Introduction

A war of sorts is changing the consumer telecommunications landscape forever. Practically everyday since early 1998, the press has covered the developing strategies and weapons of telecom companies competing for the consumers’ business including legal action, mergers, acquisitions, marketing agreements and new technologies.

The winners will be the competitors that capture and retain the largest consumer market shares in local and long distance telecommunications service and products for residential customers. Who will be victorious? Wall Street has plenty of opinions. But one thing is certain: this will be one of the most interesting business battles in US history, especially since the stakes are enormous and it is taking place during a period of such accelerated deregulation.

Historically, industry deregulation has lead to reduced prices to the consumer. A recent study by Newsweek tracked the performance of five industries that underwent deregulation and found that it resulted in combined price savings of $40-$60 billion per year to consumers. Average airfares have dropped by a third since 1978 and long distance telephone rates have declined 50 percent since 1984, according to a Newsweek article entitled, “The Joy of Deregulation."

Consumers are more sophisticated about shopping for their long distance telephone service and are aware of the approximately 10 to 25 cents per minute spread they can encounter when paying for domestic long distance calls. It will not be long until customers gain this same level of sophistication with local wireless and landline services. It is interesting that customers are still confused about the cost of a local call. With the increase in area codes, customers do not know when they pick up their phone whether that local call is free, a toll call, or perhaps being switched to the long distance carrier. When customers take the time to call their local carrier to ask about the rate for a particular call, the typical response is that the cost depends upon the caller’s particular plan. But as competition in the local market heats up, rates will become very visible, compared to the buried costs that exist now.

In fact, as area codes continue to proliferate the difference between a local call and a long distance call will continue to blur. The terms local and long distance may become obsolete especially as companies offer bundled services covering all calls.

Deregulation also prompts new entrants and consolidations. The frenzy of takeovers which began with WorldCom, Inc.`s acquisition of MCI Communications, Bell Atlantic`s acquisition of NYNEX, and SBC`s acquisition of Pacific Telesis, continues in 1998 with AT&T`s purchase of Teleport and SBC`s purchase of SNET and possibly Ameritech. Analysts predict more deals on the horizon, including another merger between Bells or a Bell take-over of some long distance carrier. This report will analyze industry changes and draw on primary and secondary data to evaluate the residential market`s media habits and buying patterns.

Understanding the different segments of the residential market including age, income, education, household makeup, and employment/work habits is critical to telecommunications companies in their effort to gain market share. In addition, it is critical to understand how these demographics are changing if a company is to stay one step ahead by supplying these groups with the right products and services. This report will provide a better understanding of the consumer market by examining consumers criteria for selecting local and long distance telephone companies. Using primary research and other information, the report will measure the relative importance of price, bundling of services, perceived level of service and other criteria.

Expanding Telecommunications Products and Services for Consumers

The markets for consumer telecommunications products and services have exploded with some vendors catering to consumer demand for existing products like mobile phones and services, while other vendors chase after emerging markets like WebTV. Existing technologies like telephones and PCs have improved in quality and at the same time, come down in price. Basic local and long distance services have more to offer including features like caller ID, second lines, and call waiting. Many of these services have increased the revenue per customer for the carriers.

Focusing on a growing consumer demand for speed and convenience, companies are offering a variety of products and services including wireless capability and prepaid phonecards. The Internet is playing an increasing role in the consumer`s life, whether it be for personal or business use. E-mail on the Internet has shifted from a novelty to competing directly with telephone voice service and the US mail. Long distance carriers are even exploring crossover services like allowing an Internet chat room participant to automatically dial the person they are conversing with through the keyboard and shift to a voice conversation.

Consumers are willing to pay for the products and services that meet their needs. Competition will continue to reduce prices making these technologies more attractive to all consumers.

