Telecommunications services - Industry Overview

More than 2,000 companies and 890,000 employees make up the U.S. telecommunications industry, which serves more than 88 million households and 30 million businesses nationwide and has revenues exceeding $175 billion. The industry is broadly divided into providers serving the communications markets for local exchange, long distance (toll), international, telex and telegraph, cellular and mobile radio, satellite, data communications, and Value-Added Network Services (VANS). The companies serving these markets are both regulated common carriers a d unregulated private network providers.

Before reading this chapter, please see "How to Get the Most Out of This Book" on page 1. 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 (SIC) system. For other topics related to this chapter, see chapters 26 (Information Services), 29 (Telephone and Telegraph Equipment), and 30 (Radio Communication and Detection Equipment).

The Federal Communications Commission (FCC) regulates interstate common carrier communications, while individual state Public Utility Commissions (PUCs) regulate communications within their jurisdictions. The FCC also regulates the use of radio frequencies by the U.S. telecommunications industry through a system of spectrum allocation and licensing. Since the break-up of AT&T in 1984, the U.S. common carrier network has been divided into 161 Local Access Transport Areas (LATAs). Communications among LATAs are handled by long distance carriers, while intra-LATA telecommunications (both local and toll calling) are the responsibility of the Local Exchange Carriers (LECs). Private telecommunications networks, which do not offer services to the public at large, are not regulated as common carriers.

Use of the telecommunications network is increasing rapidly in the United States over a network of more than 15,480 central office switches and 140 million telephone access lines. The United States has about 49 access lines per 100 population, while Canada has 53.4, Japan 42.2, Sweden 66.7, and the United Kingdom 41.4 lines. Of switched access lines in the United States, more than 119.8 million are analog and 5.4 million are digital. The volume of interstate telephone traffic over these lines has grown since 1983, when less than 8 percent of calling minutes were interstate, to more than 14 percent today. Price reductions, aggressive telephone company advertising, and growth in the U.S. economy led to steady growth in long distance telephone usage since 1984. As telephone rates continue to fall, calling volume will increase proportionately because the economic demand for telephone service is highly price-elastic.

International traffic is growing more quickly (about 7 percent per year) than domestic traffic, however, and data communications traffic is expanding at roughly twice the rate of voice telephony. During 1991, callers made more than 402.5 billion local calls, 20.3 billion intra-LATA toll calls, and 45.1 billion inter-LATA toll calls. On an average business day, there are about 9.5 billion minutes of telephone calling.

The physical telecommunications plant consists of about 750,000 miles (1.2 million kilometers) of aerial wire and more than 3.5 million miles (5.6 million kilometers) of cable. In addition, more than 4.4 million miles (7.04 million kilometers) of optical fiber are deployed, and microwave radio relay systems cover more than 57,000 miles (91,200 kilometers), which is the equivalent of 165 million miles (264 million kilometers) of individual telephone circuits. There are about 18.5 million telephone poles in the United States. Total cumulative investment in U.S. telecommunications plant and equipment installed by the firms covered in this chapter was about $290 billion in 1991. Investment for that year was about $20 billion and should grow to $22 billion in 1992.

Local telephone services are provided by seven Bell Regional Holding Companies (RHCs), which control 22 local Bell Operating Companies (BOCs) and by the following firms: GTE, United Telecom, SNET, Centel, and 1,354 smaller, independent local telephone companies. Many of these local companies operate as rural telephone cooperatives. GTE, with its acquisition of Contel completed in 1991, became one of the largest local exchange carriers in the country, with more than 15 million access lines. Long distance service is provided by AT&T, MCI. US Sprint, Metromedia/ITT, Cable & Wireless, Advanced Telecommunications (ATC), Allnet, and about 500 smaller carriers.

Major Trends

During 1991, the major developments were consolidation in the long distance industry segment; a cutback in corporate telecommunications budgets; a dramatic slowdown in local access line growth; an acceleration of private networking services offered by carriers and VANS providers; and continued globalization of the industry. The Persian Gulf conflict created a sharp rise in demand for certain international services, particularly videoconferencing. Network management will continue to be an important issue during 1992, and for the rest of the decade, as private and public networks become significantly more complex as they expand around the world. Strategically, many telecommunications carriers are focusing their efforts on the development of new, specialized services. Their gool is to generate revenue in such growing markets as data communications while consolidating their resources to maintain market share in voice telephone service and other mature markets. The wave of mergers and acquisitions among long distance carriers in recent years will continue as the industry consolidates further during 1992.

