Telecommunications services - 1991 U.S. Industrial Outlook

Ivan H. Shefrin

Telecommunications Services

The telecommunicatons industry includes hundreds of companies providing telephone, telex, and telegraph services, international communications, microwave communications, satellite services, cellular mobile radio services, paging, private radio services, regional and metropolitan networks, data communications, and value-added services.

Before reading this chapter, please see "How to Get the Most Out of This Book" on page one. It will clarify questions you may have concerning data collection procedures, factors affecting trade data, forecasting methodology, the use of constant dollars, the difference between industry and product data, sources and references, and the Standard Industrial Classification system (SIC). For other topics related to this chapter, see chapters 27 (Information Services), 30 (Telephone and Telegraph Equipment), and 31 (Radio Communication and Detection Equipment).

The U.S. national telecommunications network transmits local, long distance, and international text, video, and voice information. More than 2,000 companies provide public telecommunications services in the United States, switching more than 450 billion calls a year on a network linking 243 million telephones via 135 million local access lines and more than 15,689 central office switches. Each access line averages about 3,300 calls each year. Census Bureau data show that as of March 1990, 93.3 percent of the 94 million U.S. households had a telephone, up 0.3 percent from a year earlier, with 900,000 new homes added to the network.

Use of the network is increasing rapidly in the United States. Due to price decreases between 1984 and 1987, the average number of local calls per day increased from 1.11 billion to 1.50 billion, a 35.1 percent increase. Average daily long distance calls almost doubled, from 88 million to 162 million. By 1990, there were approximately 80 telephones per 100 U.S. inhabitants, compared with 63 telephones per 100 people in West Germany, 60 per 100 in France, and 53 per 100 in Japan and the United Kingdom.

Local telephone services are provided by seven Regional Bell Holding Companies (RHCs), which control 22 local Bell Operating Companies (BOCs); by GTE, United Telecom, Centel; and by more than 1,400 smaller, independent local telephone companies. Many of these local companies operate as rural cooperatives. Long distance service is provided by AT&T, MCI, US Sprint, Allnet, Litel, and about 500 smaller carriers. AT&T and the RHCs are currently subject to price regulation by the Federal Communications Commission (FCC). Local telephone service is subject to regulation by state public utility commissions.

Local carriers are usually independent from long distance companies (United Telecom/Sprint being a notable exception); through FCC-regulated exchange access services, they make facilities available to long distance carriers for interstate calls. Intrastate long distance calls are regulated by state public utility commissions. Exchange access services will generate more than $28 billion in revenues for the local telephone carriers in 1991.

During 1991, the most significant trend in market structure will be the growing number of international joint ventures and strategic alliances. In addition, the growth of private corporate networks, operated by corporations for internal communications, will accelerate. The distinction between private and public telecommunications markets is eroding as regulatory constraints lessen and as technology allows for virtual networks that appear to be controlled by customers but are based on common-carrier networks. Many corporate customers can no longer justify wholly private bypass networks with facilities totally independent from the public network. Instead, large businesses will look for hybrid solutions, mixing public and private networks and applications. An economic slowdown may cause many corporations to cut costs by reducing the rate of growth of their telecommunications budgets. Corporate networks will, however, continue to be a growing market for telecommunications services. In 1991, for example, Ford Motor Company will continue expanding its already huge network to cover five continents, and AT&T will being providing Pan American Airlines with services worldwide. In line with the growth of private corporate networks, telephone carriers will introduce even more sophisticated network management services, such as U.S. West's "self-healing" services, introduced in 1990, which ensure that such networks do not fail.

Global connectivity is the major force driving international alliances such as the service agreements between AT&T and KDD of Japan. More users are demanding access to sophisticated services on a worldwide basis, and telephone carriers in Europe, Japan, and North America are moving to address user needs for data connectivity. U.S. companies are focusing increasingly on the services markets in Europe as the European Community (EC) integrates its members' telecommunications policies and markets.

EC92 is the merger of 12 Western European countries, which constitute a single market of 325 million people with a Gross Domestic Product of $4.5 trillion and a per capita income of $13,770 in 1988. Although not expecting to be fully operational until 1992, the EC member countries are already gearing up for competition with other world markets, with telecommunications services and equipment a major component of EC plans. For equipment, see chapters 30 (Telephone and Telegraph Equipment) and 31 (Radio Communication and Detection Equipment). U.S. companies like IBM and Motorola are already involved in EC telecommunications markets, particularly for data communications and mobile radio services. Opportunities for other U.S. companies to increase their participation in the EC service markets are likely to increase as a result of EC market liberalization and reforms.

Telephone carriers will meet the demand for data communications and connectivity in part through services based on the integrated services digital network (ISDN). During 1990, ISDN services were deployed to roughly 150 corporate customers in the United States, and service will expand slowly during 1991. FCC data show that there were more than 6,100 ISDN "D" channel circuits in the United States by 1990. Many ISDN users have been able to save 20 percent on telecommunications costs as they are able to consolidate leased line services, eliminate expensive rewiring problems, and allocate channels according to demand. However, ISDN will continue to face implementation problems during 1991 because of limited availability of terminal equipment and lack of connectivity nationwide among ISDN switches. The latter problem is called the "island" configuration, whereby carriers can provide ISDN services only from a single central office switch to a local calling area, rather than on a long distance basis between switches. The island configuration results from ISDN vendor incompatibilities and software that does not yet conform precisely to international standards.

