Posted: 09/1998

Behemoth Integrated Service Providers to Dominate U.S. Long Distance Market

By Chris Cho

The U.S. long distance services market is in for a dramatic transformation in 1998 and
1999. Industry consolidation and the entry of the Bell companies will create a completely
new environment in which behemoth integrated service providers will dominate the local,
long distance, data, wireless and cable markets.

Image: Interexchange Service Revenues (1984-1997)

Drastic shifts in the playing field will be the result of several factors. First, the
number of competitors continues to grow even as shrinking reseller margins raise barriers
to entry. Second, both old and new competitors are rapidly increasing revenues and gaining
market share by consolidating. Third, carriers are shifting their focus away from plain
vanilla long distance toward a buffet of integrated products and services. Traditional
carriers have employed an "If you can’t beat them, feed them" strategy, which
leverages their networks by selling wholesale capacity as well as bundled voice and data
services to resellers.

The long distance market is getting crowded as more than 1,000 competitors vie for
customers. Since the Telecommunications Act of 1996, categories distinguishing service
providers have been virtually eliminated as incumbent local exchange carriers (ILECs),
competitive LECs (CLECs), Internet service providers (ISPs), wireless providers, cable
television companies and electric utility companies all offer long distance services.

The success of the prepaid calling card and dial-around industries indicates that
customers are using multiple service providers to meet their different communications
needs, and many of these niche providers continue to flood the market. The pending entry
of the regional Bell operating companies (RBOCs) and well-capitalized international PTTs
(government-owned telecom companies) also will clutter the market with even more sizeable
competitors.

Consolidation also is reshaping the competitive landscape in the United States and
creating large multiservice providers. Within Tier I, AT&T Corp. plans to add local
and cable service to its product portfolio by acquiring Teleport Communica-tions Group
Inc. (TCG) and Tele-Communications Inc., respectively. WorldCom Inc. is rapidly building a
voice and data powerhouse with its acquisitions of Brooks Fiber Properties Inc.,
CompuServe Interactive Services Inc. and MCI Communications Corp. Other companies have
launched themselves into Tier I status through large acquisitions. The combinations of
Qwest Communications Interna-tional Inc. and LCI International Inc., Teleglobe Inc. and
Excel Communications Inc. as well as STAR Telecommunications Inc. and PT-1 Communications
Inc. have enabled lesser-known carriers to compete head-to-head against AT&T,
WorldCom/MCI and Sprint Communications Co.

Through consolidation, partnerships, alliances and joint ventures, telecommunications
companies have broadened their product portfolios to include an entire array of services
such as local, long distance, data, Internet, wireless, cable and utilities. The
convergence of these markets has enabled some carriers to provide a "one-stop
shop" to its customers for all their communications needs.

Image: Retail Switched Services Revenue Share Analysis (1996-1997)

Market Growth

New research by ATLANTIC-ACM shows that the U.S. long distance market has thrived since
divestiture and grown at an average annual rate of 7 percent from 1984 to 1997. In 1997,
total interexchange service revenues reached $92.1 billion (see graph).

Although the four largest carriers–AT&T, MCI, Sprint and WorldCom–account for 78
percent of the total long distance industry revenues, their market share has been falling
due to intense competition from smaller carriers. The traditional Big Three increased
their total long distance revenues but, as a group, lost market share in 1997. WorldCom
managed to increase its market share, but combined with MCI’s losses, showed little
growth.

A combination of consumer churn, competitive pricing and access charge reform led to a
drop in retail revenues for the Big Three carriers in 1997 for the first time ever. The
most noticeable drop was in residential revenues, where market share fell from 88 percent
in 1996 to 82 percent in 1997. As smaller companies aggressively target business and
residential customers with discount flat-rate 1+ plans, dial-around products, prepaid
cards and low-cost Internet telephony, the Big Three retail market share is expected to
erode from 74 percent in 1997 to less than 61 percent by 2000.

As larger carriers defend their position in the retail markets, many have begun to
compensate their lost market share by concentrating their efforts on the lucrative
wholesale and data markets. The wholesale switched services market in the United States
has grown at an average annual rate of 31 percent over the past three years and reached
$9.8 billion in 1997. Wholesale revenue growth can be attributed to the growth of
resellers and their increasing need for capacity.

The private line and data market also has experienced tremendous growth. In 1997,
private line and data revenues grew 34 percent and exceeded $13.5 billion. Increasing
demand for Internet, asynchronous transfer mode (ATM) and frame relay services will drive
double-digit growth in this market over the next few years.

Chris Cho is a senior analyst with the Boston-based strategy consulting firm
ATLANTIC-ACM. He can be reached by phone at +1 617 720 3700 or by e-mail: [email protected]