        Table 1: Largest Telephone Companies
          (by access lines as of Dec. 1989)

Bell Atlantic Corp                       17,056,802
BellSouth Corp                           16,720,367
Ameritech Corp                           15,899,000
NYNEX                                    14,960,953
Pacific Telesis Group                    14,202,949
JS West Communications                   12,306.536
GTE Corp.(1)                             12,300,000
Southwestem Bell Corp                    11,444,061
United Telecommunications, Inc.           3,811,980
Contel Service Corp.                      2,591,090
Southern New England Telephone Co         1,875,000
Centel Corp                               1,590,716
ALLTEL Corp                               1,123,590
Puerto Rico Telephone Co                    803,713
Cincinnati Bell Telephone Co                781,064
Rochester Telephone Enterprises, Inc.       610,338
Century Telephone Enterprises               296,034
Telephone & Data Systems, Inc               263,914
Pacific Tolecom, Inc.                       252.732
Lincoln Telephone & Telegraph Co.           185,338

(1) GTE acquired Contel in 1990 to become the nation's fourth largest telephone
company.
SOURCE: United States Telephone Association.

Services

The trend toward globalization gained momentum during 1991 as US Sprint finished an optical fiber network that will link Europe to Asia via the company's U.S. network. Such facilities will enable multi-national corporations to link foreign offices to their headquarters by a variety of means and encourage greater international investment and trade. However, despite the large corporate demand for private networks, users still face formidable obstacles in designing and implementing international private networks. For example, a German firm that provides airline computer reservation services wanted to build a network with hubs in Munich and Paris. After difficulties in securing leased line service from France Telecom, the firm moved its second hub to London instead. Another firm reportedly had to wait 18 months before getting a private circuit from central to northern Europe. Other problems in creating international private networks include different technical standards, restrictive policies on attaching equipment to the public network, and high prices for bulk-capacity leased circuits.

In the United States, a critical strategic and technical issue for the U.S. telecommunications industry in 1992 will be ensuring the integrity and security of the national network infrastructure. During 1991, as security concerns were heightened by the Gulf conflict, carriers took added precautions. However, several unexpected events caused major breakdowns of the country's telecommunications system. In January 1991, the inadvertent cutting of an AT&T optical fiber cable disrupted New York stock markets and long distance service to three states. (A ninehour computer software malfunction a year earlier had blocked calls throughout half the country.) In June 1991, software breakdowns of the telephone computer signalling system in four major metropolitan regions put more than 10 million customers out of service.

The National Research Council concluded that more network failures will occur unless telephone companies move to resolve problems with their complex telecommunications software. Most major carriers have since instituted programs to assure network reliability, but the increasing intricacy of digital technology and the software that drives it will be a key consideration during 1992 and beyond.

In the area of technology, the industry in 1992 will experience a proliferation of high-speed data services through a variety of broadband options. The RHCs' telephone operating companies will continue to introduce fast packet switching, high speed frame-relay data services, and Switched Multimegabit Data Service (SMDS). The introduction of the Integrated Services Digital Network (ISDN) is likely to grow as well, though at a slower pace. ISDN enables ordinary local telephone lines both to transport high-speed data and handle more than one voice telephone conversation at a time. Users have had a need for high-speed data communications services on the public network for several years, especially in tenns of Local Area Network (LAN) connectivity. However, most companies cannot justify the cost of purchasing high-speed data links, which tend to be quite expensive in the short term. This is due in part to the 1990-91 recession, and many firms have used less sophisticated data services to meet the minimum level of required connectivity. However, with an economic recovery under way, wideband services should experience growing user demand during 1992.

INTERNATIONAL COMPETITIVENESS

There are about 350 providers of international telecommunications services in the United States, and they use both satellites and undersea cables made of either copper or optical fiber. Satellite services are made available through the Communications Satellite Corp. (COMSAT), a private company that is the U.S. signatory to the International Telecommunications Satellite Organization (INTELSAT) and the International Maritime Satellite Organization (INMARSAT) consortia. In recent years, the FCC has authorized private undersea cables and satellite systems to compete with COMSAT, traditional telephone carriers such as AT&T, and the International Record Carriers (IRCs) that provide telex and telegraph services. The majority of international carriers lease circuits from firms that own satellite and cable facilities, and resell them to the public for a profit.

The market for international services is segmented into International Message Telephone Services (IMTS); specialized services such as private line, ISDN, and virtual networks; the traditional telex and telegraph record services; and International Value-Added Networdk services (IVANS). The compound annual growth rate for international voice telephone service is about 4-5 percent. Total international telecommunications services revenues were about $11.5 billion in 1991, and should increase to approximately $12.5 billion in 199?.

In keeping with the high demand for services that support global private networks, the major U.S. carriers accelerated the introduction in 1991 of international Virtual Private Network (VPN) services. AT&T now has service agreements with Australia, Belgium, Canada, France, Japan, and the United Kingdom, while US Sprint and Cable & Wireless have combined their resources to offer service to at least seven countries. Domestic VPNs, introduced in 1986, now have more than 1,000 customers. International VPNs grew slowly in 1991, but the numbers are likely to accelerate in 1992.

Alliances among U.S. and foreign telecommunications providers are becoming commonplace in the industry. During 1991, for example, MCI Communications allied with 15 foreign telephone carriers to provide a service called Global Communications Service to manage international private networks. Locations are in Brazil, Canada, Germany, Guam, Hong Kong, Ireland, Italy, Japan, Korea, Mexico, Sweden, and the United Kingdom.