Connectivity problems may be eased as carriers finish installing software for Signalling System 7 (SS7), which will be used to provide ISDN nationwide. The SS7 is being deployed rapidly, with some local exchange carriers contracting out to independent vendors for systems integration. Bell Atlantic and BellSouth equipped about 80 percent of their access lines with SS7 by early 1991, for example; by the end of the year, Bell Atlantic expects 65 percent of its switches to be capable of providing ISDN service. US Sprint began its introduction of ISDN service in 1990, while AT&T plans to introduce ISDN to more than 110 cities by 1991. MCI will begin implementation during 1991.

Local Services

In 1990, the total value of capital investment in local exchange communications plant and equipment was about $246 billion, with the largest investment, about $85 billion, being in central office switching. Of local carriers' 135 million access lines in 1990, 17 million were used for PBX and Centrex connections, 46 million for business customers, and about 87 million for residential subscribers.

Total revenues from local exchange services were about $76 billion in 1990, and are expected to grow at a 2.9 percent annual rate during 1991. Local telephone carriers had about $2.7 billion in revenues from private line services, of which local private lines generated more than $1 billion. Voice grade private line services other than data communications brought the local carriers about $476 million in revenue, while data services constituted almost $450 million. Toll (long distance) revenues from private line service were $1.5 billion. Total toll revenues for local exchange carriers were about $16 billion in 1990, indicating that about 15 percent of all local exchange carriers' revenues are derived from intrastate long distance telephone service. For the RHCs, the figure is about 25 percent. Access charges, paid by subscribers and long distance companies to the local exchange carriers, constituted about $28 billion, or an additional 25 percent of the local exchange carriers' revenues.

In one of the most significant mergers since divestiture, GTE and Contel agreed to a $6.2 billion deal to merge their operations. The combined company, with over 17.7 million access lines, will be larger than any one of the Regional Bell Holding companies. Bell Atlantic will be the second largest exchange carrier, with 17.1 million access lines.

Long Distance Services

In the long distance, interexchange telephone service market, AT&T has about a 67.4 percent share. MCI maintained a 12.1 percent share during 1990, US Sprint holds a 8.5 share, and other carriers have about 12 percent. Long distance revenues were about $55 billion in 1990, and will rise about 8 percent during 1991. Prices for long distance service will continue to fall, while calling volume will increase about 10 percent. Access charges paid by long distance carriers for connection with local exchange networks constitute about 50 percent of a long distance company's cost structure, and contribute about 25 percent of the local exchange carriers' revenues.

The total number of interstate switched access minutes handled by all long distance carriers has grown steadily at 13 percent a year since mid-1984. AT&T's traffic has grown at a rate slower than the industry average, while the traffic handled by all other carriers has continued to grow an average of 30 percent a year. The result has been a declining market share for AT&T. AT&T's share of the overall market for interstate switched minutes has declined from over 80 percent in late 1984 to about 64 percent in the first quarter of 1990. This trend is likely to continue in 1991.

Since 1984, rapid traffic growth has been offset by sharply falling prices. As a result, toll revenues have grown more slowly than the volume of long distance calling. From 1984 through 1989, AT&T's share of toll revenues fell from 90 percent to less than 70 percent. Toll service revenues for a number of carriers are shown in Table 1. [Tabular Data Omitted]

The key factor driving the long distance industry, especially for the residential market, is price competition. Long distance companies will continue to face reduced profit margins and high short-term costs from building and maintaining the modern digital network infrastructure needed to provide quality service and reliability. The result in 1990 was an acceleration of the mergers and acquisition trend of the past few years, which is likely to continue in 1991. Another strong area of competition will continue to be the intracorporate communications and private networks market, as the top three carriers compete fiercely for lucrative corporate contracts, many worth tens of millions of dollars.

Industry Consolidation

Industry consolidation continued in 1990, as evidenced by MCI's acquisition of Telecom*USA for $1.25 billion. In addition, MCI took a write-down in 1990 of $1 billion to complete the digitization of its network. While US Sprint's network is 100 percent digitized, and AT&T's is 90 percent (after a 1989 write-down of $1 billion), MCI was only at about 40 percent in 1990, and will use its acquisition of Telecom*USA to expand its use of optical fiber networks and to push forward on network modernization. MCI will seek to capture a larger share of the data communications market during 1991. In addition, United Telecommunications announced its intention in 1990 to buy the remaining 19.9 percent of US Sprint it did not already own. Other mergers during 1990 included Telesphere Communications' acquisition of National Telephone Services Inc. for $48 million.

Other than AT&T, MCI, and US Sprint, some of the other major long distance carriers include Advanced Telecommunications, ALC Communications, Allnet Communications, Cable & Wireless North America, Litel Telecommunications, Metromedia ITT, National Telecommunications Network, RCI, Telesphere International, and Williams Telecommunications.

Remote Data Processing

As remote data processing services become ubiquitous, driven by point of sale terminals, automatic teller machines, credit card validation terminals, and other advanced services, data transmission services will grow from about $800 million in 1988 to $6 billion by 1995. Such services are provided by both common carriers and value-added service providers. Data processing firms depend on data transmission services to communicate with their customers. Data transmission services may be switched or use private lines.

Leased Circuits

About 25 percent of network usage goes to switched measured telephone service, 35 percent for WATS lines, 15 percent for virtual private networks, 15 percent to private line services, and the remaining 10 percent is attributed to other services such as discount and special access. WATS usage will decrease over the next few years as acceptance of virtual private network services increases proportionally. Virtual network services are being offered both domestically and, increasingly, on an international basis.

