Dossier: U.S. Telecom Service Markets

 

 

 

U.S. COMPETITIVE TELECOM MARKETS:
1997 Edition

 

 

Northern Business Information

McGraw-Hill Building, 37th Floor

1221 Avenue of the Americas

New York, NY 10020-1095

(212) 512-2900

 

Ron Cowles

Carmen Parisi

Tole Hart

Judith Hellerstein

 

 

October 1997

 

 

 

Table of contents

1.0 Executive Summary

1.1 Overview

1.2 Market Factors

1.3 The Evolution of Local Competition

1.4 Market Dynamics

 

2.0 Significant FCC Rulings

2.1 The FCC’s Local Competition Order

2.1.1 Overview

2.1.2 Judicial Stay of the FCC’s Rules

2.1.3 Impacts on the Telecom Market

2.2 The FCC’s Access Reform Order

2.2.1 Overview

2.2.2 Impacts on the Telecom Market

2.3 The FCC’s Universal Service Order

2.3.1 Overview

2.3.2 Impacts on the Telecom Market

 

 

3.0 The Connecticut Experience

3.1 Connecticut Demographic Profile and Forecast

3.2 Significant Policy-Related Activities — 1996 and 1997

3.2.1 Interconnection Rates and Wholesale Discounts

3.2.2 SNET Restructuring

3.2.3 Balloting

3.2.4 Alternative Form of Regulation

3.2.5 Future Decisions and Remaining Issues

3.3 Connecticut Local Exchange services Market

3.3.2 Market Share

3.3.3 Connecticut Local Telecom Market — Revenue Forecasts

3.3.4 Assessment

3.4 Connecticut Long-Distance Markets

3.4.1 Connecticut Intrastate Toll Market Revenue Forecast

3.4.2 Connecticut Interstate Toll Market Revenue Forecast

3.4.3 Long Distance Market Share

3.4.4 Assessment

3.5 Connecticut Wireless Market Assessment

 

 

List of Exhibits and Tables

 

Exhibit 3.1 Connecticut Resident Population

Exhibit 3.2 Connecticut Employment by Sector

Exhibit 3.3 Connecticut Total Employment

Exhibit 3.4 Connecticut Local Exchange Services Market — History

Exhibit 3.5 Connecticut Local Exchange Services Market — Market Shares

Exhibit 3.6 Connecticut Local Exchange Services Market — Revenue Forecast

Exhibit 3.7 Connecticut Switched Access Market — Revenue Forecast

Exhibit 3.8 Connecticut Intrastate Toll Market — Revenue Forecast

Exhibit 3.9 Connecticut Interstate Toll Market — Revenue Forecast

Exhibit 3.10 Connecticut Long Distance — Market Shares

Table 3A. Connecticut Local Exchange Services Market Forecast

Table 3B. Connecticut Switched Access Market — Revenue Forecast

Table 3C. Connecticut Intrastate Toll Market — Revenue Forecast

Table 3D. Connecticut Interstate Toll Services Market — Revenue Forecast

 

4.0 Atlanta Metropolitan Service Area

4.1 Demographic Profile and Forecast

4.2 Significant Regulatory Or Legislative Actions

4.2.1 Telecommunications and Competition Development Act of 1995

4.2.2 Interconnection Rates, Costs, Terms and Conditions

4.3 Atlanta Local Exchange Services Market

4.3.1 Certified Carriers

4.3.2 Atlanta Local Exchange Market Share

4.3.3 Atlanta Local Telecom Market — Revenue Forecasts

4.3.4 Assessment

4.4 Atlanta Long-Distance Markets

4.4.1 Atlanta Intrastate Toll Market—Revenue Forecast

4.4.2 Atlanta Interstate Toll Market—Revenue Forecast

4.4.3 Atlanta Long-Distance Market Share

4.4.4 Assessment

4.5 Atlanta Wireless Markets

 

List of Exhibits and Tables

Exhibit 4.1 Atlanta Metropolitan Service Area Population

Exhibit 4.2 Atlanta Employment by Sector

Exhibit 4.3 Atlanta Total Employment

Exhibit 4.4 Atlanta Local Exchange Services Market — Historical Revenues

Exhibit 4.5 Atlanta Local Services Market Shares

Exhibit 4.6 Atlanta Local Exchange Services Market — Revenue Forecast

Exhibit 4.7 Atlanta Switched Access Market — Revenue Forecast

Exhibit 4.8 Atlanta Intrastate Toll Market — Revenue Forecast

Exhibit 4.9 Atlanta Interstate Toll Market — Revenue Forecast

Exhibit 4.10 Atlanta Long Distance — Market Shares

Exhibit 4.11 Atlanta Wireless Market Share

Table 4A. Atlanta Local Exchange Services Market Forecast

Table 4B. Atlanta Switched Access Market — Revenue Forecast

Table 4C. Atlanta Intrastate Toll Market — Revenue Forecast

Table 4D. Atlanta Interstate Toll Services Market — Revenue Forecast

 