One of the fastest growing segments of the international market is for value-added data services and IVANS, which will experience expansion of about 24 percent in 1992. Services such as electronic mail, enhanced store-and-forward facsimile, and on-line database access are becoming increasingly popular as a means of bridging time zones in today's global economy. To facilitate such services, the U.S. Government negotiated bilateral IVANS agreements in 1991 opening foreign markets to U.S. international VANS providers in Hong Kong, Japan, and Korea. In addition, efforts continued during 1991 under the Uruguay Round of negotiations in the General Agreement on Tariffs and Trade (GATT) to cover IVANS under a multilateral system of international law for trade in services. More IVANS agreements with foreign countries are likely during 1992.

Many U.S. firms have begun to offer telecommunications services to the domestic markets of foreign countries, rather than simply on an international, cross-border basis. The Bell Telephone RHCs, in particular, are investing heavily in overseas ventures such as paging and cellular mobile telephone. The RHCs also have capitalized on a wave of privatization sweeping the world's monopoly telephone companies in recent years, investing heavily in foreign telephone companies put up for sale by their governments. During 1991, Southwestern Bell purchased an interest in Telmex, Mexico's state-owned telephone operator, and several RHCs bid to take over operations of the Venezuelan telephone company, CANTV. This followed acquisitions in 1990 of the New Zealand phone company by Ameritech and Bell Atlantic. Two RHCs also competed during 1991 to be Australia's second telephone service provider. The RHCs have been particularly active in the European Community and in Eastern Europe, and these efforts will continue during 1992. Other international activities of the RHCs include cable television, computer software, directory publishing, network management, packet-switched data communications, Personal Communications Networks (PCNs), and voice mail systems.

Outlook for 1992

Revenues of the domestic telecommunications service companies are expected to increase at least 5.5 percent in 1992, with slow but steady growth as the economy rebounds. Long distance revenue will grow about 6 percent while international service revenues should rise more than 17.7 percent from 1991 levels. Value-added and data communications services will continue to experience growth rates of 15 percent or more during 1992 as the U.S. network becomes increasingly digitized and the demand for computer connectivity grows rapidly. Cellular telephone revenues will increase to about $6 billion and the number of mergers and acquisitions is likely to slow from the pace of recent years. Call volume will continue to expand in 1992, but this will not directly affect revenues because of price reductions in local and long distance services.

Long-Term Prospects

Developments in the globalization of private networks, innovations in broadband and radio technologies, and the steady march toward regulatory liberalization around the world will influence long-term prospects for the U.S. telecommunications services industry. The convergence of public and private networking and the competition among traditional telephone carriers, VAN providers, and corporate networks with excess communications capacity will redefine the already blurred boundaries of the telecommunications industry structure.

New radio technologies and the move toward personal communications systems, such as telephone numbers assigned to individuals rather than locations, will change the way society lives and does business. Telecommunications will evolve gradually from point-to-point to person-to-person communications. The eventual introduction of broadband telecommunications channels into every home and office will facilitate telecommuting and work-at-home employment, reducing strains on our nation's overburdened transportation infrastructure. One key broadband communications technology to watch will be the Advanced Intelligent Network (AIN), now under development at Bell Communications Research (Bellcore), the centralized research and testing body of the Bell companies, which is due for early product testing releases during 1992.

Changing global regulatory policies are greatly increasing the potential world market for U.S. telecommunications services, and should allow U.S. companies to do business overseas more cheaply and efficiently. Since telecommunications costs absorb a significant percentage of many firms' revenues, overseas policy reforms that result in cheaper transmission costs and the ability to configure networks according to each company's needs should contribute to success in international markets. The ability to communicate with foreign partners and subsidiaries is vital to the continued growth of the U.S. economy. Over the long term, telecommunications services will serve an even larger role in fostering that development, and the country's social and economic health will depend on the smooth functioning of an increasingly complex national and international network.

Local Services

The market for local telephone service is mature, and growth rates reflect broad economic trends, such as business investment, housing starts, and population growth. One measure of local service growth is the modest expansion in the number of telephone access lines, which has consistently averaged about 3 percent annually over the past 10 years. Minutes of use is another standard for benchmarking performance. During 1991, growth in use slowed to 6 percent, half the rate of two years earlier. Revenue for local telephone services grew about 3.6 percent in 1991 and should increase by 3.8 percent in 1992.

Technological developments and market forces have caused the LECs to replace much of their older electromechanical switching equipment with newer, digital computer technology known as stored program control switching. About half of the BOCs switch calls digitally but must convert telephone converations back to their original analog form for call processing.

The use of digital technology has allowed local telephone companies to equip most of their offices to provide "equal access" to competing long distance carriers. New signaling systems have been developed that permit calls to be set-up more quickly and efficiently. In the late 1980's, telephone company offices began to convert to the newest system, called Signaling System 7. In addition, the telecommunications industry has Seen developing standards for ISDN.