The demand for private leased circuits will increase more slowly, while the market for basic telephone service is likely to fall as more sophisticated, customized, and user-specific applications become more popular among corporate clientele. The market for T-1 services, private bulk rate circuits offered at 1.544 megahurtz per second, will continue to grow rapidly, and will be about $2 billion in 1991. The fastest growth is in the area of so-called fractional T-1 services, in which the bandwidth for T-1 circuits is allocated among different customers based on demand. Fractional T-1 services were reportedly growing at least 50 percent in 1990.

The market for 900-number pay per call services (sports, weather, stock quotations), currently offered by AT&T, MCI, US Sprint, and Telesphere, will grow from $500 million in 1988 to $4-5 billion by 1995. Growth in 900 services will come mainly at the expense of growth in toll-free 800 services, which should remain relatively flat through the next several years. The overall market for 800 number services, however, is about $25 billion and thus much larger. There are about 200,000 telemarketing services nationwide that depend on such services.

INTERNATIONAL TELEPHONE SERVICES

There are about 350 U.S. providers of international telephone services, carried both by satellites and by undersea cables of either copper or optical fiber.

Satellite services are provided through the Communications Satellite Corporation (COMSAT), a private company that is U.S. signatory to the International Telecommunications Satellite Organization (INTELSAT) and to the International Maritime Satellite Organization (INMARSAT). These are the global satellite cooperatives owned by the world's telephone companies. In the past few years, the FCC has authorized private undersea cables and satellite systems to compete with COMSAT and with traditional telephone carriers like AT&T.

Many developments during 1990 affected the structure of the international telephone services market. AT&T, losing market share domestically but expanding in international markets, signed an agreement with the Soviet Ministry of Communications to explore cooperation in telephone services. It also installed a new $12 million satellite earth station in California that will transpond with other earth stations in 12 Pacific Rim countries. And the company has introduced enhanced facsimile services to the United Kingdom and Japan, aided by a new U.S. trade agreement with Japan on international value-added services. AT&T's ownership of Istel, a British value-added service company, and its equipment alliance with Italtel, the Italian telecommunications company, will also provide inroads to the European services market. In partnership with Japan's KDD, AT&T also announced a deal to link the People's Republic of China to the United States and Japan with satellite and fiber optic cable facilities.

Other U.S. companies were also active overseas in 1990. Bell Atlantic and US West signed a letter of intent with Czechoslovakia to form a joint venture company to build a public packet-switched data network. These two companies also agreed to construct a national cellular telephone system and to work towards modernizing Czechoslovakia's overall network. Also, Ameritech and Bell Atlantic agreed to purchase New Zealand's state telephone company for $2.4 billion. Sweden and Hungary announced plans to privatize their telephone companies, an activity in which U.S. companies may have an opportunity to participate. Bell Atlantic won and then lost a contract to manage part of Argentina's telephone system, while Nynex now owns 50 percent of the telephone company in Gibraltar. Privatization is likely to increase in 1991.

For the first time, advanced services beyond basic telephone, telex, telegraph, and leased circuits, are now available internationally. For example, both AT&T and Japan's KDD began ISDN service to France in 1990 in cooperation with France Telecom. And MCI began providing its virtual private network service and its electronic mail services to Belgium.

Most international services, however, consist of basic switched services, including telephone, telex, and telegraph. In 1990, revenues collected by U.S. carriers from their customers for these international services originating in the United States, including services to Canada and Mexico, totaled about $8 billion. Switched telephone service accounts for at least 80 percent of that total.

In general, prices for international telephone and telex services are appreciably higher overseas than in the United States, so calls from a foreign country to the United States cost more than calls from the United States to that foreign country. This is one reason the United States generates more international calls than it receives. But since foreign companies charge more than U.S. companies for connecting international calls, the United States pays out more than it receives; the U.S. net settlements deficit for international telecommunications traffic rose from approximately $40 million in 1970 to more than $2 billion in 1990, as shown in Table 2. The FCC estimates that $1 billion of this deficit is a direct subsidy paid by U.S. consumers to foreign telecommunications administrations that charge overly high prices to other telephone companies for completing international calls. [Tabular Data Omitted]

The deficit is produced almost entirely by telephone traffic, which is growing 20 percent a year, while telegraph and telex have been declining (see Table 3). The deficit is keeping pace with growth. With 20 percent compounded annually, the deficit will double about every 3.6 years. If the current growth rate and settlements practices are maintained, the deficit will be about $7 billion in seven years. [Tabular Data Omitted]

In 1990, the FCC opened an inquiry into the way international payments are established and suggested that it might encourage rate negotiations between U.S. and foreign carriers in order to lower accounting rates for services, thereby reducing the deficit.

A major reason for the growth in international telephone service appears to be falling costs; the average cost per message dropped 55 percent between 1975 and 1988. On the other hand, the cost of telegraph service rose by 150 percent, suggesting that users have found more economical alternatives. Telex prices decreased 13 percent over the same period, and demand increased until 1986, when electronic mail and other substitutes began eroding the market position of the older technology.

The average cost of international telephone service dropped from $21.42 per message in 1975 to less than $9 in 1990, and this trend is likely to continue. In contrast, telegraph rates have risen from an average $6.77 per message in 1975 to more than $17 in 1990. Telex prices have remained relatively stable, going from $7.64 in 1975 to about $6 in 1990.

