Communications Market Overview

During the 1990s, the communications industry outperformed the overall market, which itself experienced a decade of tremendous growth. In an environment of deregulation and privatization, relative worldwide prosperity, a general state of peace, and the globalization of commerce, the entire world population was able to focus on improving its overall standard of living. Basic and advanced communication services became an increasingly high priority for both businesses and consumers. For its own part, the US saw a near-tenfold increase in venture capital, enabling the rapid creation of entrepreneurial companies focused on offering innovative products in key sectors of the telecom industry, such as broadband access and optical networking. Coupled with no Internet taxes, beneficial trade policy, and rising stock prices, the industry experienced a true golden era.

Total US voice and data service revenues, nearly $270 billion in 1999, account for about 30 percent of the total world service revenues. One of the ten fastest growing manufacturing sectors in 1999 was telecommunications equipment (including radio/TV equipment), which totaled $84.5 billion in the US. In March 2000, the telecom equipment and service providers had combined market caps totaling $2.7 trillion.

By July 2001, this number had dropped to $1 trillion. What happened to cause such an enormous drop? Several factors contributed to the descent: 

• At the macroeconomic level, deflationary monetary policy had a significant impact on the telecom companies, who suffered from higher real interest burdens, sinking asset values, and falling growth. 
  

• There was a realization that Wall Street expectations for communications companies were becoming extravagant, and that credit and capital financing were a bit too easy to find, causing an oversupply of products and services in the market. 
  

• In addition, the failure of many dot coms, Internet service providers (ISPs), and competitive local exchange carriers (CLECs) led to declining demand for computers and networking infrastructure.

Report Structure

This report is segmented into five distinct chapters, each reviewing targeted areas of the overall telecommunications market. The broad segments covered in this report are: 

• Telecom background and current market issues,

• Network infrastructure,

• Broadband access,

• Network support, and

• Telecom services. 

The telecom background and current market issues discussed herein lay the foundation for Insight's forecasts and forward-looking analysis of the selected areas in the telecommunications industry. The effects of privatization, deregulation, the current US economic climate, and other developments on the local, long distance, international, wireless, and cable TV markets are examined. The major restructuring of the industry over the past decade called for a shift in the imperatives of its participants. A before-and- after analysis of these changes and the motivations behind them provides not only an understanding of how the telecommunications market has evolved, but insight into where that evolution will lead next. 

Continued technological advancement and the ongoing transformation of network infrastructure are ultimately driven by end-user demand for bandwidth. The migration of networks from electronic circuit switching to photonic packet switching is paramount to keeping pace with the transmission requirements of innovative, high-bandwidth services and applications. Accomplishing this requires carriers to update systems and equipment at all levels of the telecommunications network architecture–end-user, access, metro, and core. This report examines these issues as well as competing data network transmission technologies, such as frame relay, asynchronous transfer mode (ATM), private line, integrated services digital network (ISDN), and internet protocol (IP) virtual private networks (VPNs).

The advent of high-speed broadband access has brought with it a number of options for content delivery: digital subscriber line (DSL), hybrid fiber/coax (HFC), fiber, fixed broadband wireless, mobile, and satellite. As with advancements in underlying technologies, the demand for applications, notably higher speed Internet services, is fueling the growing demand for broadband local access. Insight’s examination of the various broadband access alternatives includes discussions on current market trends, the ambiguity of subscriber demand for these services, and five-year forecasts for subscribership. The premises wiring market, including business cabling systems, residential cabling systems, and specialized fiber cabling applications, is also examined. 

The network support systems that lie behind the network infrastructure include various operations support systems (OSSes) leveraging both business and network operations. Network operators’ legacy support systems must be continually updated to accommodate new technologies, services, and applications. Business support systems include customer care, mediation, rating, and billing. Network support systems include engineering and planning, provisioning, trouble/repair, and network management. 

The final section of this report considers the telecom services landscape. In addition to a detailed analysis of voice, data, and video services, marketing innovations specific to subsections of business and residential subscribers, such as the healthcare industry, small businesses, rural and urban consumers, and ethnic consumers, are also examined.

Telecom services discussed in this report:

• Local 

• Consumer Internet Access/E-mail 

• Long Distance

• Business Internet Access/VPN

• Voice over Packet

• Wireline Data Services

• Enhanced Voice Services

• E-Commerce

• Directory Services

• Mobile Data Services

• Enhanced Directory Services

• Digital and High-Definition TV

• Mobile Voice Services

• Streaming Video

• Unified Messaging

• Videoconferencing

Telecom Market Outlook: Telecom Services

The prospects for both telecommunications services and equipment in the short-term are mixed. On the one hand, the scarcity of funds due to the recent dearth of fresh capital and profit is putting limits on the expansion of the broadband network. The continuing modest growth in telephone voice traffic is being offset by declining per minute charges. Also, consumer spending is expected to begin dropping along with the economy, further inhibiting growth. 