5.0 Dallas Metropolitan Service Area

5.1 Demographic Profile and Forecast

5.2 Significant Regulatory Or Legislative Actions

5.2.1 Public Utility Regulatory Act of 1995

5.2.2 Legislative Issues

5.3 Dallas Local Exchange Services Market

5.3.1 Certified Carriers

5.3.2 Dallas Local Exchange Market Share

5.3.3 Dallas Local Telecom Market — Revenue Forecasts

5.3.4 Assessment

5.4 Dallas Long-Distance Markets

5.4.1 Dallas Intrastate Toll Market — Revenue Forecast

5.4.2 Dallas Interstate Toll Market — Revenue Forecast

5.4.3 Dallas Long Distance Market Share

5.4.4 Assessment

5.5 Dallas Wireless Market Assessment

 

List of Exhibits and Tables

 

Exhibit 5.1 Dallas Metropolitan Service Area Population

Exhibit 5.2 Dallas Employment by Sector

Exhibit 5.3 Dallas Total Employment

Exhibit 5.4 Dallas Local Exchange Services Market — Historical Revenues

Exhibit 5.5 Dallas Local Exchange Services Market Shares

Exhibit 5.6 Dallas Local Exchange Services Market — Revenue Forecast

Exhibit 5.7 Dallas Switched Access Market — Revenue Forecast

Exhibit 5.8 Dallas Intrastate Toll Market — Revenue Forecast

Exhibit 5.9 Dallas Interstate Toll Market — Revenue Forecast

Exhibit 5.10 Dallas Long Distance — Market Shares

Table 5A. Dallas Local Exchange Services Market — Revenue Forecast

Table 5B. Dallas Switched Access Market — Revenue Forecast

Table 5C. Dallas Intrastate Toll Market — Revenue Forecast

Table 5D. Dallas Interstate Toll Services Market — Revenue Forecast

 

6.0 Seattle Metropolitan Service Area

6.1 Demographic Profile and Forecast

6.2 Significant Regulatory Or Legislative Actions

6.2.1 U S WEST Compliance With Section 271 of the 1996 Telecom Act

6.2.2 Interconnection Rates, Costs, Terms and Conditions

6.2.3 Rate Realignment, Depreciation, and Quality of Service Issues

6.2.4 Future Decisions

6.3 Seattle Local Exchange Services Market

6.3.1 Certified Carriers

6.3.2 Seattle Local Exchange Market Share

6.3.3 Seattle Local Telecom Market — Revenue Forecasts

6.3.4 Assessment

6.4 Seattle Long-Distance Markets

6.4.1 Seattle Intrastate Toll Market — Revenue Forecast

6.4.2 Seattle Interstate Toll Market — Revenue Forecast

6.4.3 Seattle Long-Distance Market Share

6.4.2 Assessment

6.5 Seattle Wireless Market Assessment

 

List of Exhibits and Tables

 

Exhibit 6.1 Seattle Metropolitan Service Area Population

Exhibit 6.2 Seattle Employment by Sector

Exhibit 6.3 Seattle Total Employment

Exhibit 6.4 Seattle Local Exchange Services Market — Historical Revenues

Exhibit 6.5 Seattle Local Exchange Services Market Shares

Exhibit 6.6 Seattle Local Exchange Services Market — Revenue Forecast

Exhibit 6.7 Seattle Switched Access Market — Revenue Forecast

Exhibit 6.8 Seattle Intrastate Toll Market — Revenue Forecast

Exhibit 6.9 Seattle Interstate Toll Market — Revenue Forecast

Exhibit 6.107 Seattle Metropolitan Service Area Long Distance Market Shares

Table 6A. Seattle Local Exchange Services Market — Revenue Forecast

Table 6B. Seattle Switched Access Market — Revenue Forecast

Table 6C. Seattle Intrastate Toll Market — Revenue Forecast

Table 6D. Seattle Interstate Toll Services Market — Revenue Forecast

 

7.0 Carrier Profiles

7.1 BellSouth

7.2 SBC Communications

7.3 Southern New England Telecommunications Corp

7.4 US West Communications

7.5 GTE Corporation

7.6 AT&T Communications

7.7 MCI Communications

7.8 Sprint Corporation

7.9 Teleport Communications Group (TCG)

7.10 WorldCom

 

 

 

8.0 U.S. Competitive Telecom Markets: 1997 Database

8.1 Database Overview

8.2 Definitions

8.3 Documentation

8.4 Assumptions and Methodology

8.5 Connecticut Telecom Service Markets Database

8.6 Atlanta Telecom Service Markets Database

8.7 Dallas Telecom Service Markets Database

8.8 Seattle Telecom Service Markets Database

 

