THE US TELECOMMUNICATION INDUSTRY: 1996-1999

AMBRISH DEEPIKA RITUTAPAN ANIL KARTIK D BHUWANESHWARI ANKIT SONAL APARNA ANKITA RAVISHANKAR

INTRODUCTION
Congress passed the sweeping "Telecommunications Act of 1996"

1st

February 1996

8th

February 1996

President Clinton signed the Act into law in a ceremony at the Library of Congress.

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Understanding the ACT

Abolishment of the historic barriers to cable's delivery of telephone services
This provision does not, however, appear to be self-enforcing

States are specifically authorized to impose "competitively neutral" requirements regarding universal service, public safety and welfare, service quality, and consumer protection.

The provisions of the Cable Act do not apply to cable operators or affiliates to the extent they are providing telecommunications services,
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Understanding the ACT

Imposes interconnection obligations on all "telecommunications carriers," both new entrants and incumbents

Existing LECs have a set of separately identified obligations that go beyond those that apply to new entrants.

The Act permits carriers to agree on a "bill and keep" system, but does not require such a system. Individual interconnection rates must be "just and reasonable,"
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What are the pressing concerns of the long-distance companies? What are they trying to achieve? What about the RBOCs? What are the segments they are all competing in? Which of them have the best prospects?

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LONG DISTANCE CARRIERS

Pressing Concerns
Deregulation in the market allowing competition from ILECs High demand for wide array of telecom services Stagnated growth in Long Distance Market`

Objective
Enhancing position in long distance and entering new markets (newly opened up local services and broadband)

Strategically one stop shopping to customers

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RBOCs
Local / Regional Players Competition was mainly within a particular region Post the 1996 Act, it was expected that they would compete in each others regions The route chosen was consolidation thus expanding the regional presence Strengthening themselves against more powerful long distance carriers like AT&T

As an individual player, Long Distance Carriers had the advantage of infrastructure which could be leveraged upon to expand in to newly opened up regional markets
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 What is AT&Ts business strategy?

How has it changed from before the

Telecommunications Act of 1996? And from before it got split up in 1984?

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AT&T History
Period Event Formation of Bellcom, Comsat PPP 1950 - 60 Bell Labs Competition MCI, Hush-a-Phone, Carter Electronics Corporation 1960 75 DOJ charges AT&T of suppressing competition Technology Strategy/Focus Communications and guidance systems for the U.S. space program Electronic Switching System Forbidding network competition from accessing AT&Ts

Separation of Bell System from AT&T AT&T Communications Long Distance Business AT&T Technologies - Manufacture and sale of telecommunications equipment American Bell (AT&T Information systems) sale of computers (Unix systems) Selling switching systems in Europe, Middle East and Africa

AT&T breakup 1975 84

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AT&T History
Period Event
Credit Card Universal Card NCR Acquisition

Technology Strategy/Focus
Rationale: Resources? Financial Information

Global company in Network Computing

AT&T Corporation Mainly Long Distance, AT&T wireless, Universal Card and AT&T Labs Lucent Technologies Consumer and Business Products NCR Corporation Networked Computing

1985 95
Corporate Restructuring

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AT&T String of Acquisitions

Month/Year Company Acquired Teleport Group Communications Rationale Access to 85 local markets Financial Synergy in reduced local access fees Largest Cellular Service Provider in the US

Jan 1998 Oct 1998 Dec 1998 Mar 1999 May 1999

Vanguard Cellular systems

Global Network Services (of Data Services Market IBM)

TCI Corporation Media One Agreement with Time Warner and Comcast to sell AT&T Phone services
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Phone service, Internet access and cable television No. 3 Cable Operator in the US

The Game plan

Moving from Long Distance - stagnated, reduced share of AT&T
Last Mile advantage, reduce local access charges Bypass and bandwidth strategy

Bundle of Services local, long distance, high speed internet and other advanced services
Product to service Achieve vertical integration to provide an end-to-end service to the customer Challenge: Cable Infrastructure
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 What

are

the

long-distance

carriers

technology strategies? What are the new

technologies in the picture? How do they compare as feasible alternatives for the IXCs?

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Technology Strategy
Offering customers a wide array of telecommunication services Develop packed switched network infrastructure Huge bandwidth requirements necessitate investment in fiber-optic cable infrastructure (Exhibit 4) Focusing into cable broadband services
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allows both telephony and

New Competitive Technologies

Bandwidth Digital Subscriber Line (DSL) Cable Modems Upto 52 Mbps 10 Mbps Benefits Cons Limited physical reach Performance degradation with increased customers Dramatic increase in transmission capacity Huge Cost advantages (dont have to pay access fees) Small difference in voice quality, as compared to normal telephony

DWDM (For Internet Telephony)

Fixed Wireless
Satellite based cellular and Internet services

1.54 45 Mbps
Upto 64 Mbps

Cheaper than cable undertaking

Wireless broadband service Massive fixed cost investments Unclear if end user rates are comparable
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 What does a comparison of the

income statements of the RBOCs and

the long-distance carriers tell you?

