Posted: 12/1998

Making the Vertical Leap

By Robert Rosenberg

Growth opportunities in tele-communications have shifted from providing commodity
services to customized services, such as asynchronous transfer mode (ATM) and packet-based
bandwidth on demand. New technologies have transformed the telecommunications business
model, which traditionally emphasized horizontal services and carrier control of networks,
to a vertical focus that is more customer-centric than carrier-centric.

Image: Business Telecom Expenditures by Industry–1998

The key reason for this shift is that communications has become much more competitive,
based not only on the Telecommunications Act of 1996 but also on technological and service
quality improvements from new market entrants. Today corporate customers need to
differentiate their services and products by being better or faster, and are turning to
information technology (IT) to achieve this. Insight Research Corp., Parsippany, N.J.,
sees four major forces driving this change to the basic structure of the telecom industry
in the United States, as it impacts vertical industries:

Leading Vertical Industries

Health care. Health care is a critical vertical industry for
both local and long distance carriers due to its size, continued growth and its existence
in every geographic region. All the regional carriers have specific marketing teams and
products targeting the health-care industry. Recently, the growing importance of health
maintenance organizations (HMOs) such as Kaiser-Permanente and Humana, and the resulting
centralizing of communications within this industry, has changed health care.

Health-care costs and the size of the total health-care industry have grown
significantly faster than the national economy. Since 1988, employment in health care
increased from less than 7 million to more than 11 million. The reasons for the leap are
well-known: As more people reach advanced ages, and the medical arsenal advances along
with them, the U.S. tab for quality medical care reaches Americans’ pain threshold.

For example, Medicare–the federal health program for persons at least 65 years old or
disabled–now covers more than 42 million Americans at an annual cost of more than $130
billion. Health-care providers are under increasing pressure to utilize computers and
telecom networks to reduce these costs, for example, via telemedicine and health-care
databases.

Financial Services. Financial service firms, be it banks,
mutual fund brokerages, or insurance giants, all are moving as quickly as possible to
achieve two seemingly contradictory goals: delivering services more efficiently and
reducing costs by downsizing. Increasingly, outsourcing of telecom functions is being used
to achieve these goals. For example, in 1998 AT&T Network Solutions announced
agreements to manage the telecom networks for Citibank and for Merrill Lynch, while
competing firms such as Andersen Consulting and EDS prosper by serving the financial
services firms.

Since the 1930s the banking industry has been shaped and regulated by the Glass-Steigel
Act, which was designed during the Great Depression to protect consumers and investors
from the abuses that aggravated the bank failures of that decade. To reduce competition
and protect local institutions, this act separated commercial from investment banking and
banned interstate banks, along with other provisions. In spite of steady erosion of the
scope of this act, it still shapes major mergers, such as between Citibank and Travelers
Insurance.

Today banks are faced with new competitors from outside their industry and outside of
the United States. Their lines of business have shifted, as electronic technologies make
automated teller machines (ATMs) (and soon e-commerce) preferable to branch tellers as the
primary customer contact point. While banks in 1998 continue to move rapidly to
consolidate and reduce costs, they also are cautious about untried technologies,
remembering their money-losing ventures into home banking in the 1980s. Insight sees
e-commerce as the most likely way to provide services any time, anywhere for both
consumers and businesses.

Professional Business Services. These firms look to
communications in general, and wireless networks and the Internet in particular, to
facilitate direct customer contact and hold down other expenditures (such as courier and
mail costs). In professional services, the constant need is for more effective customer
contact and reduced costs, which leads to changes such as the increased use of
voice-response machines and e-mail. The primary asset for these firms often is their
professional staffs, who increasingly are out of the office working with or prospecting
clients. Consulting firms such as Booz Allen & Hamilton and Andersen Consulting have
seen their information and communications budgets increase by at least 35 percent annually
as they implement the necessary network services and buy laptop computers to access them.

Employment Shifts

As employment shifts between industries, the communications opportunities are shifting
even more:

Robert Rosenberg is president of The Insight Research Corp., a Parsippany,
N.J.-based consulting firm providing comparative market research and competitive analysis
to the telecommunications industry. Visit Insight on the web at www.insight-corp.com.