On the other hand, while end users only have a relatively fixed amount of disposable income, attractive services can make the amount they are willing to spend on telecom services grow. Users have at least been willing to pay for bandwidth and basic connectivity, which is the primary function of networks. It is also expected that the availability of broadband access will greatly increase overall network usage, spurring sales of next-generation broadband switches to carriers. 

At present, the most disturbing question relates to the effects that the recent terrorist attacks on the United States will have on the communications industry, and the unpredictable nature of events that may occur in their wake. In general, major perturbations, such as wars and global depressions, fundamentally alter global priorities and diminish the relative importance of deploying high-speed communications networks and advanced services. The intrinsic value of communications, however, does not decrease, and the protection of enterprise and service provider networks and data transmission takes on newfound gravity. 

Videoconferencing, network security, and data storage services are expected to experience a boost as a result of the recent occurrences, although these areas alone may not balance out the expected declines in networking equipment purchases by enterprises. According to Bernstein Investment Research and Management, a unit of Alliance Capital Management L.P., the videoconferencing market currently stands at $1.5 billion. As such, if the market doubled to $3 billion, it would not boost revenue for AT&T, Sprint, or other carriers more than 1-2 percent. Wireless usage and cell phone sales have been steadily increasing as well, but with a likely decline in the number of people that will be traveling, less will be spent on international roaming fees, a major source of revenue for wireless carriers.

Broadband Access

According to the FCC, a broadband communication service is one in which data transmission rates of at least 200 Kbit/s are supported in at least one direction. This definition encompasses a number of established and emerging communication network access services operating over various wireless and wireline network topologies, including: 

• T-Carrier,

• DSL,

• Cable modem,

• Fiber optics,

• Fixed broadband wireless, and

• Direct-to-home satellite. 

The demand for higher speed Internet services is fueling the growing demand for broadband local access. The number and availability of these high-bandwidth Internet access options has increased dramatically in the past few years, but still, not all options are available to every customer. 

So far, the growth of Internet traffic has occurred in spite of the relatively slow access methods that most users must endure. The need for higher bandwidth Internet access is more critical than most people realize. Higher-speed access will tend to dramatically increase Internet usage for most users, with a compounding effect on total traffic growth. 

Insight expects subscribership to all existing and emerging broadband access service types to experience strong growth during the course of the forecast period.

Increased Network Capacity 

The Internet’s true impact on telecommunications infrastructure comes from traffic growth. For the first 18 years of the Internet’s existence, when the number of hosts roughly doubled every 18 months, network traffic doubled every 12 months on average. In 1997, the Internet reached critical mass. Nearly every Internet user could reach nearly every other Internet user, and nearly every major company embraced the World Wide Web. As a result, traffic began doubling every six months, for a four-fold growth per year.

In 1999, data traffic volume surpassed voice traffic volume for the first time. Further, data traffic is estimated to be growing much faster than voice traffic.  The continued and expected increases in Internet infrastructure buildouts will mean that: 

• Available bandwidth will be so plentiful and cheap that it will be nearly free, which is a major business challenge for those installing networks and trying to make money.
  

• The Internet will be so pervasive that it will be taken for granted.
  

• Internet content will be viewed through a wide range of appliances, including computers, televisions, and other household items.

Network Infrastructure and Support

The increasing bandwidth demands of subscribers are often unpredictable and challenging for telecommunications carriers to meet. Carriers must not only satisfy today’s bandwidth demands by leveraging the limits of existing infrastructure, but also must plan for future subscriber needs. The network infrastructure must therefore provide not only more bandwidth, but quick provisioning of services and guaranteed quality of service in a cost-effective and efficient manner. 

Two of the areas in which major changes are occurring are optical networking and network support. The emergence of the optical network is a crucial milestone in the evolution of communications networks. Optical networks provide higher capacity and reduced costs for applications, such as the Internet, video, multimedia, and other advanced digital services. Many in the telecom industry believe that an all-optical network will be necessary in order to keep up with bandwidth demands. 

Deployment of dense wavelength division multiplexing (DWDM) systems in long-haul applications is already well underway. As carriers begin using more wavelengths in their networks, there is an increased need to manage that capacity in the native optical layer, avoiding costly and inefficient optical/electrical/optical conversions. As demand for capacity increases, traditional network functions—add/drop multiplexing, cross-connection, signal restoration, and service deployment—will have to be performed optically. 

The traditional focus of OSSes has been on the operation of the public switched telephone network (PSTN). As new networks, new technologies, and new carriers have entered the industry, there has been an increased need to integrate network operations systems with certain business operations systems, especially with customer contact and customer billing systems. The rapidly changing nature of the telecommunications industry is forcing all service providers—wireline, wireless, cable, and ISPs—to re-engineer their businesses and develop information technology (IT) infrastructures that span the enterprise.

Components

At the foundation of the supply chain is infrastructure provider demand for technologies and components that facilitate the mass deployment of commercially viable broadband networks. This demand has encouraged component and technology providers to develop network building blocks that enable increasingly cost-effective, higher-performance network infrastructure solutions.

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