Centrex services, which are central-office based systems for switching traffic within a customer's premises, will serve as a base for migration to ISDN. Seven million Centrex lines in service during 1991 served an estimated 20,000 business customers. Major Centrex features include automatic call distribution (ACD), automatic routing selection (ARS), central-office based local area networks (CO-LANs), ISDN, Station Message Detail Recording (SMDR) and other billing services, network management, voice mail, audio conferencing, and switched 56 kilobits-per-second (Kbps) data links. LEC revenues from Centrex services were about $1.4 billion in 1991.

Many local telephone companies implemented a variety of new Custom Local Area Signaling Service (Class) during 1991, such as caller identification, call trace, call blocking, busy number redial, selective call forwarding, and unique ringing. These services are likely to generate increasing revenues for the LECs during 1992. Some state PUCs have allowed the LECs to keep CLASS out of the cost and revenue requirement computaions for the telephone rate-making process, thus making it highly profitable although customer base penetration still averages less than 4 percent. Other major product categories for local service include pay telephones (about $2.1 billion in 1991), and wide-area telephone service (WATS), 800/900 number services, private lines, and directory and billing services (totaling about $6.5 billion).

A key competitive factor in local exchange service is the move from rate-of-return regulation to controlling rates through price caps. In New York State, for example, the Rochester Telephone Corp. has a three year price-cap arrangement with the New York Public Service Commission under which the firm can raise prices for its monopoly services, such as local residential calling, by inflation less a productivity factor of 3.25 percent. If the company increases its productivity at a greater rate, it splits the difference between corporate profit and ratepayer refunds. Other services, such as Centrex, private line, custom calling (call waiting, forwarding, and conferencing), and CLASS, are subject to flexible pricing within preset limits. The FCC has a similar price cap plan for regulating the rates of AT&T. Ratepayers are likely to see real price decreases while firms such as AT&T and Rochester Telephone will increase profits and efficiency.

An important long-term strategic issue for local telephone companies will be the increasing level of competition in the now virtual monopoly provision of local telephone facilities. The last few years have seen a proliferation of Metropolitan Area Networks (MANs), which provide specialized private network services to corporate customers, often over high-speed digital networks of optical fiber. A critical issue for MAN market viability is state regulatory policies toward interconnection with the Public Switched Telephone Network (PSTN). If this interconnection is granted, it could lead to larger potential markets for MAN operators and increased LEC competition. Interconnection policy also would be critical for cable television companies if the FCC, courts, and Congress decide to permit direct competition by telephone companies. Cable companies already have entered the market, for example Tele-Communications Inc. (TCI) in Denver, which is leasing its fiber optic capacity. Additional competition will come from the accelerating introduction of new mobile radio technologies, due in part to an FCC decision in 1991 to favor innovative technology development in its allocation of scarce radio spectrum. However, local loop competition will take many years to develop before it has any significant impact on LEC revenues.

Long Distance Services

Traffic growth in the long distance market segment will continue to exceed that of local exchange services, but price competition will keep revenue growth proportionately lower than actual increases in calling volume. An important strategic issue for the telephone carriers will be how to stabilize prices to maintain strong revenues while also remaining fully competitive. With the current level of merger and acquisition, the price cap system now in effect for AT&T - plus the lessening of time required for regulatory approval of rate reductions by the FCC - the industry is likely to achieve greater equilibrium over the next five years.

Revenues of the long distance telephone companies increased 7.3 percent in 1991, and are projected to grow 7.6 percent in 1992. Although the 1990-1991 recession contributed to lower growth in calling volume and helped result in reduced earnings to the industry, volume continued to increase at a rate far exceeding growth in the economy as a whole.

MCI, US Sprint, and other carriers will continue to gain market share from AT&T in 1992, but during 1991 AT&T fought aggressively to maintain its position and is likely to stabilize its dominant stance in the industry. During 1991, AT&T took over the long distance and international service operations of Alascom from Pacific Telecom Corp., significantly expanding its geographic coverage, and a Cable & Wireless (United Kingdom) U.S. acquisition made that firm this nation's fifth largest carrier. Other foreign carriers made inroads into the U.S. market as well, as Litel Communications sold a 20 percent share to Italcable, Italy's international carrier.

FCC data show that, for the period since 1984, industry traffic volume grew at an annual rate of 13 percent. AT&T's traffic grew at a slower rate than the industry average, while other carriers' traffic grew nearly 30 percent annually. In the market for interstate switched minutes, the result of an AT&T growth rate slower than the industry average has been that AT&T's market share fell from more than 80 percent in 1984 to less than 63 percent in 1991. Due to price cuts, however, AT&T's total toll revenues have declined slightly since 1985 because the volume growth did not offset the impact from rates. AT&T's market share for all long distance revenues, including the LECs, is now less than 50 percent. Excluding the LECs, AT&T's share is about 65 percent.