 

1.0 Executive Summary

 

The 1997 U.S. Competitive Telecom Markets Report analyzes the local competitive environment of four diverse areas of the country. The criteria for selecting the areas was based on the level of growth and the number of companies competing for market share in the following telecom markets: Local Exchange Service, Switched Carrier Access Service, State Toll Service, and Interstate Toll Service. One conclusion readily drawn from this report is that the incumbent Local Exchange Carriers (LECs) are under heavy revenue pressures as a result of Access Reform and aggressive competitors anxious to get a share of the combined revenue in excess of $9 billion U.S. dollars. The incumbents stand to lose substantial telecom market share in regions targeted by competitors such as, AT&T, MCI, Sprint, WorldCom, and a host of lesser players, as Access Reform and local competition come to fruition.. The report also estimates current and future local exchange and long distance phone revenues, reviews the competitive strategies pursued by the local and national telephone companies, and analyzes the potential impact of state and federal regulations and other trends affecting the telecom marketplace.

 

1.1 Overview

 

Two major considerations formed the basis for this report. First, government regulations to implement the U.S Telecommunications Act of 1996 (1996 Telecom Act) may be the most important element in shaping the new competitive telecom marketplace. Second, the conventional method of studying the telecom marketplace on a national basis is no longer valid because the market is not developing that way. Using these considerations, Northern Business Information took the following approach to assess whether and to what extent competition in the major components of the telecom market does exist and to assess how the market will develop in the coming years. U.S. Competitive Telecom Markets: 1997 Edition:

 

 

 

 

 

 

1.2 Market Factors

 

Local competition is not expanding uniformly across the country. Certain areas are experiencing aggressive competition, while in other areas, progress is much less. In certain markets, as with geographic areas, competition is much greater than other markets. For example, in the U.S. Competitive Telecom Markets: 1996 Edition, Northern Business Information studied the markets of New York City, Chicago, Los Angeles and San Francisco. In that report, Northern Business Information identified extensive competition in the largest and most concentrated markets of local exchange services, access services, and long distance services. In fact, Northern Business Information demonstrated that NYNEX (now Bell Atlantic) has only an 80% share of the business local exchange services market in New York City yet NYNEX maintains nearly 100% of the residential local exchange market. The study contained in this 1997 edition shows that while there is competition developing in the switched access and long-distance markets, there is very little competition in the local exchange markets in the smaller metropolitan areas of Atlanta, Dallas, and Seattle. But Why? Because these markets and areas provide lower margins. Generally long-distance and carrier access rates are higher than they normally would be in a fully competitive market and the local exchange rates — especially residential rates — are priced residually and not on an economic basis. In many cases these rates are subsidized and therefore offer limited margins to attract competitors. This rating scheme has historically been followed by state and federal regulators as a way of promoting connections to the network, by keeping residential rates artificially low. As this report shows, it all boils down to the fact that the level of competition is directly correlated to the available margins necessary to attract competitors.

 

These findings fly in the face of having a national policy of common rules for all carriers and all markets governing the evolution of competition. This single-minded focus on regulating open markets may only delay their arrival. While competitors indulge in marketing and regulatory strategies to defend their markets, arguing about proper levels of interconnection charges and whether or not there is competition, the customer suffers by continuing to pay inflated rates for long distance services, the incumbent local exchange carriers continue to hemorrhage their more profitable revenue streams to competitive bypass, and the aspiring competitive local exchange carriers continue to lose access to that narrow window of opportunity through which they must enter in order to establish themselves as full service providers. This study also shows that:

 

 

 

 

 

 

 

 

 

 

 

1.3 The Evolution of Local Competition

 

The level of competition in the local exchange and exchange access marketplace is and has been impacted by technology, economics, and regulatory design. Local exchange and exchange access markets, primarily in the largest metropolitan areas, have been affected by service bypass (customers moving from one service, such as switched access, to another service, such as dedicated access, in order to save costs) as well as dedicated and switched facilities bypass arrangements in competition with the incumbent LEC. Many of these bypass arrangements are a product of regulatory mandates that require the pricing of many of the LEC services to achieve regulatory policy goals rather than to achieve economic efficiencies. The end result is that, to the extent possible, customers will choose alternatives that do achieve economic efficiencies. The evolution of this phenomena is explained following.

 

First, at divestiture, large concentrations of traffic were handed off to the Interexchange Carriers (IXCs) from the incumbent LEC central offices to the IXCs' Points of Presence (POPs). Initially, the incumbent LEC network consisted primarily of copper-based technology. Over time, fiber optic technology significantly reduced the cost of large volume transport and caused a migration from copper technologies to fiber-based technologies. This technological migration prompted IXCs and large business users to move from usage-based switched transport services to more cost-based dedicated service offerings from the incumbent LEC. In addition, the high concentrations of traffic began to attract competition from outside suppliers.

