Competition in the Telecommunications Industry

The telecommunications industry includes companies providing point-to-point communications services. The industry includes telephone services, television and radio broadcasting, and paging and beeper services. The industry also includes those companies that lease the use of telephone lines, satellite

The largest phone companies in the United States, AT&T and Verizon, both reported better-than-expected earnings for the final quarter of 2005. The improved earnings were driven, at least in part, by continued demand for wireless and broadband services. The companies have been discounting their highspeed data and wireless plans, leading to record numbers of new subscribers at their mobile phone subsidiaries.

Traditional phone service was not the highest seller at either company. Nearly 60 percent of Verizon's revenue now comes from the wireless, broadband, data, and long-distance services. AT&T signed up 425.000 new broadband customers in 2005, about the same number as in the previous year, but its revenue from Internet services grew 21 percent as customers upgraded to higher-speed service offerings.

The improved earnings reported for the phone services sector are important because investors have been pessimistic about the industry. Wall Street has been concerned about the loss of phone customers to Internet phone companies like Vonage and competition from the cable sector. Despite the happy returns for AT&T and Verizon, however, the competition from other parts of the telecommunications sector is a very real issue.

Cross-market Competition

Competition in the telecommunications sector is fierce. Players are entering the communications marketplace from all sides. Internet firms, like Google, are working to offer new voice and video services. Traditional wireline phone companies are losing customers to broadband and wireless providers. In response, wireline companies are investing billions in to increase the market coverage, capacity, and speed of their fiber optic networks. Verizon Communications is working to connect its fiber lines directly to its customer's homes, while BellSouth and AT&T more modestly plan to connect their fiber networks to the local node or curb.

Telecommunications companies are investing heavily in new services. Phone companies are working to provide integrated voice, video, and data transmissions. Regional Bell Operating Companies are making agreements with content providers to offer on-demand television services over Internet Protocol. Phone service providers seeking to enter this arena must compete with cable companies, who already have an extensive network of customer connections offering both television and Internet services. Meanwhile, Internet service providers are also entering the phone service market, through VoIP (Voice over Internet Protocol) systems and through reseller agreements with telephone carriers such as Sprint Nextel.

Another market under exploration by phone companies is the broadcast of audio and video to handheld wireless devices. Downloads available for broadcast include news, sports information, music, and even television shows. This market is attractive because the cable industry does not already have a competing delivery system in place. According to graphics chip manufacturer ATI Technologies, which develops circuits for cellular phones, demand for 3-D graphics systems for games is falling while demand for mobile television systems is on the rise. And the demand for mobile TV is expected to reach beyond the cell phone to laptops, PDAs, and portable media players.

Cable and satellite television service providers have seen a decline in share prices as investors take note of increased competition from other parts of the telecommunications sector. One area where cable providers remain strong is the offering of bundled services - integrated voice, video, and data offerings. Bundled services offer the consumer a discount over buying separate systems, so buyers tend to be more loyal and less likely to switch providers. Competition my increase, however, as phone companies upgrade their networks to capture a share of the bundled service market.

Mergers and Acquisitions

Major telecom players are growing through expansion and acquisitions, such as Verizon's recent purchase of MCI and the recent merger of Sprint and Nextel. The newly formed Sprint Nextel has been buying up many of the former Sprint affiliate companies as well. ALLTEL has been investing in wireless companies, while both Sprint Nextel and ALLTEL have been divesting themselves of wireline operations.

In November 2005, SBC Communications acquired AT&T and assumed its name and stock ticker symbol. The acquisition helped transform SBC from a phone services carrier into global communications giant. The new AT&T will offer video, data, wireless, and wireline phone service over an Internet-based network. Through an alliance with Yahoo!, the company is developing the capacity to provide on-demand content and targeted advertising.

Outlook

Its no longer a simple wireline telephone world. As new technologies open up new methods of communication, competition in the industry will continue to remain fierce. Just as significantly, competition will come from all sectors of the industry. The days of cable vs. cable and phone vs. phone are long past - now everyone must be ready to face everyone else. Competition, in turn, will drive the development of new technologies as companies seek to distinguish themselves with new product offerings.

Sources: CMP Media, Inc., M&A Insight, New York Times, Value Line

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