The primary reason for the fall in prices is the declining cost per voice channel in transoceanic and satellite systems. As a comparison of trans-Atlantic cable systems shows (see Table 4), the 1970 cost per voice path was approximately $49,000, while in 1988 the cost was about $9,000. The underlying reason for the dramatic decrease in costs is the technology that has enabled the total capacity of cables to increase substantially from 1,440 voice paths over a coaxial cable in 1970 to 37,800 voice paths over fiber optic cable in 1988. [Tabular Data Omitted]

AT&T, the largest U.S. carrier of international calls, had 1988 revenues of $2.7 billion. The most significant international calling destinations for AT&T customers in the United States were the United Kingdom, West Germany, Japan, the Philippines, Australia, India, and Korea, each representing at least $40 million.

MCI and US Sprint entered the international market in the mid-1980s. With respect to telephone service, MCI's international revenue was $205 million in 1988, and Sprint's was $73 million. MCI subsidiaries, Western Union International and the newly-acquired RCA Globcom, also generated $226 million in revenues for international record services (i.e., telex and telegraph) in 1988. MCI and Sprint derive substantial portions of their revenues from Canada, Mexico, the United Kingdom, Japan, France, and Italy. AT&T's international message telecommunications service (IMTS) market share eroded somewhat during the 1985-1988 period, but remained very large through the late 1980s (see Table 5). AT&T's market share for international traffic is likely to erode further during 1991. [Tabular Data Omitted]

Value-Added Network Services

The major trend shaping market structure during 1991 in the value-added network services (VANS) business will be global connectivity. VANS include packet-switched and public data services; telecommunications and information gateway services; code and protocol processing and conversion; electronic mail services; electronic data interchange; travel reservation systems; voice mail services, including voice store and forward; audiotex (interactive 900 telephone) services; enhanced facsimile services, such as store and forward; alarm and security services; utility and environmental monitoring; transaction and credit validation services; electronic funds transfer; automated teller machine services; point-of-sale transaction services; electronic banking; data processing services; on-line database access; information retrieval services; videotex (on-line data base) services; telecommunications network management services; remote computer monitoring services; electronic software distribution; and computer processing and data preparation.

VANS are one of the fastest growing segments of the telecommunications services industry, expanding at a rate of at least 10 percent annually. U.S. revenues in 1990 were approximately $670 million for public data networks providing enhanced services. Data processing services totalled about $30 billion, and on-line database services were about $4 billion. Revenues for Electronic Data Interchange (EDI) services, one of the fastest growth areas for VANS, were about $800 million in 1990. EDI will continue to experience high growth rates in 1991. In 1987, according to the EDI Association, there were only 1,465 users, 8,800 in 1990, and more than 9,000 expected in 1991.

Other VANS with high growth during 1991 will be transaction oriented, with such services as claims processing, point-of-sale settlement, and credit card validation. Demand is also growing for public data communications networks to interconnect local area networks (LANs) using high-speed access to packet-switched networks and other new technologies. With over 18 million LAN nodes worldwide and more than a 20 percent annual growth rate in the LAN industry, this will develop into a major business for value-added service providers.

A variety of companies are considered "value-added" carriers or network service providers. Generally, value-added networks purchase leased circuits from common carriers and optimize their use by providing packet-switching, protocol and speed conversion, and security, administrative and billing features. The client in turn receives a less expensive, more reliable, and more robust data communications service than usually would be available from a basic telephone carrier.

International VANS Alliances

The trend toward global networking to meet multinational corporate demand is driving foreign investment in the United States and forcing U.S. companies to forge overseas strategic alliances and joint ventures in the value-added and data communications market. During 1990, this trend was evident as General Electric Information Services (GEIS) announced plans to add Asia as a site for a fourth network to complement facilities in New Jersey, Paris and London. GEIS also began voice mail service to England, and introduced an international video-conferencing service between London, the United States, and Japan. British Telecom acquired Tymnet from McDonell-Douglas for $355 million, while France Cables and Radio, a subsidiary of France Telecom, acquired 80 percent of Cylix Communications, a U.S. provider of value-added data communications services and of very small aperture terminal satellite networks. France Cables, through a U.S. holding company, also holds 14.9 percent of TRT/FTC Communications, an international carrier mostly owned by the U.S. company Pacific Telecom Cable.

MCI Communications purchased a 25 percent share in Infonet, a data networking company owned by telecommunications administrations in France, Germany, Belgium, Sweden and Spain. AT&T now owns Istel, a British value-added services provider, which will augment its ability to provide electronic mail and related services on a global basis. And Japan's NTT Data Communications opened a large facility in New Jersey. Also in the international arena, Canada and the United Kingdom opened to competition their markets for long-distance voice telephone services; the United States negotiated a new agreement further opening the value-added services market with Japan; and discussions continued in Geneva at the General Agreement on Tariffs and Trade (GATT) organization on whether to subject world trade in telecommunications services to the disciplines of international trade law, which could guarantee access to and use of basic telecommunications services worldwide.

Domestic VANS Alliances

Western Union and US Sprint joined together their E-Mail networks, while US Sprint folded its Telenet data communications subsidiary into its long-haul carrier organization, now called the Sprint Data Group. Sprint and BT Tymnet together control about 75 percent of the U.S. value-added public data services market.