 

The increasing number of small IXCs and the average price structure of the incumbent LEC offered a marketing opportunity to the Competitive Access Providers (CAPs).* * The first CAP, now known as Teleport Communications Group, first obtained a Certificate of Public Convenience and Necessity to provide local exchange services and exchange access services in 1985 in New York State. Initially, they targeted the high-capacity, POP-to-POP markets (at divestiture, a smaller IXC without a nationwide network would hand off its traffic to a large IXC such as AT&T, creating high-volume, POP-to-POP markets).

 

Subsequently, large business users have found it far more economical to use dedicated fiber facilities (either the incumbent LECs', the CAPs', or their own) to reach the IXC (Premises-to-POP market). Where the incumbent LEC was involved, this resulted in service bypass, moving customers from usage-based switched services to more economically priced dedicated services. Where CAPs were involved, this was initially accomplished through the use of a PBX (or in the case of interconnecting LANs, a CSU/DSU or router) placed at the CAP node. Using this PBX, the CAP could route originating traffic directly to the IXC using the CAP's facilities and, using the IXC's switching equipment, directly route terminating calls to the end user's or CAP's PBX using assigned direct inward dialed (DID) trunk numbering (NXX) code. Using this type of network configuration, the CAPs began to advertise diverse services, including:

 

 

 

 

 

 

 

 

 

 

 

 

 

Where CAPs were not involved, large business users provided facilities directly to the IXC's POP, using network configurations similar to those described for the CAP.

 

Next, CAPs began seeking access to the incumbent LECs' local loop plant to avoid running fiber to multiple customer locations and to expand the CAPs' ability to reach additional customers without extensive network buildouts. In 1986, MFS filed a petition with the FCC seeking such relief. In October 1992, the FCC ordered Expanded Interconnection to special access services in its action in CC Docket 91-141, and subsequently in 1993 ordered switched transport interconnection in this same proceeding to be concurrent with its local transport rate restructure ordered in CC Docket 91-213.* * See Expanded Interconnection with Local Telephone Company Facilities, Second Report and Order, 8 FCC Rcd 7374 (1993), and Transport Rate Structure and Pricing, Third Memorandum Opinion and Order on Reconsideration, 10 FCC Rcd 3030 (1994), respectively. Expanded Interconnection became an important vehicle for CAPs to reach additional end user customers without the expense of building the local exchange network. These arrangements entail interconnecting with the incumbent LEC's local exchange network either through "physical collocation" (establishing a CAP node within the incumbent LEC's central office) or through virtual collocation (establishing a CAP node at a "meet me" location such as a manhole). Some state regulatory commissions have mandated the unbundling of incumbent LECs' local exchange services into "link" and "port" components to facilitate these arrangements and to encourage local switching competition.

 

For intrastate intraLATA toll, most state regulations provide for intrastate intraLATA toll competition and a number of states have enacted requirements for intraLATA presubscription (see Sections 3 through 6 for events in the states of Connecticut, Georgia, Texas, and Washington). The majority of the intrastate intraLATA competition facing the incumbent LEC is from the large IXCs, namely AT&T and MCI. AT&T is just beginning to initiate major marketing initiatives into selected intraLATA toll markets by offering time-limited discount plans.

 

1.4 Market Dynamics

 

Local Exchange revenues will continue to rise, while prices will be kept relatively constant. This is mainly due, for residence customers, to: (i) continued demand for online and data services; (ii) additional line growth to meet the needs of telecommuting and home businesses, access to online services and the Internet, and other second-line needs (which will soon taper downward because the FCC’s mandated Subscriber Line Charge increases — see Section 2); and (iii) growth in optional features and functions, CLASS services, and ISDN services. For business customers, the cause is continued demand for multiline service, including centrex (which will soon taper downward because the FCC’s mandated Subscriber Line Charge increases).

 

Switched Access revenues will decline briskly once full competition enters the market. An even bigger influence, however, is the FCC’s Access Charge Reform order (see Section 2). Following the rules the FCC has adopted will phase out local loop and other non-traffic sensitive costs from those charges and with the increased productivity factor, carrier revenues will reduce substantially after the FCC’s transition period (year 2002).

 

Intrastate Long Distance revenues will begin declining nationally in 1998 due to price competition from new entrants. This will take place sooner in the more competitive markets.

 

Interstate Long Distance revenues will continue to rise until the RBOCs enter the market. This will be the result of initial price increases in domestic long distance services and an increase in international calls brought about by the expanding global economy. However, there could be a slight decrease in revenues as AT&T flows through the initial access charges reduction to basic interstate rates. Hopefully, international long distance rates will begin coming down as settlement rates are renegotiated.