MTI US Telecom Industry 1996-1999

THE US TELECOMMUNICATION INDUSTRY: 1996-1999

AMBRISH ANIL ANKIT ANKITA

DEEPIKA KARTIK D SONAL RAVISHANKAR

RITUTAPAN BHUWANESHWARI APARNA

INTRODUCTION

• Congress passed the sweeping "Telecommunications Act of 1996"

1st February 1996

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

8th February 1996

2

Management of Technology and Innovation IIM Kozhikode || PGP 14

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,

3 Management of Technology and Innovation IIM Kozhikode || PGP 14

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,"


1

• 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?


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


RBOCs

Local / Regional Players

Competition was mainly within a particular region

Post the 1996 Act, it was expected that they would compete in each other’s 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


2

• What is AT&T’s business strategy?

• How has it changed from before the

Telecommunications Act of 1996?

• And from before it got split up in 1984?

8


AT&T History

Period Event Technology Strategy/Focus

1950 - 60

Formation of Bellcom, Comsat PPP Communications and guidance systems for the U.S. space program

Bell Labs Electronic Switching System

Competition – MCI, Hush-a-Phone, Carter Electronics Corporation

Forbidding competition from accessing AT&T’s network

1960 – 75 DOJ charges AT&T of suppressing competition

Separation of Bell System from AT&T

1975 – 84

AT&T breakup

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 History

Period Event Technology Strategy/Focus

1985 – 95

Credit Card – Universal Card Rationale: Financial Information Resources?

NCR Acquisition Global company in Network Computing

Corporate Restructuring

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


AT&T String of Acquisitions

Month/Year Company Acquired Rationale

Jan 1998 Teleport Communications Group

Access to 85 local markets Financial Synergy in reduced local access fees

Oct 1998 Vanguard Cellular systems Largest Cellular Service Provider in the US

Dec 1998 Global Network Services (of IBM)

Data Services Market

Mar 1999 TCI Corporation Phone service, Internet access and cable television

May 1999 Media One No. 3 Cable Operator in the US

Agreement with Time Warner and Comcast to sell AT&T Phone services


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


3

• 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?

13


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 allows both telephony and

broadband services

14


New Competitive Technologies

Bandwidth Benefits Cons

Digital Subscriber Line (DSL)

Upto 52 Mbps Limited physical reach

Cable Modems 10 Mbps Performance degradation with increased customers

DWDM (For Internet Telephony)

Dramatic increase in transmission capacity Huge Cost advantages (don’t have to pay access fees)

Small difference in voice quality, as compared to normal telephony

Fixed Wireless 1.54 – 45 Mbps Cheaper than cable undertaking

Satellite based cellular and Internet services

Upto 64 Mbps Wireless broadband service

Massive fixed cost investments Unclear if end user rates are comparable

15


4

• What does a comparison of the

income statements of the RBOCs and

the long-distance carriers tell you?

16


Consolidation Trajectories


Revenue Growth($ million)

0

5000

10000

15000

20000

25000

30000

35000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

AmeriTech

Bell South

GTE

Bell Atlantic

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

AT&T

Sprint

Qwest


Profit Growth ($ million)

-3000

-2000

-1000

0

1000

2000

3000

4000

1995 1996 1997 1998

AmeriTech

Bell South

GTE

Bell Atlantic -2000

-1000

0

1000

2000

3000

4000

5000

6000

7000

1995 1996 1997 1998

AT&T

Sprint

Qwest


Capital Expenditure ($ million)

0

1000

2000

3000

4000

5000

6000

7000

8000

1995 1996 1997 1998

AmeriTech

Bell South

GTE

Bell Atl

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

1995 1996 1997 1998

AT&T

Spirint

Qwest


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


5

• What are the RBOC’s core competencies?

• How are they counter-attacking?

• Which of Treacy’s “value disciplines” do

they possess?

22


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


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


RESOURCES

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


Treacy’s “Value Disciplines”

PRODUCT LEADERSHIP

OPERATIONAL EXCELLENCE

CUSTOMER INTIMACY

• Cellular licenses to operate wireless businesses

• Enhancing position in long-distance market

• Exploit fast growing market for broadband data services

• Strong network architecture that efficiently serves the local phone market

• Star or ring network architecture that minimizes network outages

• Local access to end users

• service quality and reliability

• Offer customers a wide array of telecommunication services


6

• What is the business strategy behind

non-telecom companies’ entry into

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

27


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 Microsoft’s Windows CE software for its digital cable set top units

– Nextel - > subscribers will be able to use Microsoft’s MSN Web portal for internet services

• Operating system battle between Windows CE and 3COM’s Palm OS in handheld computers

28


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

. 29


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.

30


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 31


Swing Between Vertical Integration And Stratification

• Interface :

– Is the point at which a supplier of value-added and a customer of that value-added 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 32


Functionality That Customers Can Utilize And How Companies Compete

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Time

Perf

orm

ance

Compete with

superior functionality

Compete Through speed,

convenience and customization


CYCLE OF INTEGRATION AND DISINTEGRATION

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 strong-holdings

Underserved Market

Over Served Markets


MTI US Telecom Industry 1996-1999

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