In videotex services, there are more than two dozen commercial systems in operation in the United States. Data on some of the larger firms are presented in Table 6. In 1990, there were nearly 1.7 million subscribers of videotex services, an increase of 20 percent over 1988. The market size is estimated at $99.9 million in 1987, $159.9 million in 1988, and about $200 million by 1991. Online databases and interactive services continue to experience significant growth, and provide a stimulus to the public data networks, which are used as a means of access. There are more than 4500 databases available in the United States via at least 620 online services. [Tabular Data Omitted]

Rates and Tariffs

Despite the AT&T divestiture as of January 1984, and the competition stemming from more liberal FCC policies, subsidies in the form of access charges paid by long distance to local telephone carriers in the United States continue to be substantial, helping keep down the cost of local service. While U.S. inflation has averaged 6.1 percent annually since 1977, the increase in the cost of telephone service has averaged only 4.4 percent, according to the U.S. Bureau of Labor Statistics. Between 1977 and 1989, the inflation adjusted price of telephone service decreased by 24.3 percent. American consumers pay only about 2 percent of their income for telephone service, roughly the same percentage as in 1974.

Price changes have been most dramatic for long-distance telephone service, where (in current dollars) prices have risen 0.6 percent a year on average, less than one-tenth the overall rate of inflation. Real prices have fallen by 45.7 percent, while for interstate services alone the drop has been 59.7 percent since 1977. The real price of an intrastate telephone call was 26 percent less in 1989 than it was in 1983, while the price of an interstate long distance call is 46.3 percent less today.

For local telephone service, rates rose during the 1980s. Consumers pay about 5.9 percent more in real terms for local service today than 10 years ago. However, the real price of local service has begun to decline recently, and since 1986 has fallen 3.0 percent.

The price for international calls has also decreased substantially and is well below that in other industrialized countries. Between 1977 and 1987, the average price per minute for an international call originating in the United States fell from $2.20 to $1.16. Adjusted for inflation, these data represent a 71.8 percent price decrease. In 1988, the price per minute for long distance calls originating in the United States and terminating in the 10 countries with the highest volume of U.S. traffic was 28 percent lower than for calls going in the opposite direction. Prices for international services will continue to fall during 1991.

During the first half of 1990, the Consumer Price Index for telephone service increased slightly, as increases in the cost of local service offset declines in the cost of long distance services. Local service prices rose at an annual rate of 4.4 percent, while the cost of interstate calling declined at a rate of 2.9 percent and the cost of state toll calls fell at a rate of 2.7 percent. As a result, the composite Consumer Price Index for telephone service increased at an annual rate of 1.9 percent. The nation's overall rate of inflation during the first half of 1990 was 6.1 percent. Thus, after adjusting for inflation, the real cost of telephone service fell at a rate of about 4 percent.

Telecommunications Policy Developments

In a major development, the Ninth Circuit Court of Appeals in California overturned the FCC's Third Computer Inquiry decision, throwing into question the issue of Open Network Architecture (ONA) and competition safeguards. In response, the FCC indicated it would continue its ONA program and open a new inquiry docket on the issue of competition policy and so-called non-structural safeguards that do not require AT&T and the RHCs to maintain separate subsidiaries for the provision of unregulated services. See the 1987 U.S. Industrial Outlook, chapter 31 (Telecommunications Services), for a fuller discussion of these issues.

The FCC also sought comments on a plan to lessen regulation of AT&T long distance services provided to large business customers, but maintain current policies for services provided to small business and residential customers. The FCC proposed that AT&T be permitted to provide customized, single-customer services to large business users under contract instead of tariff, or through private offerings not regulated by the FCC. In developments related to the AT&T divestiture, hearings were held in Congress during 1990 to investigate amending the Modified Final Judgment of the AT&T divestiture Consent Decree and lifting the line-of-business restrictions on the RHCs; this effort will continue in 1991. AT&T has been subject to greater regulation than other long-distance carriers since its divestiture because the FCC designated the company a "dominant" firm in the industry. As AT&T has lost considerable market share since divestiture, however, and the Regional Holding Companies now offer all long-distance carriers equal access to the local exchange network, the FCC proposes to reduce the level of regulation imposed on the company.

In a significant regulatory development, the FCC decided in October 1990 to impose a system of rate regulation known as price caps on GTE and the Bell Operating Companies' interstate access services, despite strong opposition from users and many long distance companies. In so doing, the FCC reduced the companies' allowable rate of return from 12 percent to 11.25 percent, but ruled that they can now retain additional profits from exchange access services. The plan will be voluntary for all other local exchange carriers, and is designed to provide the telephone companies with greater incentives to become more productive. The FCC estimates the plan will result in lower interstate access charges of $337 million in 1991, savings which long distance carriers can then pass on to their customers. Lower rates are likely to stimulate network usage, helping drive up carriers' revenues. - Ivan H. Shefrin, Office of Telecommunications, (202) 377-4466, September 1990.

CELLULAR AND RADIO SERVICES

Radio communications are becoming an increasingly dynamic force in the telecommunications services industry, spurred primarily by new technologies and strong demand.

The three most important new technologies are digital cellular, PCNs (personal communications networks), and CT-2 (advanced cordless systems). Cellular phones and PCNs handle 2-way communication; CT-2 handles only 1-way (outgoing) calls. Cellular is the only one that has permanent authorization from the FCC; a few CT-2 and PCN companies have been granted trials. Both PCNs and CT-2 have already been authorized in the United Kingdom.