The product market for long distance services has several key segments, by far the largest of which is Message Telephone Service (MTS), used by most people to make direct-dial long distance calls. The MTS market is about $27 billion, and the annual growth rate is about 3.5 percent. Other important market categories are 800/900 WATS (inbound), outbound WATS. analog and digital private leased circuits, and special services such as ISDN, Virtual Private Networks (VPN), Software Defined Networks (SDN), switched 56-Kbps data service, and others. In the operator services segment about 300 firms provide directory assistance services. However, only 50 were actual long distance carriers; the rest operate as resellers without purchasing network access.

The next largest revenue category for long distance services. after MTS, is the market for 800 and 900 numbers, which totaled about $6.5 billion in 1991. However, the 800 number market is very mature. Steady traffic growth, heavy competition, and price erosion will lead to revenues remaining at the same level in 1992. Traffic from 800 number services actually accounts for about half of all long distance communications, with about 700,000 customers purchasing service. A key concern for 1992 in the 800 services market will be the issue of number portability. Portability will allow customers to switch from one long distance carrier to another without changing the 800 numbers for which they may have built significant public name recognition. There is no interim solution in sight, although Bellcore is developing a new numbering plan to be available by 1995.

The market for 900 services encountered severe difficulties and a downturn during 1991 because of problems with bill collection and negative public perception. Many state PUCS decided to prohibit disconnection for unpaid bills. As a result, such industry leaders as Telesphere Communications fared poorly. One estimate placed quarterly uncollected 900 number hills at about $66 million in 1991 (out of total quarterly billings of only $80 million). The estimated total 900 number market in 1992 will be in the range of $350 million to $400 million.

Value-Added Network Services

The market for Value-Added Network Services (VANS) is growing rapidly both worldwide and in the United States. U.S. firms are world leaders in this area, having the most liberal regulatory environment, the longest technology experience and greatest business demand. The VANS market is converging with that of the public data communications segment (frame-relay, packet switching, ISDN, SMDS, Software Defined Networks, and Virtual Private Networks) and private market for voice-data networks. Telephone carriers are providing service enhancements to their data transport products (such as leased circuits), and traditional VANS providers in the public data networking domain are targeting many of the same customers as regulated common carriers. In addition, industry consolidation has increased in recent years, with long distance carriers such as MCI and US Sprint acquiring data networking firms like Infonet and Telenet. This trend is likely to continue during 1992. AT&T is a major player in both VANS data services and long distance data transport, for example.

The trend toward international networking and the convergence of public and private telecommunications markets will continue to drive the globalization of the VANS industry. Leading this trend is multi-national corporate demand for integrated voice-data networks, high-speed data communications, and networking of computer systems manufactured by different vendors. One of the important developments allowing firms to offer global data and VANS networking is the growing trend toward regulatory policy liberalization around the world.

The VANS market comprises a broad scope of product offerings targeting a diverse range of customers: packet-switched and public data services; information gateway services; code and protocol processing; electronic mail; electronic data interchange (EDI); travel reservation services; voice mail services (including voice store and forward); audiotex 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; network services for automated teller machines; point-of-sale transaction services; electronic banking; on-line database access; information retrieval services; videotext services; telecommunications network management services; remote computer monitoring services; electronic software distribution; and computer processing and data preparation.

Revenues for the U.S. VANS market were about $6 billion in 1991 and are projected to approach $7 billion in 1992. One of the largest VANS market segments is public data networking. The market leaders in this segment during 1991 were US Sprint and British Telecom, accounting for about 40 percent and 35 percent, respectively of the U.S. domestic market.

Mobile Radio and Satellite Services

According to the Cellular Telecommunications Industry Association, the number of U.S. cellular subscribers reached 6.4 million in mid- 1991 and was expected to surpass 7.4 million by year's end. Annual service revenues exceeded $5.5 billion. The $6.2 billion deal to merge GTE and Contel, completed in March 1991, created the country's second largest cellular operator with more than 700,000 subscribers, second only to McCaw. Similarly, Pacific Telesis and Cellular Communications Inc. (CCI) proceeded with plans to combine their cellular operations in the Midwest, creating the fifth largest regional cellular network with more than 550,000 subscribers. McCaw moved in 1991 to create the first nationwide cellular telephone system.

In further trading of cellular interests, Metromedia offered virtually the last of its cellular properties to the cable concern Comcast Corp., in a $1 billion joint venture deal. Also, Metyx Mobile CTS, the twelfth largest cellular operator in the United States, sold five cellular markets for $1.65 billion in the southhwest because of its highly leveraged position and falling cellular revenues. Five regional Bell companies further expanded their cellular operations through purchases of systems outside their territories.

Legislative efforts to reallocate the radio spectrum to creak room for new wireless services resumed in 1991. The Emerging Telecommunications Technologies Act of 1991, which proposes to reassign 200 Mhz of government spectrum to the private sector, was passed by the House in July 1991. A virtually identical bill awaited a vote in the Senate.

