Snapshot of the 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 facilities and other means of transmission.

The Columbia Institute for TeleInformation (CITI) is a Columbia University research center focusing on strategy, management, and policy issues in telecommunications, computing, and electronic mass media. According to a CITI study, telecom profit margins have shrunk more than ten percent over the past eight years. Between 2001 and 2002, Lucent saw its revenue drop 42 percent. Nortel's revenue dropped 39 percent in the same period and Cisco's fell 15 percent.

Internet-based technology for converged services has blurred the distinctions among telecommunications industry platforms including telephone, wireless, and cable. As a result, future competition may come from more than one industry segment. Phone service companies, for example, no longer face competition merely from other traditional carriers, but also from cellular and Internetbased services.

The technology for Internet telephone service, known as VOIP (voice over Internet protocol), was introduced to the public in the mid-1990s, and is now being implemented. The service is winning customers in the residential market, as cable companies offer Internet calling over their own networks and a host of tiny start-ups offer low-cost plans. Internet phone service is almost completely unregulated and requires little capital, which makes small start-up companies a credible threat to traditional carriers.

Demand for traditional line-based telephone services is also decreasing in the face of wireless service. Alltell, a rural telephone and Internet services provider serving 24 states, has stated that the demand for wireless data services has exceeded expectations and the company anticipates this trend will continue. Since wireless companies began including long-distance services in their calling plans, 35 to 40 percent of long-distance traffic has moved to cell phones in the past four years.

The entertainment end of the industry is faring better, assisted by popular television technologies. The number of installed digital set-top boxes in North America is expected to increase 35 percent from last year, according to Trace Strategies. HD (High Definition) boxes are projected to make up 5.7 percent of the total installed base. Sony and Pace are expected to see the highest growth in market share. Comcast is expected to have the largest share of digital boxes, while Time Warner will have the widest selection.

Mergers and Acquisitions

The number of announced large cap deals in the telecommunications industry has been decreasing annually since 1999. Mid cap deal flow peaked in 2000 and has been declining since.

According to David Dorman, the CEO of AT&T, the telecommunications industry will see ongoing M&A activity as the industry consolidates over the next few years. Dorman predicts consolidation among long-distance and local phone service providers and also in the networking and wireless industry segments.

Dorman's predictions for economic recovery in the industry aren't as optimistic. Regarding the economic position of the telecommunications industry, Dorman stated, "We've had over 500,000 jobs go out of the sector. Those are white-collar jobs that I don't think are coming back."

It's a Phone! It's a Game! It's a Camera!

Telecommunications equipment is being merged with other technologies, blurring the distinction between telecommunications and other industry sectors. According to research group Strategy Analytics, mobile phones capable of taking pictures outsold digital cameras for the first time in the first half of 2003. The firm's data show 25 million camera phones being sold worldwide in the first six months of the year. In the same period, 20 million digital still cameras were sold worldwide. Strategy Analytics expects 65 million camera phones to be sold by the end of the year.

Phone maker Noika has developed a portable game console, or "game deck," that would allow for social gaming on handheld devices connected over a cell phone network. The game deck, called N-Gage, includes a combination of features including games, FM radio, cell phone service, the ability to play MP3 music files, and personal productivity software such as address books and calendars. Other phone makers are also working to capture the gaming market. Sprint, for example, has a game-pad attachment for some of its phones.

If multiplayer gaming over cellular phone networks becomes popular, it will increase the demand for cellular telecommunications service. It may also change the relationship between the equipment makers and the service providers. Cell phone carriers, for example, could subsidize the cost of game decks by offerings consumers package deals that include the game deck but also lock subscribers into a specific calling plan.

Outlook

New services and technologies are expanding the markets available to telecommunications companies. The industry has gambled on new markets in the past, however, with less than stellar results. In the 1990s, trillions were spent to build national and international communications networks to deal with an anticipated increase in Internet traffic. When rapid growth in Internet use failed to materialize, the companies that built the networks were left holding the bill.

More recently, telecom companies have built up wireless networks, and have been spending to upgrade those networks to offer enhanced third-generation services. The degree to which this investment will pay off remains to be seen. CITI director Eli Noam claims that the main problem of the telecom industry is that is has entered "a chronic pattern of volatility, with boom-bust patterns becoming a common occurrence rather than aberration." The industry must continue to develop new technologies in order to offer new services, but spending on development can often outstrip the resulting profits.

Sources: CableFAX, Communications Today, Knight-Ridder Tribune Business News, Wall Street Journal