Texas House Passes Telecom Legislation

In-Stat Survey Indicates Solid Growth Of Bundled Telecom Services

In-STAT research shows that just under half of the US residential market has purchased multiple telecommunications services as a package from a single provider, up from just one-third in 2004. However, the potential for growth of bundled services is only tepid at best, with just 14 percent of non-subscribers expecting to adopt them in the next year, the high-tech market research firm says.

In order to better capitalize on the bundled opportunity, providers must offer a variety of package choices to match the appropriate services with different customers’ needs. As research has shown, different age groups and income levels represent different interests, and the best of bundled offerings will account for these differences in package design and promotion.

A recent report by In-Stat found the following:

Providers typically scale discounts so that the more services that are purchased, the greater the savings. This strategy appears to be working, as 50 percent of respondents indicated that they purchase bundled services for the lower price.

Significant revenue opportunities remain to further expand average revenue per user; however, new approaches are necessary to entice non-subscribers.

Internet service was more often included in a bundle than local phone service or cable TV among survey respondents. This is interesting for the future of IP-based services such as Voice over IP (VoIP) and IP-based video services.
 

Telecom merger Fears Mount

Independent telecommunications firms are seeking to block -- or at the least place severe restrictions -- on the proposed mergers of phone goliaths SBC-AT&T and MCI-Verizon Communications, claiming they could be wiped out by the absence of competition.

Firms such as Reston,Va.-based XO Communications that provide phone and Internet services to businesses using the phone giants' networks said they and their customers will be stuck paying much higher prices if the mergers go through unabated .

SBC in January proposed buying AT&T for $16 billion, while Verizon a month later launched a $6.7 billion offer for MCI that ultimately rose to $8.5 billion in May in the face of better offers from competitor Qwest Communications.

Public utility commissions in several states, including Pennsylvania, Ohio, California, New York, New Jersey and Virginia, must approve the two mergers, as well as the Federal Communications Commission and antitrust regulators at the U.S. Department of Justice.

XO and other independent firms say they currently can choose among at least two wholesale suppliers in every market, with MCI and AT&T bidding against the former Baby Bells Verizon and SBC to keep prices down. But once AT&T and MCI are formally gobbled up by SBC and Verizon, respectively, the independents fear their options will be next to nil as the two giants opt to let each other have markets to themselves.

The mergers will give SBC and Verizon control of more than 95 percent of the market in most areas, said Douglas Kinkoph, XO's vice president of regulatory and external affairs . The end result, he said, will be higher prices that will most likely be passed onto customers.

Merger supporters, including the companies, deny that there won't be competition and say new technology such as wireless and Internet phone service continues to give customers new ways to use phones. But Kinkoph and other opponents say much of the new technology is too small and too far away from broad implementation to be of use to businesses now.

Pennsylvania's PUC has just begun considering the mergers, accepting testimony on behalf of the companies after opponents were given their shot earlier this summer.

Hearings on the SBC/AT&T merger will be held in mid-August, with the Verizon/MCI hearings following in mid-September.

XO, which had sales of $1.3 billion last year, said it is battling the buyouts not because it fears going out of business but because the merged firms will have an unfair competitive advantage or "monopoly" on offering communications services to consumers.

" The big impacts will be on the smaller [telecom] companies," said XO spokesman Alan Gilbert.

Even so, other other independent telecom providers that are smaller have chosen to remain mum on the issue.

Officials at the San Jose, Calif.-based telecom firm Covad Communications, which has revenue of $429.2 million, declined to comment on the mergers, referring instead to a press release from early May in which San Antonio-based SBC said it, alongside AT&T, would continue its current business relationship.

Yet Covad, which has customers in the Pittsburgh area, is a part of a loose alliance of smaller telecom providers that are fighting the mergers at the federal level, expressing their opposition with the FCC and the Justice Department.

The coalition, known as the Alliance for Competition in Telecommunications, has hired high-profile Silicon Valley-based lawyer Gary Reback .

State consumer advocate Sonny Popwsky said he was less concerned about what he labeled as the "troubling" mergers' effect on competitors than he was on residential consumers. With fewer competitors in the marketplace, he said, consumers inevitably will confront higher costs for phone, Internet and eventually pay-TV service.

