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The local exchange carrier (LEC) market is about to undergo a revolutionary change. This mutation will undo the monopolized, single provider market and will give way to a plethora of competitors using various technologies to deliver both conventional and new services. Independent public payphone providers (IPPs) will have to devote the time to evaluate the new environment in which the payphone business will exist to avoid the pitfalls and to capitalize on the opportunities offered. There will be an abundance of both. To better understand the imminent transformation that will occur in this $80 billion local exchange business, we can first look back at the progress that has been made to date in the restructuring of the U.S. telecommunications market.
Since the mid-1970s, when either the regulators of the U.S. District Court for the District of Columbia opened a market to competition, a new and robust industry emerged within a decade. For example, today's telecommunications equipment market is estimated at more than $20 billion in sales. The cellular market is estimated at $14 billion, and the long distance market is estimated to generate $70 billion in annual sales. The market for payphone usage has reached $8.8 billion. In each case there were stumbling blocks along the way, but competition generated new markets, products and services.
In the equipment market, there were names like Rolm, TIE, Executone and others clamoring for the opportunity to sell telecommunications products to a previously closed market. In the cellular market, the structure was decided by the FCC, which permitted two franchisees in each of the 734 market service and rural service areas. McCaw Cellular emerged as the largest cellular company. In the long distance business there was MCI and Southern Pacific Communications, the precursor to Sprint. The pioneers in each market helped to open the doors for scores of other competitors who rushed in from all over the world. The pioneers we are about to discuss are doing the same in the local exhange market. The local exchange market is but one last fortress of monopoly about to give way to an intensely competitive climate.
The prevailing players in the local exchange market are of course the Bell Operating Companies (BOCs) and the independent telephone companies. Both are often referred to as local exchange carriers (LECs). Each of these companies has had a geographic area in which it has traditionally been the monopoly provider of local services. In many cases the monopolies have been in place for 50 or more years. Even today these companies are estimated to carry more than 95 percent of all local communications. So what's the big fuss about local exchange competition?
It's about competitive access providers (CAPs). It's about cable television (CATV) companies. It's about cellular and other wireless ground communications providers. It's about satellite companies and the integration of ground wireless systems with satellite wireless systems. It's about the full service network in which telecommunications, information, education and entertainment can be provided through the same pipe into the home or business.
Who are these companies and do they really have a chance against the established and gigantic Regional Bell Operating Companies (RBOCs)? Let's briefly discuss the new kids on the block.
First there are the CAPs. The best known are Teleport Communications Inc., Metropolitan Fiber Systems Inc. (MFS), and IntelCom Group Inc. These companies have made inroads in densely populated metropolitan areas by offering to connect business customers to their long distance carriers at a fraction of the cost charged by the dominant LEC in the area.
Long distance carriers reportedly pay approximately 45 cents of each $1 to the LECs in the form of access charges for delivery of calls from their customer to their long distance switch. These long distance carriers obviously have an incentive to find a less expensive alternative. Teleport, MFS, IntelCom and others are offering just such an option. Of note, Teleport Communications is also a payphone provider to the Port Authority of New York and New Jersey. This makes Teleport both a potential supplier of local service and a potential competitor.
Another local service provider is MCI. With its MCI Metro service, MCI is apparently seeking its own path around the LECs. MCI also provides payphones and payphone services to the State of California and to Navy and Coast Guard bases around the country.
The CATV companies are related to the CAPs. In some cases the CATV companies own the competitive access providers. For example, Telecommunications Inc., Cox Communications and several other CATV companies are owners of Teleport. In many cases the CATV companies are multibillion dollars entities in their own right. Telecommunications Inc., Time Warner Communications Inc., Jones Cable, Comcast Cable and a host of others are entering the local exchange business and are intending to deliver both video and telecommunications services over the same facility.
To complicate matters more, US West, an RBOC, owns 25 percent of Time Warner Entertainment, which owns Time Warner Cable and Time Warner Communications. Other Bell companies have also invested in CATV companies. This is today's reality in the local exchange. The local exchange represents an emerging virtual free-for-all if regulators and legislators allow competition to take its natural course.
The newest term in the local exchange is CLEC, which stands for certified local exchange carrier. The CAPs and the CATV companies are petitioning state public utilities commissions to offer residential and business switched services in addition to alternative access. As each entity begins to compete for these types of customers, they become known as CLECs. This push into the local exchange for switched service access to customers includes AT&T in addition to the CAPs and the CATV companies mentioned thus far. As many of you know, AT&T provides payphones to many large accounts.
