Chapter 4. Network Service Providers and Local Competition

In this chapter...

• Local Competition

• Carriers

• Bandwidth Trading: The Commoditization of Bandwidth

• Local Service Providers

• Summary

The telecommunications industry is made up of hundreds of carriers who sell a mix of leading edge data services as well as mundane items such as voice long distance and white and yellow page directories. Often the same companies sell all of these products.

It used to be possible to neatly classify carriers into the following categories:

• Interexchange long distance carrier

• Local telephone company

• Reseller

• Cable TV provider

• Data communications provider

• Independent local telephone company

This is no longer possible. The Telecommunications Act of 1996 changed the telecommunications landscape. Interexchange carriers (IEXs) now are also competitive local exchange carriers (CLECs). Qwest is now a Regional Bell Operating Company (RBOC) through its purchase of U S West, as well as an IEX. Sprint owns an independent telephone company, sells local service outside of these territories and is the third largest long distance company. RBOCs now sell long distance service from within the states of Connecticut, Massachusetts, New York, Texas, Oklahoma and Kansas and shortly will have permission to sell it in many more states. They also are lobbying lawmakers to pass legislation allowing them to sell data communications services across the entire country without getting permission on a state-by-state basis. Passage of this type of legislation would greatly hamper the competition in the local telecommunications market.

The biggest source of growth for competitors to RBOCs is data communications services. Many of them such as McLeodUSA and Allegiance Telecom purchased new subsidiaries for their expertise in Web and Internet service. In contrast to the growth in data communications, voice long distance revenues are flat and margins are narrow due to steep price declines.

The sector with the least amount of competition is cable TV. New competitors, called overbuilders, are emerging in this area. Overbuilders build cable TV infrastructure in cities and suburban areas that already have an incumbent cable TV supplier. Overbuilders sell cable modem, local phone service and cable TV service. With the emergence of overbuilders and cable TV companies' cable modem offerings, consumers often have more options for high-speed Internet access than small businesses in rural and suburban areas. Due to the high costs of these endeavors and the declining investment in telecommunications, this can take quite some time to come about on a large scale.

Utilities are becoming a major factor in building infrastructure, particularly as overbuilders. They are leveraging their expertise in building and maintaining fiber optic networks for electric distribution to construct fiber networks.

Table 4.1 indicates the tremendous numbers of mergers and acquisitions in telecommunications. WorldCom and AT&T have created tracking stocks for their slow-growing voice divisions. Companies are also spinning off portions of their cellular assets in Initial Private Offerings (IPOs). They hope to raise capital and increase value for their shareholders by both these strategies.