Cellular technology involves cell sites located around a metropolitan area, and software that hands off calls from one site to another, enabling customers to travel without interrupting calls. Sixty percent of the cellular traffic is vehicular. Cellular also has the capacity of handling calls from hand-held portable units, but PCN and CT-2 companies are hoping to make inroads in the pedestrian market with their less expensive customer units and service charges.

Cellular

Annual revenues from cellular telephone services were about $5.2 billion in 1990, with over $8 billion collected since service was first inaugurated in 1983. Revenue growth was about 50 percent in 1990. There were 4.4 million subscribers by mid-1990 and over 7 million subscribers expected by 1991, up from 3.5 million in 1989. Worldwide, there were more than 10 million users of mobile cellular telephone service in 1990. Service was available in all U.S. metropolitan areas and was being installed in many rural areas. There are about 375 companies that resell cellular telephone service; gross capital investment in the industry reached a cumulative level of more than $5.2 billion in mid-1990, up 16 percent in 6 months. The market research firm Dataquest estimates that cumulative revenues should be $7.6 billion by 1993, with the projected compound annual growth rate expected to increase to 22.6 percent.

The cellular industry's consolidation process, marked by two notable mergers in 1990, is expected to continue at a slower pace in 1991. The trend of large corporations expanding their cellular operations by combining with smaller firms is likely to predominate. In July 1990, GTE and Contel announced their intention to merge. If approved by the companies' boards and the FCC, this $6.2 billion deal would create the country's second largest cellular operator, with about 500,000 subscribers. Both companies had been aggressively acquiring cellular operations.

Similarly, Pacific Telesis and Cellular Communications Inc. (CCI) announced plans in August 1990 to combine cellular operations in the Midwest as part of an agreement that will allow Pacific Telesis to eventually buy out CCI. The initial $87 million agreement will create one of the three largest regional cellular networks with over 530,000 subscribers. If approved by the FCC and shareholders, the deal is expected to close in the second or third quarter of 1991. McCaw Communications provides cellular telephone service to more than 850,000 customers.

PCNs and CT-2

Spectrum shortage problems which have plagued the cellular industry will continue to worsen in 1990 due to experiments with new technologies for which no permanent spectrum has been allocated. Overcrowding of the finite radio spectrum, coupled with a surge of innovative proposals for new spectrum-dependent services such as CT-2 and PCNs, led to consideration of several possible resolutions. If the Emerging Telecommunications Technologies Act is passed in the final quarter of 1990, it would reassign 200 MHz of government spectrum to the private sector. Spectrum auctions and user fees also have been suggested. The FCC is likely to look most favorably on proposals demonstrating high spectrum-efficiency.

PCNs utilize personal handsets or cordless telephones that would operate in a variety of pedestrian, office, residential, and possibly vehicular settings, via microcell technology. This concept moved closer to reality in 1990 when the FCC approved experimental licenses for several PCN trials. Strong industry interest has also compelled the FCC to begin an inquiry into authorizing PCNs on a commercial basis. Entities interested in building PCNs expect that PCN products and services will be far less expensive than their cellular counterparts.

Several trials of these new technologies will begin in 1991, with CT-2 operating in New York and Florida at 940 to 941 MHz; and PCN trials running in Washington, D.C. (American Personal Communications), and in Houston and Orlando (Millicom subsidiary PCN America) at the 1.7 to 2.3 GHz frequency. - Linda Gossack, Office of Telecommunications, (202) 377-4466, September 1990.

SATELLITE SERVICES

In the satellite services industry, innovative proposals for new applications will generate growth in 1991. Annual revenues from the three broad areas of satellite services, Fixed Satellite Services (FSS), Mobile Satellite Services (MSS), and Direct Broadcast Satellite (DBS) services, are expected to rise from $800 million in 1990 to around $1 billion by 1992.

In 1990, 29 operational U.S. communications satellites were in orbit, run by six U.S. domestic satellite operators. These satellites carried approximately 588 transponders in 1990, thought to represent around 38 percent of civilian transponders available worldwide. Industry sources indicate that increases in demand are closing in on currently available transponder space, with the highest growth in demand coming from video services. Although most of these satellites will reach the end of their lifespan in the early 1990s, a number of planned satellite launches will augment transponder availability. In the latest (November 1988) FCC processing round for satellite system applicants, which will provide satellite capacity through the 1990s, seven companies applied for permission to construct and launch a total of 15 satellites plus 3 ground spares. The new transponder capacity of these 15 satellites will be roughly equivalent to 330 Ku-band transponders and 144 C-band transponders, easing the tight supply.

Fixed Satellite Services

The Fixed Satellite Services area continues to be dominated by basic video broadcast services such as Cable TV (CATV) and other television markets. These services currently represent around 60 percent of all satellite revenues. Telephone services' contribution to satellite service revenue has been shrinking as fiber optic cable telephone systems gain an increasing share of the market.

U.S. revenues from international satellite services, both from the International Satellite Organization (INTELSAT) and from separate systems, continued to rise in 1990. COMSAT, the U.S. representative to INTELSAT, reported that its 1989 international revenues of $412 million represented an annual increase of more than 15 percent over 1988 satellite service revenues. COMSAT revenues from INTELSAT increased to $280 million in 1989, due primarily to an increase in voice circuit traffic and international business (private line) services. Video, voice, and data traffic to and from the United States rose 11 percent in 1989, with the strongest growth in voice-grade telephone traffic. However, the growth in voice transmission will likely be offset by COMSAT's wider use of digital compression technology. COMSAT predicts an increase in the relative share of video and data, where digital compression technology is less prevalent.

