Market Growth and Trends

Despite long-standing sluggishness and repeated predictions of its demise, the US private line market is seeing healthy and even accelerated growth nationally and internationally. Dramatic and accelerating increases in data transmission are not only feeding the emerging growth of new public data alternatives like frame relay, ISDN and ATM, but also sustaining a resurgence in the private-line market; an area whose expansion shows no sign of letting up.

The market's continual bandwidth hunger sustains an ongoing end-user migration upward toward higher capacity, which leaves revenue growth lagging behind circuit-equivalent expansion for private line services. At the high end of the private line market, the number of digital circuits are growing well into the double digits across all segments. And though a few hundred huge companies dominate the high end of the end-user base, a rapidly broadening range of smaller customers are moving into private line markets with ever-expanding data requirements.

While fast-packet public-switched service alternatives such as frame relay and ATM pose long-term threats to private line, they are thus far being adopted largely for new applications, for which they are particularly well adapted. There is no rush by business customers shifting wholesale from private line to frame relay. Frame relay even appears to promote private line growth to a considerable degree, particularly in local and international markets, insofar as it is used in new applications and requires private-line access.

The major question marks over the future level of fast-packet replacement for private line include how well ATM will live up to its promise of efficiently accommodating multiple media, and how widely frame relay will be adopted for long-standing, mission-critical SNA applications. Carriers remain ambivalent about tradeoffs between private line and public data services, since they want both to be seen as serving customers' best interests and to avoid the loss of revenues attending any massive shift away from private line to frame relay.

The "bandwidth on demand" concept, which blurs the distinction between a dedicated and switched service, will offer increasing benefits for many customers and eventually reduce at least some of their requirements for true private lines. Over the next five years, as data transmission bandwidths continue their tremendous growth, private line will gain back some circuits, both as access vehicles to new technologies and as large customers experiment with such technologies on their own private networks. Long-term prognoses that private line will be all but replaced by fast-packet are hardly definitive. Future technological developments could even restore the balance toward dedicated as opposed to switched services--a new data compression technology, for example, might even obviate requirements for a broadband switching technology like ATM and shift the balance back to dedicated circuits.

IXC Postures

AT&T has successfully burnished its reputation for technical excellence in recent years, helping sustain its dominant though gradually diminishing market share. AT&T clearly has the most to lose from migration away from private line--with by far the largest base. Further, its massive base of analog-access users are more likely to shift to new services like frame relay or digital private line, and, therefore, more likely to shift carriers.

Historical ambivalence bordering on disdain for private line hasn't prevented MCI from achieving the best PL growth rates among major carriers as, among other things, the clear low-cost provider of the Big Three. Firmly in the market's number-two position, MCI is extending itself most quickly and directly of all carriers to business customer premises through its ambitious local subsidiary, MCImetro.

Sprint's market growth has remained strong despite its risky price increases early in 1995. It remains well behind LDDS WorldCom, number four in both domestic and international markets, however. With probably the strongest public data businesses, Sprint also has led the way with network quality enhancements. Positioned increasingly within its new international and cable/PCS (personal communications service) alliances, its plans for enhancing local operations through CAP (competitive access provider) partner Teleport remain unclear.

The former WilTel remains the core of the new WorldCom domestic private line business, with a dominating position in carrier resale and a disproportionate share of high-capacity lines. The old IDB WorldCom business maintains a solid third-place position for the company internationally, rounding out the private line market's Big Four.

Other significant private line carriers, notably Cable & Wireless USA and LCI International, target the mid-sized to smaller business customers, pricing 15 percent or more below AT&T and Sprint. Allnet, the major long-distance constituent company of Frontier, is reversing its long-standing avoidance of private line, largely in response to intensified customer demand.

Technological capabilities, most notably sub-second restoration times promised by new SONET-based networks, are a competitive factor increasingly promoted by AT&T and Sprint. These are features currently beyond the resources of second-tier carriers, who respond instead by both discounting and generally providing superior service to customers too small to make a blip on the Big Three's radar. MCI and Sprint remained focused on the up-market, which is where AT&T also puts its priorities, despite its massive base of smaller customers.

International Market

The international private line (IPL) market, with a much smaller base and involving a much smaller proportion of the US business community, will continue growing much more rapidly than the domestic market. Besides the data explosion that is powering the domestic market and the globalization of business that is rapidly increasing international voice and data transmission requirements of US-based businesses, IPL is benefiting from the great recent expansion in international fiber capacity, improvements in domestic infrastructures abroad, and the increasingly deregulated and in some cases privatized and competitive foreign markets that both push prices down and quality up.

International customers are dramatically hiking their bandwidth demands, with high-capacity orders way up and high-capacity lines poised to become a substantial portion of the market. Fractional speeds are already a far more significant share of the international than the domestic market. Voice will continue to be a larger factor internationally than it is domestically. Growth in Internet usage is having a major impact on the international as well as domestic private line markets.

Local Exchange Markets

Local exchange markets, clearly distinguished from long-distance since divestiture in 1984, are entering a new period of transition as competition spreads and the IXCs position themselves increasingly as full-service providers.

The local exchange carriers' (LECs) share of the market has been flattest of all the private-line participants. However, they are seeing continuing growth in their digital businesses. The down-market shift of private line toward smaller businesses is strongest in local markets--and these smaller businesses may well be the LECs' best private line customers in the long-distance battles ahead. The LECs have already dramatically lowered their prices. They also have sped up and otherwise improved their service
provisioning, largely in response to the threat or reality of competition.

LECs are enhancing and promoting their performance characteristics, countering CAP competitor claims of superior diversity and redundancy. They are also offering performance guarantees, gaining ever greater regulatory flexibility, lowering prices, and seeking to motivate customers to shift from analog to digital services. At the same time, they are trying to both solidify their relationship with IXC customer-competitors and market access services directly to end-users. All this, while plotting their re-entry into the long-distance market (including private line). Meanwhile, the CAPs (competitive access providers) are growing rapidly.

So despite long-standing predictions of its demise, the US private line market is healthy and even growing. The accelerating increases in data transmission and increased international networking are likely to sustain the private line market into the next century.

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