September 1, 2000
Data Investments Buoy Declines in Voice
By Judy Reed Smith
and Taher Bouzayen
As century-old circuit-switched long-distance voice services head for retirement, they will be supported quite comfortably by investments in the next-generation — packet-based data services.Without a doubt, data will dominate the language of the future. But, how loud will it speak?Circuit Switched Slowed OverallFierce competition, aggressive price erosion and creative new business models have contributed to the retirement considerations for switched voice.According to Boston-based research firm ATLANTIC-ACM Inc.’s
(www.atlantic-acm.com) newest annual report “U.S. Long Distance Services Market: Sizing & Share Analysis 2000-2005,” the industry’s long-distance growth has slowed during the past year. Overall circuit-switched market revenues grew at an extremely slow pace of 1.6 percent from 1998 to 1999, reaching $87.6 billion in 1999, compared to a healthy annual growth of 4 percent from 1996 to 1998.This average growth in-cludes wholesale-switched voice, as well as residential and business, domestic and international retail revenues, according to the study. Retail Growth DeclineTriggered by significant per-minute price erosion, a decline in Tier 1 revenues from the residential switched segment has led to the slowdown in the overall circuit-switched market growth.In fact, Tier 1 residential switched revenues represented 42 percent of 1999’s total retail switched revenue in the United States. This significant erosion of per-minute retail revenues cut the growth of carriers’ retail revenues.In 1999, retail circuit-switched domestic and international revenues grew modestly to $55 billion and $18 billion, respectively, from $54 billion and $17 billion in 1998. This change was driven primarily by the business customers, who are considered more lucrative than residential customers.Several long-distance providers facing lower per-minute residential revenues decided to serve the business segment. For example, Startec Global Communications Corp.
(www.startec.com), long-time residential provider, stretched into Internet and business services in the first half
of 2000.In spite of attempts to raise prices during the first half of the year, the 1999 price
erosion likely will continue. Tier 1 companies that have earned per-minute premiums for their brands will be hit the hardest. For instance, AT&T Corp.’s
(www.att.com) consumer business has diminished steadily, generating 52.5 percent of total toll revenue in 1999 as compared to 59 percent in 1996.
Chart: Summary of Share Growth in Wholesale Data Revenue vs. Retail Detail Revenue 1998-2005eSummary of Share Growth in Private Line & Data Revenue vs. Circuit Switch Revenue 1998-2005eThis can be attributed to the increased use of AT&T’s less expensive plans as well as a growing shift to wireless bucket plans for everyday long-distance calls. Rumors suggest that AT&T and WorldCom Inc.
(www.wcom.com) have considered divesting themselves of their consumer long-distance business. According to ATLANTIC-ACM, Tier 1 companies’ circuit-switched residential business will decrease at a compound annual growth rate (CAGR) of -2.1 percent, moving the group from $30.3 billion in 1999 to generating only $26.6 billion by 2005.Since the retail switched residential segment is expected to grow during the same period at a CAGR of 6.2 percent, it is safe to predict a consumer migration to lower tiers over the next few years.Since Tier 2 and below players are tied less to circuit-switched platforms than long-established Tier 1 companies, the lower tier companies likely will invest a larger percentage of their network in data services to sell on a retail and wholesale basis.ATLANTIC-ACM research shows the Tier 2 wholesale data market will expand at CAGRs of 63 percent through 2005, which means the providers anticipate exploding bandwidth demand in the coming years.Wholesale DesertionsIn addition, as a result of price erosion the circuit-switched wholesale market shows signs of slowing growth. In fact, some carriers, including Broadwing Communications, a wholly owned subsidiary of Broadwing Inc.
(www.broadwing.com), and Viatel Global Communications
(www.viatel.com) announced they would abandon the low-margin switched wholesale sector for the far more promising broadband and data market.Moreover, ATLANTIC-ACM’s research shows the wholesale-switched market grew at a CAGR of nearly 82 percent between 1996 and 1999, and is expected to slow down to a rate of 11 percent through 2005.Emerging Data Revenues Offset Voice Rate ErosionAccording to ATLANTIC-ACM’s study, the overall U.S. long-distance voice and data market generated $106.8 billion in 1999, which is an increase of $99.4 billion in a single year.The revenue peak results primarily from the surge in data services. Data services revenue skyrocketed 31 percent to $21.6 billion in 1999, and represents nearly 20 percent of U.S. long-distance revenue.With tremendous improvements in ATM, frame relay, IP and other broadband services, technological innovations continue to fuel the progress in data services.In fact, revenue from retail data services represented 68 percent of total data services revenue during 1999, and ATLANTIC-ACM expects growth in the data sector to continue to increase rapidly as more players migrate to the data market.While the revenue growth continues, the transition still is a factor. For example, the RBOCs are incurring considerable network and infrastructure costs to meet the demand for their data services. A specific case in point is SBC Communications Inc.