The National Telecommunications and Information Administration (NTIA), an agency of the Department of Commerce, issued a major study, U.S. Spectrum Management Policy: Agenda for the Future, which strongly backed the adoption of market based spectrum allocation policies, or auctions. Both Houses of Congress are addressing spectrum auction legislation.

In April 1991, the FCC withstood pressure from existing service providers and created a "pioneer's preference," which gives innovators of new spectrum-related technologies an inside track when applying for licenses. Under the new rules, the preference would be awarded to an applicant who seeks to acquire spectrum for a new service or who proposes to substantially enhance an existing service. In effect, any party receiving the preference will be virtually guaranteed a license.

In July 1991, the FCC also launched an inquiry into revamping private land mobile bands below 470 Mhz. Although the proceeding could take five to six years to complete, the issue is growing in importance because of growing frequency congestion coupled with spectrum scarcity. The FCC permanently set aside 4 Mhz for air-to-ground radio communications and granted six permanent licenses for public phone services aboard airlines: GTE, In-Flight Phone Corp., Clairtel Communications Group, Mobile Telecommunications Technologies Corp., American Skycell Corp. and Jettel Group.

In another important development relating to spectrum allocation, in late 1990 the FCC issued a Notice of Inquiry (NOI) into the future of Personal Communications Services (PCS). The question posed by the NOI was the necessity of an exclusive PCS allocation. The FCC received thousands of pages of comments and reply comments during 1991, including numerous licensing proposals. On a related front, the FCC has approved more than 50 experimental licenses, selected from 90 applications, for PCS trials. The trials are taking place in frequency bands ranging from 600 MHz to 2.9 GHz, using existing and new technologies to deliver a variety of services. The licensees include AT&T, regional Bell companies, cellular operators, cable TV firms, and numerous entrepreneurs. The FCC began to review technical data from the trials in mid-1991 and could decide in early 1992 on the appropriate technologies and spectrum allocation. See chapter 30 (Radio Communication and Detection Equipment) for more information on radio communications.

In satellite services, the public visibility of communications during the Persian Gulf conflict heightened interest in satellite applications in 1991, particularly in broadcasting and mobile communications. Annual revenues from Fixed Satellite Services (FSS) and Mobile Satellite Services (MSS) rose to almost $1.2 billion in 1991, up from 1990 revenues of $800 million, as a result of fixed satellite broadcasting income. Industry revenues are expected to rise to around $1.5 billion by 1992.

Current satellite capacity remains tight, particularly for international video services over the Atlantic Ocean. Capacity was full or near full on satellites operated by INTELSAT, INMARSAT, and PanAmSat, a privately owned U.S. separate satellite system. As a result, users looked increasingly to foreign-owned satellites for satellite time in 1991, as evidenced by record usage of the Soviet communications satellite system, INTERSPUTNIK. The Soviet Union's accession to INTELSAT in July 1991 reinforced speculation of a merger with the INTERSPUTNIK constellation. Pending this possible merger, the addition of three INTELSAT satellites due to be launched by the end of 1992 will augment international supply.

Transponder availability on domestic satellites (domsats) was slightly greater, with six additional domsats planned for launch in 1992 promising new capacity. In 1991, six domestic satellite companies operated 30 U.S. communications satellites. With a total of about 600 transponders, this represented 40 percent of the civilian transponders available worldwide. By the mid-1990's, the launch of follow-on next generation satellites will add greater capacity than their current counterparts. Thirteen U.S. companies have announced their intent to launch a total of 21 domestic communications satellites by 1995.

With 1991 revenues soaring above $1 billion, FSS continued to dominate the overall U.S. satellite services industry, due largely to cable television (CATV) and other television broadcasting services delivered by satellite. In 1991, high demand for live coverage of developments during the peak months of the Persian Gulf crisis drove television-related FSS revenue sharply upward to an estimated $700 million. At the same time, revenues from satellite-delivered telephony contributed less to overall 1991 FSS revenues than in the previous year, as fiber optic technology further eroded the satellite industry's share of telephony traffic.

Private FSS networks using Very Small Aperture Terminals (VSATs) continued to expand in 1991, but growth fell short of optimistic industry predictions. Revenues from domestic VSATs services were estimated at more than $30 million in 1991, with growth expected to exceed 30 percent in 1992. Around 85 percent of the world's VSATs are used for data broadcast in North America, and the technology has created low-cost, off-the-shelf network alternatives. However, growth in the installation of new VSAT networks may slow over the next five years as the U.S. market becomes saturated. Transponder availability and price will be the key factors affecting domestic VSAT service revenues.

Revenues from international video, voice, and data transmission reached an estimated $480 million in 1991, up from around $380 million the previous year for growth of more than 25 percent. COMSAT reported around 11 percent growth in 1990 international revenues, due in part to backup services for cable outages and short-term television leases, including coverage of the Persian Gulf conflict.

