers were expected to have 3G strategies in place by the end of 2002. In terms of future revenue growth, Standard & Poor's further expects that wireless voice services will play second fiddle to wireless data transmission by 2005. Beyond these devices, satellite TV service also is a strong growth area, which extends beyond programming and involves high-speed wireless Internet services. Within this segment of the communications services industry, consolidation continues to occur, both domestically and abroad.


Global Presence

All of the leading U.S. telecoms and many of the top broadcasting companies have interests in foreign communications ventures. These often take the form of holding stakes in foreign-based services. As an example of the global reach U.S. telecommunication firms have, Verizon's service offerings extend across the globe to approximately 45 different countries. Additionally, the company operates the longest undersea fiber optic cable, known as FLAG. These kinds of activities have been encouraged by a worldwide liberalization of trade in services under new multilateral trade agreements of the 1990s. Telecommunications markets throughout the world were slated to become increasingly open to competition in the first years of the twenty-first century, and Asia and Latin America held the greatest potential for expansion-minded U.S. firms.

In the early 2000s, the wireless segment continued to have a large impact internationally, especially in Europe. In some nations (including Japan and Finland), wireless adoption rates exceeded those for traditional phone service. Because their attention had been devoted mainly to the United States, U.S. wireless providers were slow to branch out abroad. Worldwide, the leading wireless providers include Japan's NTT DoCoMo and UK-based Vodafone, plc.


Employment in the Industry

Workforces in the communications industry were hit hard in the 1980s and early 1990s by companies' implementation of technology that supplanted human jobs and by restructuring initiatives that attempted to make companies more profitable. Nonetheless, the industry's fast sales growth during the 1990s helped turn around the employment situation, and the number of workers actually rose again. In 2000, as reported by the U.S. Bureau of Labor Statistics, the entire telephone communications industry employed 1.13 million workers, a number that was expected to grow by more than 12 percent by 2010. The radio and television broadcasting industry employed 255,300, and cable and other pay television operations employed 215,800 workers. Although the radio and television broadcasting segment was expected to grow by almost 10 percent by 2010, the most explosive growth was forecast in cable and pay TV, which was expected to grow almost 51 percent.


Sources for Further Study

"at&t to create family of four new companies; company to offer to exchange at&t common stock for at&t wireless stock." at&t corporation, 25 october 2000. available at http://www.att.com.

"bell atlantic reported set to acquire gte for $52.8 billion." new york times, 28 july 1998.

"occupational employment statistics." bureau of labor statistics, u.s. department of labor, 21 april 2002. available at http://www.bls.gov.

standard & poor's industry surveys. new york: standard & poor's, 2001.

"telecommunications services." u.s. industry and trade outlook. new york: mcgraw-hill and u.s. department of commerce, 1998.

thrasher, b. holt, and robert mcnamara. "how merger mania has redefined the communications landscape." telecommunications, october 1996.

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Industry Profiles: Communications Services