International satellite systems separate from INTELSAT, owned either privately or by international consortia, continued to redefine their role in 1990. The only operational U.S. separate system was PanAmSat's PASI, with Orion and Columbia - also U.S. owned - nearing launch dates. Four additional applicants have not yet secured the requisite foreign operating agreements for further FCC licensing. In July 1990, PanAmSat petitioned the FCC to allow separate system operators to link with public switched telephone networks, arguing that increased competition with INTELSAT would lower the cost of such telephone services. PanAmSat, which provides video and data transmission for the U.S., South and Central America, and Europe, plans to launch and additional satellite system for the Pacific Rim by late 1993. Orion, the second U.S. operational separate system to win approval from INTELSAT, plans to launch its two-satellite private system into Atlantic orbital slots by late 1992 and has reportedly concluded satellite service agreements with several unnamed European countries. However, the FCC has yet to approve Orion's construction and operating license, due to concerns regarding its ability to meet the equity financing criteria. Columbia recently won a court contest with COMSAT to use Tracking and Data Relay Satellite (TDRS) capacity on two NASA satellites, advancing its planned separate system.

Interest in separate systems remains high overseas; however, INTELSAT's prohibition against separate systems interconnecting with public switched networks for international telephone services has remained an obstacle for new separate systems. While AsiaSat, a privately-owned satellite launched in April 1990, currently provides only domestic services (video, voice, and data) for Asian nations, it may benefit from PanAmSat's petition to overrule the separate systems prohibition.

The U.S. market for private FSS networks using satellites for internal corporate communications will continue its upward trend in the 1990s. The private FSS networks of choice are currently Very Small Aperture Terminal (VSAT) systems that operate within Ku-band frequencies and use antenna dishes as small as 1.2 meters in diameter. Around 160 VSAT systems were operational in 1990, with some 180,000 private satellite network earth stations projected to be in place by 1992. Industry analysts predict that revenues will grow at around 20 percent a year, reaching as much as $1.7 billion by 1992. VSAT's low cost, said to be 50 percent lower than leased line costs, will continue to attract businesses interested in more efficient and economical data communications, training, video conferencing, and voice telephone technology. Major VSAT networks can be expected to be brought on line at the rate of 10 to 15 annually for the next five years, and to use approximately 20 to 25 percent of available transponder space by the end of that period. However, because the VSAT market for major corporate end-users is almost saturated, longer term U.S. market opportunities lie with medium and small-sized companies. While data on foreign private FSS networks are not available, such networks are attractive as alternatives to leased-line systems.

Mobile Satellite Services

The mobile satellite service market had a boost in 1990 by several proposals for light satellite systems, launched in low-earth orbit (LEO) and operating under 1 GHz. This trend appears to be based on the availability of cheaper launches, as initiated by Orbital Sciences Corporation's Pegasus launch service. As a result of these proposals, annual revenues from LEO mobile satellite services may rise to $3 to $5 billion by the year 2000. The nascent industry is looking to the 1992 World Administrative Radio Conference (WARC) to allocate needed bandwidth and to establish international norms for licensing mobile systems.

The FCC has received two LEO mobile satellite services applications: Star Net, proposed by Starsys to provide two-way communications and position determination services using spread spectrum technology; and Orbital Communications' Orbcomm proposal for as many as 20 LEOs, heavily concentrated in emergency and personal communications services. While Motorola has not yet filed with the FCC, that company announced an innovative satellite-cellular telephone system, Iridium, in June 1990. That system would include 77 LEO satellites for a digital switched network in space, providing worldwide cellular-type coverage. The system is planned for full service by 1996.

With the evolution of new MSS applications, annual revenues are projected to reach $150 to $200 million worldwide by 1992, and $1 billion by 1995. Plans by COMSAT and the American Mobile Satellite Corporation (AMSC) for airborne MSS were boosted by the FCC's allocation of L-band spectrum for MSS, and by a proposal for technical standards and licensing procedures for aircraft earth stations. The FCC also provisionally allowed L-band maritime mobile satellite services to be transmitted via INMARSAT for specified aeronautical and land mobile satellite services. Also, the International Airline Telecommunications Society (SITA), one of the world's largest global networks, will begin offering digital air-to-ground data transmission services via satellite in 1991.

Direct Broadcast Satellite Services

While no Direct Broadcast Satellite (DBS) services were active in the United States, interest in the technology continued to run high. DBS, which would offer more video channels at potentially lower cost than cable television, as well as voice and video quality higher than traditional cable broadcasts, is widespread in Japan and parts of Europe. Both the U.S. Senate and House had bills pending in 1990 that would "re-regulate" the cable television (CATV) industry and encourage competition by ensuring access to programming by alternative multichannel applications, including DBS services. However, high start-up costs and difficulties of penetrating the CATV markets, rather than regulating barriers, are the prime obstacles to a true DBS system. Digital video compression technology associated with the emerging High Definition Television (HDTV) industry is seen as a potential catalyst to wider acceptance of DBS applications. The increased bandwidth requirements and frequency allocation problems now plaguing HDTV could be moderated by using a DBS system.