"These companies will become even more dominant and harder to compete against," he said. "If there's not a lot of competition, then you really need to have stronger regulation."

Not everyone agrees.

Scott Cleland, an analyst at the Washington, D.C.-based telecom research group Prescursor, said in testimony before a Senate subcommittee in April that the alternative phone services -- including wireless and Voice-over-Internet-Protocol, or VoIP -- are creating options for businesses and consumers. Solid regulation, he added, will ensure that the marketplace remains competitive.

University of Pittsburgh business professor Ravi Madhavan agreed, noting that large mergers don't always shut out their smaller competitors. "As a general rule, it leaves opportunities on the periphery," he said, meaning the smaller companies will most likely not be crowded out but instead have the chance to go after more specialized customers.

In the meantime, XO is one of several detractors that have submitted written testimony to the state PUC rebuking the mergers. The process will probably continue through the fall.

"We want to make sure that the PUCs know that people are watching them and that people at least have their eyes wide open," said Gilbert.
 

Buying Behavior Among Mid-sized Businesses - Integrated Access

When In-Stat asked 411 middle market decision-makers which telecom services were currently used in their area of responsibility (with multiple responses accepted) not surprisingly, "Wireless voice or data services" was the most commonly given response at 84% with "Local or long distance voice access" being the second most commonly given response at 79%.  As these two responses were the most commonly given responses in the enterprise market as well, though in reverse order, it seems that these services are nearing a level of maturity among larger US businesses.

Middle market decision-makers indicated "Integrated Access Services" (IAS) and "VoIP services" were both currently used with 37% and 26% response rates, respectively.  These percentages, not surprisingly, were significantly lower than indicated by respondents in the enterprise market, where response rates were near 50% for both of these emerging technologies.  As is often the case, enterprise firms are the first to employ new, cutting-edge technology solutions.  Respondents were also asked which services they don't currently use but plan to purchase in the next 12 months.  With multiple responses allowed, VoIP services and IAS registered the highest response rates at 20% and 18%, respectively, though again, these response rates were both lower than enterprise response rates for the same emerging services.
 

Cell Phone Numbers Overtake Land Lines

It really is a new world in telecommunications, and here's the latest example.  The number of wireless phone users was greater than the number of land lines in use in the United States in the second half of 2004, according to a Federal Communications Commission seminannual report on local phone competition released earlier this month.  The number of cell phone subscribers rose 15 percent to 181.1 million in 2004, while the number of land lines declined 2.8 percent to 177.9 million.

The cell phone industry has exploded over the past decade from 25 million customers and should pass 200 million this year, according to Forrester Research Inc.  The trend is spurred mainly by young people who have never paid for land line service, but it's ingrained through all age groups, the cellular industry's trade group told the Los Angeles Times.   In fact, nearly a third of North American households now make at least half their long distance calls at home from their cell phones.

About 6 percent of phone customers have "cut the cord" and gone entirely wireless, the Times story said.The numbers show a very competitive marketplace for voice services, according to SBC Michigan -- competition that should be reflected when Michigan legislators later this year take on the task of updating the state's Telecommunications Act.

"There's a new competitive landscape including wireless, voice over Internet Protocol and cable telephony," SBC spokesman Steve Kauffman said. "Those are all head to head competitors, right now, today, more than they ever were before."  Critics, however, contend that cell phones continue to be more of a handy adjunct to land lines for many consumers, given their cost and the frequency of dropped calls.

Nevertheless, the number of wireless connections has skyrocketed, in Michigan as nationally.   The FCC figures show 3.6 million wireless connections in Michigan in 2000. By 2004 that had jumped to 5.8 million.  By comparison, SBC over that same period lost 2 million land lines in Michigan.  The total number of wirelines in Michigan fell during that period from 6.6 million in 2000 to 6.0 million in 2004.   That means that Michigan hasn't quite caught the national trend yet of wireless connections being greater than wirelines. But it will doubtless happen soon, Kauffman said.   The FCC also reported that among Michigan households, monthly spending on wireless services has risen from $22.13 in 2000 to $50.83 in 2004, while wireline spending has dropped from $66.03 in 2000 to $46.73 in 2004.

