The divestiture of 1984
The US telecoms environment has seen some spectacular mergers lately:
Local operator SBC bought the international operator AT&T;
Verizon, another local operator, acquired the second-largest international operator, MCI, (previously known as WorldCom); and
International/mobile operator Sprint Corp bought wireless operator, Nextel Communications.
As a result of these mergers five major telcos now remain in the USA: Verizon, SBC, BellSouth, Sprint and Qwest.
These developments have to be analysed in the context of a range of developments in the past.
Of course, it all began in 1984 with the AT&T divestiture, which led to the set-up of local telephone companies (RBOCs: US West, BellSouth, PacificTelesis, Southwestern Bell – SBC Communications, American Information Tech – Ameritech, Nynex and Bell Atlantic.) and long-distance telephone companies (AT&T, followed by its competitors MCI and Sprint).
This all made perfect sense at a time when telecoms meant making telephone calls. And it served the US environment well – the country saw a rapid increase in competition, which resulted in better prices and a range of innovative services. Although the Americans complained about their telcos (just like everybody else), for a long time the telecoms environment was more competitive in the USA than in most other countries.
The rise of cable TV
In a separate development, in its early years the cable TV industry in the USA received protection from the regulator, the FCC. This regime didn’t allow telcos to own, amongst other assets, cable TV companies. In that way this industry was able to build a competitive infrastructure next to the telcos.
From the late 1970s onwards new interactive services started to enter the market and were pursued, both by the telcos (videotext) and the cable TV companies (iTV). However, neither really got any traction until the Internet and digital TV began to arrive in the 1990s. From then on it became clear that the telcos and the cable TV companies were on a collision course, since both were now able to enter into each other’s traditional markets.
The FCC correctly foresaw these developments and, in the 1996 Telecoms Act, the US government (guided by the FCC) promoted infrastructure-based competition rather than ‘pure’ telecoms competition. It took a light-handed approach within the telco market, which upset the many competitors who would have loved to utilise the telcos network to establish competition with the incumbents.
However, the FCC persisted with its approach and continued to stimulate more infrastructure-based competition, championing wireless operators and BPL providers. The country was the first to ratify regulations that allow for broadband over power lines (BPL). The fact that in 2004 the telcos asked for, and received, special protection when they promised to start rolling out a $75 billion FttH infrastructure also needs to be seen in the light of this infrastructure-driven regulatory approach.
In the cable TV market, it are the satellite companies that are delivering the much needed infrastructure based competition.
Now add broadband to the equation
In the meantime, the cable TV companies, uninhibited by vested telecoms interest in data networks, grabbed the opportunity to enter the broadband market in the late 1990s, and they are still the market share leaders – mainly because the telcos were very slow to roll out broadband. This vindicated the FCC’s infrastructure regime – in the end it was competition from the cable TV operators that forced the telcos to move into broadband.
For the cable companies, the upgrade of their analogue TV networks allowed this convergence to take place. Boosted by their broadband success they started to penetrate deeper into the telco market with VoIP, at the same time using their new digital TV infrastructure to deliver a range of new iTV services.
While, in the meantime, the telcos are also moving into such triple play business models (delivery of voice, high-speed Internet and video services over one access line), they have problems of their own to fix before a full-blown pursuit of this market is possible. The current restructuring will certainly curtail the Telco’s content related triple play activities.
They need to quickly replace their traditional telecoms network with a next generation network (NGN) based on IP, basically turning it into a gigantic datacomms network, which is much better suited to the technical requirements for the delivery of applications and content services.
Over the next ten years telephone and basic access revenues, which now account for 80% of most telcos revenues, is going to be turned upside down, as the price for telephone calls is going to further decrease by up to 80%. The NGNs are going to make this possible, as this development will result in a 50%-60% efficiency gain – which, in turn, will lead to massive cost savings (read ‘sackings’) in the traditional telco businesses (wages typically account for 60% of these companies’ costs).
On these new networks voice will simply be one of the applications, not THE application and the telcos understand that they will have to drastically change their business models in order to cope with these massive changes – the value of their traditional markets is dropping at an enormous rate. It is therefore a logical development for the telcos to go for scale, hence the mergers.
The most likely scenario is that, with NGNs and FttH, the telcos will have a far superior infrastructure. However, they will never be able to transform themselves into the best application and content providers. So, in the natural course of events, structural separation will be introduced and this will eventually produce a much better wholesale environment for the content and service providers.
The future of infrastructure-based competition
Where does this leave the cable TV companies? Their strengths obviously lie in content. While they do have infrastructure it won’t constitute any competition to FttH networks, and it is highly unlikely that we will see massive overbuild of FttH infrastructure, as this doesn’t make economic sense.
Nevertheless, there is no guarantee that this isn’t going to happen – so, yes, we will see some initial FttH roll-outs from cable TV companies, as even the telcos with all their money won’t be able to fibre every town and city in the country quickly enough. There is a window of opportunity for other infrastructure providers, including BPL and the wireless operators, to get a part of the action and use the opportunity that will exist for the next of 5 to 8 years to establish themselves, before the next major shake-out takes place.
The divestiture of 2014
In a ‘perfect world’ as soon as the telcos are prepared to offer good access that makes it economically viable for content and service providers to use these networks there will be less need for others to build infrastructure.
The cable TV companies will have to make a decision where they fit into all of this. Are they infrastructure providers or content providers? Those who perceive the reality to be the latter might choose to offer their video entertainment services over the FttH networks from the telcos.
What this means for the FCC is that the newly created super telcos will become even bigger monopolies and that the country might need to see a new divestiture around 2014.
United States of America