International satellite systems separate from INTELSAT have also experienced high demand for services. The only operational U.S. separate system satellite, PanAmSat's PAS1, is completely booked, with around 80 percent of its traffic from broadcast video services. Two additional U.S. separate systems have moved closer to operation. One is Columbia Communications Corp., which was awarded the use of commercial capacity on two satellites in the National Aeronautics and Space Administration (NASA) program known as Tracking and Data Relay Satellite System (TDRSS), and is now in the INTELSAT consultation process to provide international services by early 1992. The other is Orion, which received final FCC authorization to launch two satellites for service in North America, Western Europe, and West Africa by 1992. Four additional applicants have not yet secured the requisite foreign operating agreements for further FCC licensing.

Mobile satellite services, with estimated revenues of more than $85 million in 1991, will likely generate $150 million by 1992, thus making this sector the most dynamic and innovative in the satellite services industry. Optimism regarding new MSS services remains high, particularly in the areas of satellite-delivered cellular telephony, digital radio (or digital audio broadcasting, known as DAB), and in-flight telecommunications via satellite. Other services include satellite-delivered digital car radio broadcasting and vehicle tracking. The largest domestic MSS application continues to be land mobile satellite services (LMSS), including vehicle tracking and messaging. Twenty thousand trucks were equipped with mobile satellite transceivers in the U.S. in 1991.

For international MSS, COMSAT revenues grew 30 percent between 1990 and 1991. A launch of two new INMARSAT 2 (F2) satellites in 1991 provided much-needed capacity for international MSS applications. Maritime transmission remains COMSAT's largest mobile business area, but the company predicts aeronautical services will eclipse maritime within the next decade with services such as international in-flight telephony and in-flight news. Maritime services continue to grow, however, with telephone traffic to and from cruise ships increasing 190 percent since 1987 and telex volume up 36 percent, according to COMSAT.

The Global Positioning System (GPS), which uses the U.S. Defense Department's Navstar constellation of satellites, has emerged as a linchpin in an increasing number of MSS positioning services. Sixteen of the planned 24 Navstar satellites are in orbit, providing 24-hour two-dimensional GPS services and positioning accuracy within 60 feet. When the constellation is completed in 1993, GPS use is expected to become a standard option for automobiles, with hand-held GPS receivers commonly used by pedestrians, hikers, and campers.

Rates and Tariffs

The price of telephone service has historically lagged behind inflation in the rest of the economy and, to a lesser extent, behind changes in interest rates. Barring a serious recession, or unexpected surge of inflation, no significant increases in the cost of local telephone service are expected during the near-term future. Prices have been stable and there are few important state rate cases pending with proposals to raise prices. In 1984, rate cases pending before PUCs totaled nearly $7 billion in requests for increased prices. By 1990 that had fallen to $260 million. The low level of rate cases, combined with the move toward price cap regulation, should keep down price increases in 1992.

Prices of direct dial long distance calls have decreased about 45 percent since January 1984, the result of increased competition, rapid technological progress, implementation of subscriber line charges (reducing local network access costs to long distance companies), and other structural forces in the industry. The largest single factor in these reductions has been the introduction of subscriber line charges paid directly by customers. Local telephone companies have been required by the FCC to make matching reductions to the charges they impose on long distance carriers. Since Congress ruled several years ago that subscriber line charges cannot be increased in the future, however, further reductions in long distance rates, including those for 1992, cannot be expected to continue at the same pace as in recent years. Any additional price decreases in long distance rates will come instead from productivity gains, technological progress, and intense competition.

The cost of telephone service for residential subscribers declined 0.4 percent during 1990, the latest year for which data are available, while the nation's overall rate of inflation was 6.1 percent. In real terms, the cost of telephone service dropped about 6 percent during the year. The Consumer Price Index (CPI) for telephone service includes local service charges (which increased 1.0 percent), state toll charges (which declined 2.2 percent), and interstate long distance charges (which declined 3.7 percent), according to FCC data. The national average monthly charge for residential local service with unlimited calling was $12.40 in October 1990. The total cost of local service, including subscriber line charges and taxes, averaged $17.78, compared with $17.53 one year earlier. Businesses taking single-line service paid an average of $41.09 for service in 1990, compared with $41.25 in 1989.

The average household spent $325 for telephone service in 1980, versus about $567 in 1989. Telephone service accounts for about 2 percent of total household expenditures every year, a percentage that has remained virtually unchanged for 15 years. Since 1984, with the divestiture of AT&T, expenditures for toll service increased by about 5 percent a year while long distance rates were falling about 5 percent annually. These data suggest that residential use of toll service has grown by about 10 percent per year since 1984.