Industry experts say the sales figures for broadband lines due to be released with second-quarter earnings reports over the next couple of weeks are likely to be among the few bright spots in an otherwise lackluster period for the dominant telephone companies.

"Share of broadband subscribers is critical to telecom companies as a defense against competition from VOIP (voice over Internet protocol), as well as a major driver of near-term revenue growth," Morgan Stanley analyst Simon Flannery said in a research note on Monday.

Several analysts expect telephone companies to report roughly 1 million new digital subscriber lines for the second quarter. While such a total would be down about 20 percent from the first quarter's growth rate, analysts say it would still be good for 55 percent of all new broadband subscribers.
 
 

Keynote Systems Inc., known for measuring the performance of popular Web sites, also found that the reliability of Voice-over-Internet phone service is significantly affected by the provider of the high-speed Internet line used to dial a call.

Time Warner Cable and MCI Inc.'s UUNET business service scored highest on reliability. Keynote found little variance in audio clarity among the broadband providers,

The study was based on 154,000 calls placed in May and June using six leading Internet phone services, or 22,000 each, and seven providers of high-speed Internet connections.

Keynote declined to disclose the full rankings from the study, which it is selling to clients, but said the scores varied widely from top to bottom and that even the leaders had substantial room to improve.

Vonage, for example, posted the best score for service reliability with just 80 out of 100 possible points, but that was four times better than the worst of the six service providers. Likewise, AT&T CallVantage took the top ranking for audio clarity with a score of 82, or twice as high as the worst performer.

Disruptions in the ability to make or receive a call was a key problem, the study found. Keynote said service availability ranged from 99.4 percent of the time to as low as 94.8 percent.
 
 

There is one often overlooked item on the 109th Congressional agenda that is critical to our economy and our American system of free enterprise.  I am talking about updating our nation’s telecom laws to unleash billions of dollars in new investment and economic growth, to renew America’s global competitiveness and to put consumers, rather than the government, in charge of our innovation economy.

When Congress last revisited the nation’s telecom laws in 1996, the Internet was in its infancy, cell phones were rare, few people had personal computers outside of work and cable companies provided solely television service while phone companies gave you only your dial tone. Today, technology has brought an explosion in consumer choices, value and innovation. 

Cable, wireline, wireless and satellite companies all are competing directly to meet your communications needs—from Internet, to digital television to voice.  Congress has done a good job keeping regulatory and tax burdens low on emerging technologies, like Internet telephone service, making new advances more rapidly available to more Americans.

Unfortunately, this hands-off approach has not been extended to all competitors in today’s communications marketplace.  The 1996 Telecom Act was written for a world in which only cable providers could compete with other cable providers, and only phone companies could compete with one another. 

Technology has obliterated those distinctions—to the benefit of consumers who now can make choices across a variety of communications technologies.  Yet the laws on the books have not caught up with this technology-driven reality, tilting investment and the market advantage toward newer technologies not mired in outdated rules. 

Some have proposed increasing the regulations on every competitor to level the playing field.  I could not disagree more.  In a competitive marketplace, consumer choices should guide the evolution of technology, not a "government knows best" approach.    Similarly, where a compelling justification exists for limited regulation, such as to ensure affordable basic access to a dial tone or to uphold law enforcement and public safety needs, then the burden should be borne by all competitors, rather than a select few.  Otherwise the government continues to distort the marketplace, and companies that uphold public objectives are essentially penalized for doing so.

Updating our almost decade-old telecom laws also could unlock billions of dollars in investment, infusing our economy with new jobs and GDP growth and helping the United States boost its global competitiveness. According to a study commissioned by the U.S. Chamber of Commerce, unleashing market-based competition in today’s communications sector could bring 212,000 new jobs and $634 billion in GDP growth over the next five years alone.

Currently, the United States ranks 13th in the world in broadband deployment, down from 11th in just one year.  How is it that the country that invented the Internet is falling so rapidly behind?  I believe the answer is not lack of American ingenuity, but heavy-handed, outdated government policy. 

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