(www.sbc.com), which started its data project “Pronto” by investing more than $6 billion to build a nationwide data infrastructure.Another example is how Verizon Communications
(www.verizon.com, formerly Bell Atlantic Corp. and GTE Corp.) will leverage GTE’s data platform to carry its long-distance data traffic once it receives approval from more states in its region.While many Tier 1 players showed solid data services growth of 12 percent from 1998 to 1999, the majority of growth in the data market was generated by the many companies that are registered to offer long distance but earn less than $1 billion in gross annual revenues.These companies, broken out in ATLANTIC-ACM’s report as Tiers 2 through 5, represent 57 percent of the increase in data revenues from 1998 to 1999. Among them are newer players such as Williams Communications
(www.williamscommunications.com), Cable & Wireless USA
(www.cwusa.com), GTE Long Distance, Broadwing and several other carriers.Future SurvivalTechnological innovation, re-sponse to competition, strategic investments and effective mergers are the keys that will determine survival in this new era of long distance.The Bell Atlantic-GTE merger is an example. GTE provided Bell Atlantic with a cutting-edge, nationwide, long-distance network, while Bell Atlantic brought a large customer base to the table.In the future, it will not be surprising to witness RBOCs buying out CLECs in order to offer local with long-distance services in out-of-region cities.In addition, companies will need to extend their network reach at reasonable costs. For instance, AT&T has reported it is building a joint network with three other carriers. Joint network building allows companies to complete the network faster and, with a cost-sharing arrangement, up to 40 percent savings over an individual build.According to the study, the four factors mentioned above–innovation, response to competition, strategic investment and effective mergers–will contribute to a $250 billion long-distance market by 2005. And, ATLANTIC-ACM expects the evolving market to grow at a CAGR of 14.9 percent through 2005.Once again, the impressive growth of the data services market will be the major factor. In fact, the data segment is projected to generate more than $107 billion for all companies by the year 2005, representing 43 percent of total interexchange revenues by that year.This segment expects to grow through 2005 at a CAGR of 30.4 percent, which truly is an explosive rate when compared to the 9 to 10 percent from 1996 to 1998. It is the data market, therefore, that brings the promise of future returns to the historic and emerging telecom players.Companies Reposition to Serve Data NeedsTo take advantage of this, major companies strategically are repositioning themselves to serve the burgeoning data demands of their customers.For example, WorldCom is transitioning from a traditional voice carrier to a data-centric service provider, and Qwest Communications International Inc.
(www.qwest.com), which recently acquired incumbent US WEST Inc., has adopted the slogan “Ride the Light” to emphasize the speed of data transmission.Companies have and will continue to invest in dark fiber and lay it down, keeping it ready to light when they believe the investment will pay off. Williams Communications and Level 3 Communications Inc.
(www.level3.com), for example, have laid an impressive amount of dark fiber anticipating great demand for capacity years to come.Appetite for Data Drives GrowthCompanies that anticipate their customers’ needs and that provide the data services will maintain healthy growth.The need for real-time data transmission, high-speed Internet connections and other services for websites with complex content, sophisticated web-enabled applications, and remote storage needs are catalysts for higher bandwidth such as OC-3 through OC-48.Cable & Wireless USA and other providers have begun to commercialize OC-192s between Boston and New York City. In the meantime, AT&T and three partners are building state-of-the-art fiber optic overlay networks that will provide ultra-high-speed bandwidth OC-192 services and OC-768 when that technology is available in the next 18 to 24 months.Currently, the possibilities for potential data services are as vast as our imaginations and the technologies to support our creative new services. The shift to data for voice and daily services will not happen magically within the next five years. The thousands of rotary dial phones still in use remind us that it takes time to educate people about the benefits of new services. However, it is indisputable that the data sector will grow at an extremely rapid pace with fiber capacity, like highways that are filled as soon as access is available. The evolving data market will grow with the generations using it to develop new businesses, download music, share photos, trade video, play online and chat internationally for little or no cost.These generations give a rejuvenating shape and a fresh face to the telecom arena through the leverage of data services.The moment has come for Father Time–circuit switched–to step down from his throne while grooming his healthy promising son–data services–to lead the telecommunications industry until its future generation decides to grant it a retirement plan.Dr.
Judy Reed Smith is CEO of ATLANTIC-ACM Inc., a Boston-based
strategy-consulting firm. Taher Bouzayen is a long distance and data analyst for
ATLANTIC-ACM. They can be reached at +1 617 720 3700 or www.atlantic-acm.com.
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