Policy Developments

One of the most significant policy developments during 1991 was the decision by Federal District Court Judge Harold Greene to allow the Bell telephone companies into information services. The divestiture agreement that broke up AT&T in 1984 barred the Bell RHCs from providing information services, as well as from manufacturing equipment and offering long distance telephone service. Also during 1991, a bill passed the Senate and was debated in the House of Representatives to allow Bell telephone company manufacturing. The trend toward allowing the RHCs more regulatory freedom is likely to continue in 1992, with an important long-term impact on the structure of the U.S. telecommunications industry. Opponents of RHC freedom claim that such a trend will restrict competition and move toward the old AT&T-style monopoly system; proponents believe that removing restrictions will bring more and better services to American consumers and help to revitalize the U.S. economy.

In keeping with the general trends toward deregulation, the FCC moved further to streamline requirements imposed on AT&T to make it easier for the company to compete with MCI, US Sprint, and other long distance carriers. The FCC reduced regulation of almost all of AT&T's large business services and removed them from price-cap regulation. This will permit AT&T to begin offering many of these services through contracts rather than tariffs. Also, the speed with which AT&T can introduce new services and prices was reduced from 45 days to 14, allowing its competitors less lead time to make competitive adjustments in response. The FCC also decided to prohibit discount services to large businesses (called "Tariff 15") because they discouraged price reductions from other carriers. An important issue for AT&T during 1992 will be its ability to continue offering customized service packages known as "Tariff 12" to individual corporate customers. During 1991, the FCC investigated the competitive impact and legality of Tariff 12 custom network agreements, and customers voiced concern about how the FCC's decision would affect their existing private voice-data networks.

After the Ninth Circuit Court in 1990 reversed its Computer Inquiry III policies on competition safeguards, the FCC decided in 1991 to reimpose Open Network Architecture (ONA), AT&T structural separations relief, and earlier policies on Network Channel Terminating Equipment (NCTE). The Commission also issued a new proposed rule-making inquiry on additional accounting safeguards and authority over state regulation. Especially important is the issue of Federal-state jurisdiction, as ONA covers local exchange access to Bell telephone company networks for value-added (enhanced) service providers.

A critical regulatory concern for 1992 will be the allocation of scarce radio frequencies, especially for innovative new technologies such as high-speed data LANs. A controversial new policy to auction off spectrum to qualified bidders will receive attention during 1992, and if approved would be a radical shift from the licensing systems now in place. Both the Congress and the Department of Commerce advanced new policy proposals in 1991, but differences remained over spectrum bidding, sharing, auctioning, and coordination.

Other key regulatory issues during 1991 were interstate access charges, interconnection to LEC networks, telephone-cable company competition, privacy issues such as Caller ID and Automatic Number Identification (ANI), and international accounting rates between U.S. carriers and their foreign counterparts. None of these issues was resolved during 1991 and regulators will consider them again in 1992.

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Additional References

U.S. Spectrum Management Policy: Agenda for the Future, U.S. Department of Commerce, National Telecommunications and Information Administration, Washington, DC 20230, Telephone: (202) 377-1880.

U.S. Telecommunications in a Global Economy: Competitiveness at a Crossroads, U.S. Department of Commerce, Washington, DC 20230, August 1990, Telephone (202) 377-1880.

Long Distance Market Shares, Federal Communications Commission, June 28, 1991, 1919 M St., NW, Room 537, Washington, DC 20554, Telephone (202) 632-0745.

Statistics of Common Carriers, Federal Communications Commission, December 1990, 1919 M St., NW, Room 537, Washington, DC 20554, Telephone (202) 632-0745.

Telephone Rates Update, Federal Communications Commission, January 1991, 1919 M St., NW, Room 537, Washington, DC 20554, Telephone (202) 632-0745.

Trends in Telephone Service, Federal Communications Commission, February 1991, 1919 M St., NW, Room 537, Washington, DC 20554, Telephone (202) 632-0745.

Critical Connections: Communications for the Future, U.S. Congress, Office of Technology Assessment, OTA-CIT-407 (Washington, DC: U.S. Government Printing Office, January 1990), Telephone (202) 783-3238.

Computers at Risk: Safe Computing in the Information Age, National Research Council, National Academy Press, 1991.

Growing Vulnerability of the Public Switched Network: Implications for National Security Emergency Preparedness, National Research Council, National Academy Press, 1991.

Communications Week, CMP Publications, Inc., 600 Community Dr., Manhasset, NY 11030, Telephone (516) 365-4600.

Industry Basics: Introduction to the History, Structure and Technology of the Telecommunications Industry, 1989, 3rd Edition, North American Telecommunications Association, Washington, DC 20036, Telephone (202) 296-9800.

Telecommunications Market Review and Forecast: Annual Report of the Telecommunications Industry, 1991 Edition, North American Telecommunications 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 1991, United States Telephone Association, Suite 800, 900 19th St., NW, Washington, DC 20006-2102, Telephone (202) 835-3100.

Telephony, Telephony Publishing Corp., 55 East Jackson St., Chicago, IL 60604, Telephone (312) 922-2435.

COPYRIGHT 1992 U.S. Department of Commerce
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