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Consolidation Trajectories

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Revenue Growth($ million)

35000 30000 25000 20000
AmeriTech Bell South GTE Bell Atlantic

90000 80000 70000 60000 50000 AT&T Sprint

15000
10000 5000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998

40000
30000 20000 10000 0

Qwest

1990

1991

1992

1993

1994

1995

1996

1997

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1998

Profit Growth ($ million)

4000 3000 2000 1000 0 1995 -1000 -2000 -3000 1996 1997 1998 AmeriTech Bell South GTE Bell Atlantic 7000 6000 5000 4000 3000 2000 1000 0 -1000 -2000 1995 1996 1997 1998 AT&T Sprint

Qwest

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Capital Expenditure ($ million)

8000 7000 AmeriTech 9000 8000

Bell South
GTE Bell Atl

6000
5000 4000 3000 2000

7000
6000 5000 4000 3000 2000 1000 0 AT&T

Spirint
Qwest

1000
0

1995

1996

1997

1998

1995

1996

1997

1998

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RESULT
4 Out of 7 baby Bells remaining Consolidation
Local/ Regional players in complementing space End to end technology acquisition One stop shop for various consumer needs New technology, speed and bandwidth

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 What are the RBOCs core competencies? How are they counter-attacking?

Which of Treacys value disciplines do they possess?

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RESOURCES
TANGIBLE RESOURCES Technological Resources: Cellular licenses to operate wireless businesses Physical Resources: Star or ring network architecture that minimizes network outages Strong network that provides telephone service to residential and business customers INTANGIBLE RESOURCES Reputational Resources: Reputation with customers, service quality and reliability Innovational Resources: capacity to innovate

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RESOURCES
Capabilities
Strong network architecture that provides local access to end users Rapid adaptation to new technology that they now offer data services

Core competencies
Strong network architecture that efficiently serves the local phone market Ability to assess market changes and new technologies Ability to adapt to the new market needs
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RBOCS Strategy Post Telecommunication Act

Initial Strategic reaction was to consolidate to protect against competition in local market

Developing capabilities to enter long-distance market

To exploit wireless businesses in their regions that they started offering data services

Develop capabilities to offer customers a wide range of telecommunication services

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Treacys Value Disciplines

Cellular licenses to operate wireless businesses Enhancing position in long-distance market Exploit fast growing market for broadband data services

Local access to end users

service quality and reliability Offer customers a wide array of telecommunication services

CUSTOMER INTIMACY

PRODUCT LEADERSHIP

OPERATIONAL EXCELLENCE

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Strong network architecture that efficiently serves the local phone market Star or ring network architecture that minimizes network outages

 What is the business strategy behind non-telecom companies entry into

this market, e.g. Microsoft, Cisco, etc?

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CONVERGENCE OF IT INDUSTRIES AND TELECOM

Example - Internet Telephony uses packet switching Microsoft In Telecom Stake in Comcast to offer advanced capabilities in delivering video, data and interactivity Stake in Quest - > will offer hosting services built on Microsoft platform AT & T - > agreed to license Microsofts Windows CE software for its digital cable set top units Nextel - > subscribers will be able to use Microsofts MSN Web portal for internet services Operating system battle between Windows CE and 3COMs Palm OS in handheld computers
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BUSINESS STRATEGY OF NON TELECOM COMPANIES

Rapid growth in the demand for high speed internet access via accessible technologies such as DSL, cable modems, and broadband wireless
To gain access to the large customer base To merge handheld computers access standards and technology with its own operating system ( Microsoft Windows CE ) To push their operating system, software etc into the whole consumer electronics world, from cable set-top boxes to Internet telephones Microsoft wants to have Windows CE set the standard for its the cable set-top box that will control high-speed access to the Internet from homes across the country. To make its browser software and operating system the common standard across competitors within the industry .
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BUSINESS STRATEGY OF NON TELECOM COMPANIES

Platform Leadership
Platform leadership enables companies to exert influence over the direction of innovation that is taking place in their industry Extending their weight over the network of firms and customers involved with the industry Platform leadership, when combined with complementary innovation has the ability to produce win-win situations for the platform leader, complementary product manufacturers and finally customers.

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Disruption, Disintegration & The Dissipation Of Differentiability

It is difficult to predict, a priori, whether a move towards or away from vertical integration is more astute or flawed Competitive advantage from vertical integration is strongest in tiers of the market where customers are under-served by the functionality or performance available from products in the

market
Disintegrated or stratified industry structure will often be the dominant business model in the tiers of the market that are less demanding of functionality
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Swing Between Vertical Integration And Stratification

Interface :
Is the point at which a supplier of value-added and a customer of that valueadded interact whether within or between organizations

Modular interface & structured dialogue:

Customer of value added must understand and be able to specify the supplier its attributes and parameters Metrics for those attributes must exist and measurement technology must be available The customer must understand the interactions or interdependencies between the attributes of what is provided and the performance of the system in which the procurer will use it

Interdependent interface and unstructured dialogue

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Functionality That Customers Can Utilize And How Companies Compete

Compete with superior functionality

Performance

Compete Through speed, convenience and customization

Time
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CYCLE OF INTEGRATION AND DISINTEGRATION

Underserved Market

After 1984, AT&T forced to disintegrate into 7 baby bells, which operated locally and AT&T operated long distance segment

After the de-regulation rule of 1996, the baby bells started consolidating to leverage complementing strongholdings

Over Served Markets

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