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The recent tragic oil spill in the Galapagos Islands made
headlines the world over. Of course, every news story written about the
ecological disaster made mention of the fact that the Galapagos are the
island chain that inspired British naturalist Charles Darwins theory of
natural selection. Recently, some scientists have said that the unique
wildlife of that area will likely rebound and that natures resilience
might allow a full recovery over time. In any event, this is another factor
(man-made or otherwise) that the creatures in the Galapagos will have to
adapt to.
That got me thinking about evolution in general, and evolution of the
service provider market in particular. (What can I say? This industry is
near and dear to my heart!) But, coupled with a press release I had received
at about that same time, it set the wheels spinning.
The release, from Technology Futures, Inc. (www.tfi.com),
touted a research report entitled The Impacts Of Competition And
Technology On Local Exchange Switching Assets. The report set out to
quantify the effects of high-speed data access and wireless on the value of
ILEC investment. As a reporter on the effects of IP telephony technology, I
was fascinated to learn more about the future of circuit-switched
technology, especially in light of the fact that I have been very focused on
the packet telephony threat (as opposed to wireless) to traditional service
providers. I thought it would be interesting to see what cumulative effect
these next-generation technologies would have on the incumbent providers.
It's abundantly clear that the ILECs have their work cut out for them. It
seems everyone wants to provide local telephone service to consumers and
businesses. And as new technologies emerge that enable competitive service
providers, the battle will only continue to heat up.
I requested a copy of this research report in hopes of giving you a
picture of how competition is affecting the PSTN switching environment. Many
of the report's conclusions are based on assumptions, backed up by
mathematical projections. This is in contrast to some industry reports that
deduce market sentiment about the future by averaging the opinions of the
media and vendors to a specific market segment. To its credit, the report
explains projections in a logical manner, based on a set of assumptions. So,
say you don't agree with every assumption in this report or see other
factors affecting the general thought process at hand; you can factor in
your own viewpoints to get a slightly different result.
The report starts with the fact that roughly half of North American ILEC
revenue comes from usage sensitive charges such as long-distance and access
charges from long-distance companies; the other half is made up of monthly
and other recurring fees. I found it interesting to learn that ILECs hold a
very high share of the low-speed data market characterized by modem calls.
They hold an approximate 50 percent market share in the high-speed data
market.
THE THREAT
Wireless voice is having an immediate impact on ILECs as more and more
revenue producing minutes-of-use are migrating to wireless networks. Other
threats to wireline voice are so-called "e-communications" such as
e-mail, e-commerce, and IP telephony.
Wireless
The growth in wireless will indeed have a dramatic effect on wired telephone
access as more households turn to wireless as their primary or only source
of voice service. Currently however, only two percent of households use
wireless as their primary source of voice service. And yet, a full 30
percent of the population has already adopted cellular/PCS service and that
number is growing quickly.
e-Communications
The report continues, stating that the e-communications market will have a
dramatic impact on ILEC voice revenues over time. Some examples include
ordering something on the Internet instead of calling an 800 number, sending
an e-mail instead of making a phone call, and visiting a Web site instead of
making a telephone inquiry. According to the study, over 10 years, online
users will transfer half of their base wireline voice minutes to
e-communications. There is another factor here worth exploring: While it is
logical to assume that e-communications will certainly displace voice
communications, it's my opinion that over time, brick and mortar purchases
will move to the Web and as a result, greater numbers of
customer/representative interactions will take place online instead of
face-to-face. If voice communications resulting from e-commerce remain
constant, then as e-commerce sales increase, the number of phone calls
generated by e-commerce will likely increase as well.
The study continues its hypothesis estimating that by 2005, 70 percent of
U.S. households will be online. The conclusion is that 30 percent of
wireline voice usage will be displaced by e-communications. By multiplying
70 percent by 30 percent, you receive the amount of total wireline usage the
study estimates will be eliminated by e-communications in four years, which
TFI rounds down to 20 percent. An interesting point to factor in here is
that as long-distance rates continue to decrease worldwide, we will likely
see an increase in calling minutes that are difficult to currently project.
I, for one, still think twice before I place an international call but if I
could call Europe or Asia for a few pennies a minute, I would surely
increase the time spent talking on the phone with my distant friends and
relatives.
As you can see, ILECs are facing an assault on many fronts. Taken
together, the projected amount of lost voice usage due to e-communications
and wireless competition will total a whopping 50 percent by 2005! In these
pages, we constantly discuss the use of enhanced services as a way for
service providers to attract new customers as well as retain old ones; well,
the incumbents are on an increasingly limited schedule by which they must
roll out these services or risk losing business.
At the recent COMNET show in Washington, D.C., one of my fellow editors
had the opportunity to meet with many equipment vendors who as recently as
two months ago were focusing exclusively on CLECs. It seems the recent CLEC
financing shakeup has made many of these hardware vendors rethink their
priorities and are now shifting to focus on the ILEC market. They are also
fairly quick to mention that "the CLEC thing wasn't really serious, we
always believed the ILECs would make up the majority of our customer
base." Funny, how companies constantly reposition themselves to adapt
to an ever-evolving telecom market.
CONCLUSION
So as the plethora of new services continues to evolve, the question
becomes, who will provide them? I always thought of the incumbents as being
too slow to adapt to changing technology. They had little need to work that
hard in light of the guaranteed revenue stream they enjoyed. Perhaps market
competition is already affecting the way ILECs operate as they realize the
need to focus on providing other services, whether they be wireless,
high-speed data, or other enhanced services.
In my home-base in Fairfield County, Connecticut, the primary source of
broadband Internet access is Cablevision's cable modem service. I wonder if
SNET realizes how much business they lost by not rolling out DSL sooner. I
know many people who have signed up for broadband service, and yet I don't
know a single person in my area that uses DSL -- everyone seems to have a
cable modem. So as time marches on and technology flies ever faster, it will
be interesting to see how the ILECs evolve to maintain their revenue streams
and grow into new areas. I am looking forward to the day when SNET starts to
offer lots of new and exciting enhanced services so we can test-drive them
in these pages. If you have an opinion, I'd love to hear it. Please address
it to rtehrani@tmcnet.com.
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