Cellular companies represent another set of competitors. Led by McCaw Cellular, GTE, Sprint, the regional Bell cellular carriers, Comcast and others, these companies can offer microcell access to neighborhoods and to businesses that permit customers to be connected to their long distance carrier through a wireless system. The new owner of McCaw Cellular is AT&T.
But cellular providers are not the only purveyors of wireless telecommunications services. Specialized mobile radio (SMR) providers are also rolling out wireless services. Perhaps best known is Nextel Communications, a New Jersey-based company. Nextel plans to compete with the cellular companies. Its rollout plan is already under way, and recently it received a commitment for a substantial investment from Craig McCaw, the former owner and founder of McCaw Cellular who sold his business to AT&T.
The picture would not be complete without mentioning personal communications services (PCS), for which telecommunications companies have recently bid $7 billion dollars just for the spectrum to provide the service. An inexpensive pocket phone in the hands of consumers that is linked to a PCS network may soon become more than an expensive dream.
Beyond the ground-to-ground wireless systems providers are the mobile satellite providers. In this category, American Mobile Satellite Corp. is perhaps the best known. Yet, systems such as Motorola's Iridium and other low earth orbiting (LEO) service providers are ready to launch their networks in the sky. These networks are conceived to permit anyone, anywhere to communicate through a wireless telecommunications system.
The likeliest scenario for the future is that each technology will be subject to the process of natural selection. The fittest will survive and find their place in the telecommunications infrastructure of the future. The current merger and acquisition activity and the many joint ventures and alliances reflect an effort to protect the vital business interests of today's successful companies.
With all of this taking place simultaneously, it often gets difficult to keep score. It is also difficult to determine how to play the game, what offensive strategies to initiate, and what defensive strategies to implement. Pending legislation and regulation introduce yet another variable to the puzzle.
What does all this mean to the independent payphone provider? To answer this question we must again look backward. Long distance prices have declined approximately 60 percent in the last decade since competition was permitted in that business. Cellular companies are enjoying double digit growth in subscribers. At the same time, prices are coming down dramatically. A few years ago the average monthly cellular phone bill exceeded $100. Most recently, that average has dropped to $56. International call prices have dropped substantially as well due to the technology of compression that is used to squeeze more throughput out of satellite transponders. Clearly, the advent of local competition means lower access prices for IPP providers either through the new competitors or because of them.
But competition in the local exchange means a lot more than lower prices. It also means the introduction of new and innovative services. A reservoir of information, education, entertainment and new forms of communications will be upon us before the end of 1996. Will the IPP providers continue to provide plain vanilla payphones that do no more than provide plain old telephone service (POTS)? Or, will the IPP providers differentiate themselves with new products that deliver the full service network to people on the move? Will plain vanilla payphones be needed if wireless pocket phones become the favored communications device of consumers? These are serious matters to be evaluated.
Perhaps an analogy will help. When the television first appeared on the consumer scene, the disappearance of the radio was predicted. Yet there are more radios in existence today than ever before. They do not resemble their antique counterparts. They come in all shapes and sizes and have features that combine clocks, phones and other services with the traditional radio. They are sleek, more powerful, and have improved fidelity -- with a much lower price tag. Radio stations have had to determine what the market wants and have adapted their programming to suit today's consumer. What consumers want is what determines the continued viability of a retail business. Successful businesses pay close attention to their customers and patrons, and to their changing needs.
In interpreting its customers' needs, AT&T for one believed that the traveling public was ready for enhanced services, so it introduced the Payphone 2000. More a transaction terminal than a regular payphone, the Payphone 2000 has a video screen, a keyboard, a data port and speed dial access to services such as hotel and airline reservations.
Unfortunately, our telecommunications industry tends to be driven by technology and not necessarily by consumer needs. Yet few companies can avoid joining the competitive technology game for fear of being left out of a large developing market. The most difficult issue appears to be one of timing. How fast will the mass market respond to the opportunity to read electronic newspapers and to cybershopping, cyberdating, cyberwork, video-on-demand, cybereducation, cybermedicine and the like? Will it be several years, a decade or a generation? Billions of dollars are being bet that the information superhighway will become highly desired by consumers in a matter of years. Many companies are working diligently to deliver these new services to residential and business customers.
Who is preparing to deliver these services to the traveling public? Do you think the AT&T Payphone 2000 may offer a clue?
John Gammino is president of John Richard Associates, Inc., a Hazlet, NJ-based telecommunications consulting firm. The firm provides consulting assistance in the areas of public and personal communications and CATV.