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The Year Ahead: Telecom/IT in 2003
CEDAR KNOLLS, NJ, January 6, 2002 - Analyst firm Probe Research has kicked off the New Year with some bold predictions about telecom and IT for 2003. Here's their stab at some highly likely, and even some less likely, events for the carrier industry, regulation, the FCC and others.
1. RBOCs and Long Distance: By summer of 2003, Probe expects that the Bells will finally get their much-ballyhooed entrance into national IX. By year-end, they will capture 15-20% of the market; within three years, over 40% through aggressive bundling. Some chance of RBOC purchase of distressed assets in metro areas to facilitate IX access.
2. Long Distance and the RBOCs: Once the RBOCs enter national IX, Probe questions if they waited too long and allowed events to have passed them by. Probe forecasts that RBOC entry in 2003 will continue to place pressure on prices, reducing margins and making it a difficult business.
3. RBOCs' International Moves: RBOC efforts overseas will be driven by where the major enterprises from their home turfs have cross-border telecom requirements. Probe suggests that the RBOCs will continue divesting past discrete investments in foreign carriers, especially wireline incumbents.
4. AT&T Split-up? Probe believes that AT&T will finally have evolved from the Ma Bell carrier and equipment monopoly to being simply a very large Enterprise-focused carrier. The consumer business, while still relatively big, is in sharp decline at AT&T and the challenge from the RBOCs and from IP technology will lead AT&T to exit the mass market voice business, especially if UNE-P is scuttled.
5. The Crippling of UNE: Probe foresees that the FCC's review of the Telecom Act to be issued this month will lead to a substantial change in the UNE program. The existing rules will sunset, preserving existing service but forcing all new UNEs to be done under a contract basis. CLECs and IXCs that rely upon UNE will find it less effective. Some CLECs will see a sharp decline in subscribers and more will fail.
6. What Will the Republican Congress Do? Probe expects some effort to forge a compromise telecom bill that could pass the House and Senate to enshrine FCC modifications and enact measures favorable to the RBOCs. The bill would maintain collocation and interconnection rules on a contract basis with performance measures. Broadband will be exempt from unbundling in return for a stricter broadband deployment timetable, with tax incentives and loans to spur deployment.
7. We Will Pay for Telecom Security: Probe believes the RBOC will bear much of the cost for securing local telco networks. They will ask the FCC to impose a "security surcharge" on subscribers to offset cost and restore lost revenues. The FCC will no doubt initiate a proceeding and come to the aid of the ILECs.
8. Can an RBOC Fall Apart? According to Probe, the chances are not "good" that one of the RBOCs would collapse (ignoring the Qwest corruption debacle), though it is still possible if two things occur: (a) the economy falls dramatically in 2003, and (b) mobile companies surge in the stock market. If these two factors both come to pass, then Probe expects a reasonably high probability of an RBOC failing (>50%).
9. And If an RBOC Should Be Heading into Failure, then What? There is debate over which RBOC could fail if the economy gets knocked down. Verizon has a lot of debt. BellSouth faces actual declines in its key cities, like Atlanta. BellSouth in a period of decline is a merger partner, with Verizon and SBC fighting over control. If the economy goes south and wireless surges, Verizon is a contender with BellSouth looking for a merger partner. SBC might stick it out, as it is relatively unencumbered with debt.
10. Bankruptcy or Liquidation? Probe predicts that some of the North American telecom carriers emerging from Chapter 11-bankruptcy protection will slip back into the courts for outright liquidation by year-end. Intense competition, lackluster or limited-growth demand and continued price erosion will offset any benefits of debt-free operations. The "second time around" developments may trigger complaints to or pressure on U.S. trade authorities by rival carriers, particularly Europeans, who may claim the Chapter 11 process is used to mask unsound business plans.
11. WorldCom Dumps the MCI Business: WorldCom not only has to get rid of debt, it also has to find growth amid the wreckage it created for itself. Its MCI division is no longer a candidate for growth, mired in a market beset by low pricing, threatened by competitive entry of the RBOCs, and the demise of UNE-P and IP technology. Probe expects WorldCom to look for a buyer of its consumer business.
12. What about Sprint? Probe anticipates Sprint shrinking in its long distance business; it has little in the way of metro assets to shore up the big Enterprise customers, its share in the consumer market is relatively small and an RBOC entry into IX could be painful. Look for Sprint to explore deals with one or more RBOCs (provided the RBOCs are not pushing themselves into insolvency).
13. Let's Wave Goodbye to Adelphia and Cablevision. Probe awaits Adelphia and cash-strapped Cablevision to be gobbled up by one of the larger players (and it won't be Time Warner or Comcast) and a series of mergers among carriers with fewer than 1 million subscribers. Charter will decline further in 2003.
14. Media Industry Will Consolidate Further - Aided by the U.S. FCC: The FCC is pursuing a docket that could allow for considerable concentration of the media industry - local TV, radio and newspapers. The FCC will tilt in the direction of big business and diminished political activity and diversity.
15. European p2PTTs: What a Mess! The p2PTTs (partially privatized PTTs) face even less effective landline competition than U.S. carriers do. The stocks of BT, FT and DT are not well. Europe's economy is not in any kind of high growth mode. FT and DT will be hard hit and the governments will not let them fail. The U.S. props up its ILECs through regulation and indirect payments (like access charges), and tax breaks. In Europe the subsidy arrangement will, perforce, be much more a display of naked political power.
16. NTT Proves It Can't Grow: NTT, once the most valuable telecom company on earth, is in deep decline. It has announced access line contraction. Its market cap is $59.5B, but since it owns 2/3rds of DoCoMo, NTT landline has a net market cap of $28.7B. The Japanese economy is in permanent decline, has a rapidly aging society, and has no mechanism for fixing its financial system. Probe expects a worsening of the situation for NTT.
17. Global Consolidation: The recent European match-ups of Telia-Sonera and Telenor-Utfors may not necessarily be made in heaven but their limited-ambitions may have appeal to others in that region, including Belgacom, Tele-Danmark and competitive carrier Cable & Wireless. According to Probe, FT, DT and Telecom Italia will be absent from consolidation activity because of their financial problems. Asian assets are likely to be accumulated further by Hutchison Whompoa, Singapore Telecom and perhaps Japan's NTT despite its weakness; none of them, however, will take the mantle of regional leadership which is sought by Australia's Telstra and Hong Kong's PCCE via their Reach joint venture.
18. Expansion Opportunities: Probe suggests that AT&T, Equant and Infonet Services will face critical worldwide expansion decisions in 2003. With their global multinational corporation (MNC) accounts presence they have the resources among enterprise buyers to take greater advantage of consolidation and competitive chaos. Smaller telecom carriers and additional undersea pipes (360networks, Flag, Tyco, etc.) will become available for cost-effective purchase to enhance existing international routes and national market access (without the capex build-out line items).
About Probe
For over 26 years, Probe Research, Inc., has leveraged its unique insights and experience in both the traditional world of telecommunications and the burgeoning world of data and packet networks to successfully maneuver clients through changes in demand, demographic shifts, introduction and evolution of new technologies and platforms, industry structure transformations and financial market volatility. Probe provides clients with expert guidance through continuous research services, consulting projects, retainer programs and a variety of other direct analyst-access services.
Among its many continuous information and consulting programs, Probe offers two services that specifically focus on the carrier market, including regulation, its vendors and the FCC. U.S. Competitive Service Markets (USCSM) analyzes business models, strategies and new initiatives of both the established U.S. mega-carriers and newer competitive carriers. Global Carriers (GC) delivers extensive coverage of the escalating competitive battles over global markets among telecom and IP service providers.
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