Nine U.S. companies have been granted conditional permits by the FCC for high-power, "true" DBS services, operating on the Ku-band with downlinks between 12.2 and 12.7 GHZ on frequencies dedicated solely to DBS. While no U.S. DBS launches have been made to date, FCC reports that all nine permitees have submitted evidence of "due diligence" in contracting the construction of DBS satellites. The first satellite launch for high-power DBS is slated for late 1993 by Sky Cable, a $1 billion, 108-channel service planned by a joint venture of Hughes Communications Inc., Cablevision Corporation, NBC, and Rupert Murdoch's News Corporation Ltd.

Medium-power DBS, which operates in the 11.7 to 12.2 GHz range on FSS-designated bands, promises more immediate service, as the application uses existing technology and can utilize satellites already in orbit for other applications. SkyPix, a Seattle-based firm, plans to launch an 80-channel, medium-power DBS service with nationwide availability as early as May 1991. The project would be the first DBS system to use video compression techniques for digital broadcast of programming such as pay-per-view (PPV) television and movies. Also scheduled for launch by late 1990 or early 1991 was a 10-channel, PPV DBS system planned by K-prime Partners, a venture of nine cable multiple system operators (MSOs), including TeleCommunications Inc. and Viacom. - Patricia Cooper, Office of Telecommunications, (202) 377-4466, September 1990.

Outlook for 1991

Revenues of the domestic telecommunications service companies are expected to increase 5.7 percent in 1991, with low growth caused by the possibility of economic slowdown, reduced housing and commercial construction, and lower corporate telecommunications expenditures. Long distance revenue will grow about 6 percent while international service revenues should drop slightly from 1990 levels. However, value-added telecommunications and data communications services will continue to experience growth rates of 15 percent during 1991 as the U.S. network becomes increasingly digitized, and commercial ISDN products develop more rapidly. Cellular telephone revenues will increase about 37 percent. Call volume will continue to expand in 1991, but this may be offset by moderate price reductions in local and long distance services. The number of mergers and acquisitions is likely to slow from the pace of recent years.

Long-Term Prospects

The next decade is likely to be one of significant change for the telecommunications services industry, which may look quite different in terms of market structure within the next five years. The merging of public and private telecommunications networks, the explosion of new mobile communications technologies and services, the introduction of broadband transmission, ubiquitous digitization, and virtually cost-free bandwidth are some of the forces that will shape the change. For regulators, the convergence of technology and market forces means even greater difficulties in keeping unregulated activities distinct from tariffed services.

Public data networks in the United States will face increased competition during the 1990s from new technologies such as virtual private network services, software-defined data services, an advanced method of circuit and packet-switching known as frame relay that will allow simultaneous voice and data communications, fast-packet switching at high bandwidth that will also allow voice communications as well as data, optical fiber systems using SONET (fiber optic) technology, and broadband ISDN. SONET technology will experience an especially high growth rate, both in the United States and abroad. France Telecom plans to add the capability by 1992, for example. The overall trend for both value-added services and common carriers will be to integrate voice and data applications at very high speeds.

Voice messaging and speech recognition will also play a major role in the industry during the coming years, as will store-and-forward enhanced facsimile services, EDI and electronic mail. Carriers will attempt to integrate such services into single-service packages. In terms of user applications, the penetration of such sophisticated telecommunications services into the residential market has been much slower than for business customers. However, it is likely that with the growing concerns over scarce energy resources and environmental quality, services oriented towards telecommuting will become more widespread during the 1990s, as workers increasingly spend more time away from the office. The growth of at-home work may spur the development of more advanced telecommunications business services into the residential market. Such trends were already evident during 1990, as AT&T and the state of Arizona planned a test to discover whether telecommuting can improve environmental quality, and may ultimately lead to a market convergence between business and home customers. - Ivan H. Shefrin, Office of Telecommunications; (202) 377-4466, September 1990.

PHOTO : Figure 29-1 U.S. Telecommunications Services Trade Deficit

Additional References

1987 U.S. Industrial Outlook, U.S. Department of Commerce. Critical Connections: Communications for the Future, U.S. Congress,

Office of Technology Assessment, OTA-CIT-407, U.S. Government

Printing Office, January 1990, Washington, DC 20402. Telephone:

(202) 783-3238. Statistics of Common Carriers, Federal Communications Commission,

December 1989, 1919 M Street, NW, Washington, DC 20254. Telephone:

(202) 632-0745. U.S. Telecommunications in a Global Economy: Competitiveness at a

Crossroads, U.S. Department of Commerce, August 1990. Telephone:

(202) 377-1880. Communications Week, CMP Publications, Inc., 600 Community Drive,

Manhasset, NY 11030. Telephone: (516) 365-4600. Industry Basics: Introduction to the History, Structure and Technology of

the Telecommunications Industry, 3rd Edition, 1989, North American

Telecommunications Association, Washington, DC 20036. Telephone:

(202) 296-9800. Telecommunications Market Review and Forecast: Annual Report of the

Telecommunications Industry, 1990 Edition, North American Telecommunication s

Association, Washington, DC 20036. Telephone:

(202) 296-9800. Telecommunications Reports, Business Research Publications, Inc., 1036

National Press Building, Washington, DC 20045. Telephone: (202)

347-2654. Telephone Statistics 1990, United States Telephone Association, Suite 800,

900 19th Street, NW, Washington, DC 20006-2102. Telephone: (202)

835-3100. Telephony, Telephony Publishing Corporation, 55 East Jackson, Chicago,

IL 60604. Telephone: (312) 922-2435.

COPYRIGHT 1991 U.S. Department of Commerce
COPYRIGHT 2004 Gale Group