Methodology Uses Convergent Sources

This report combines primary and secondary research to achieve greater insight into trends and market sizes than is possible with any one type of data. The primary research consisted of interviews with regulators, industry players, and academicians, as well as Insight’s proprietary survey of 1018 randomly selected consumers. Secondary research was based on information from regulators, government agencies as well as electronic and non-electronic searches of articles from newspapers and trade journals, Internet searches, research reports from a number of securities houses, and attendance at conferences and trade shows. Using its convergent methodology, Insight has integrated qualitative and quantitative data from these independent sources to identify key trends in consumer demand and vendors’ plans to provide services.

Insight made its five-year technology and expenditure forecasts using a macroeconomic model of consumer markets within the US. This model is based on sets of equations that balance market supply and demand for different sectors of the consumer markets. We have given added emphasis to communications technologies for consumers and to consumers’ willingness to pay for various telecom services and products.

All revenue forecasts are in actual dollars for each year, including the effects of inflation. For example, the forecasted dollar revenues are made without additional adjustments for inflation. Insight assumes that over the next five years, inflation in the US will average two to four percent per year.

Segmentation Covers All 102 Million Households

This report will utilize a common methodology based on segmenting all 102 million households in the US by a variety of demographic criteria. Households with telephones are the primary purchasing element for consumer telecommunications products and services, rather than individuals within these households. This statistically convergent methodology combines primary consumer research, information from carriers on their offerings and strategies, information from periodicals, the Internet (e.g. Yahoo! Finance), investment newsletters (e.g. United & Babson Investment Report), US government demographic data, and Insight’s experience analyzing telecommunications markets and technologies.

Insight utilized a proprietary survey conducted by Taylor Nelson Sofres Intersearch (TNS), formerly Chilton Express. A primary research study was conducted with 1,018 respondents in March, 1998. For this sample, the survey data was weighed to account for probabilities of random selection of an individual male or female household member and balanced by age, sex, race and education to match key US Census demographic variables.

Conclusion

This report will provide an objective analysis of the key trends plus profiles of key competitors in the various service and product areas. It will then explore success factors and forecasts of consumer demand from 1997 to 2002.

A summary of the key points in this report are:

• Despite major advertising campaigns run by the large long distance telephone companies costing billions of dollars, 10 percent of the population is still unaware of who their LD carrier really is.

• Though common wisdom is that the older age groups are more loyal to AT&T, our research shows that seniors were just as likely to switch from AT&T as any other age group. Although AT&T’s market share was pretty constant across most of the income levels, AT&T was somewhat lower in the $100,000' category while MCI’s market share for this group was slightly higher than expected.

• Respondents are reporting they are paying more per month on their local phone bills than their long distance phone bills, with both bills coming in at under $50 each. As long distance rates continue to drop, it will be interesting to see if the volume and length of calls go up. The same question holds for the local market. As competition intensifies and rates fall, will the average monthly bills decline or will volume offset lower rates?

• Forget the bells and whistles. Well more than half of the respondents said advanced features, trusted company name, and one bill were fourth or fifth, or the least important criteria when selecting a telephone company while customer service and lowest price were far and away the deciding factors. There were however, some interesting regional differences regarding price and customer service. The Northeast and West regarded lowest price as the number one reason to select a telephone company while the Midwest and South put best customer service as their number one criterion for selecting a phone company.

• Long distance telephone service pricing has become negotiable and cut-throat. In an experiment Insight conducted, the win-back efforts we uncovered after switching our residential service to a second-tier carrier were alienating and poorly considered. Customers resent it when they receive better offers after they leave a company than when they were with that company. We were put off by the hounding, and we lost trust in a company that could not speak with a consistent voice and make a consistent offer. The multiple offers we endured were confusing and they manner in which they were pro-offered left ample room to feel cheated.

• Many of the phone products and home computer equipment have become commodities with equivalent high quality and low prices.

• The Internet and new types of networks and products have already begun to have a major impact on the way telecommunications is provided and will be provided in the future.

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