Introduction to Updated Report

This update is based on the original report entitled Telecommunications Services in Vertical Markets, published by Insight Research Corp. in September. 1996, with updated information and analysis, based on data available in mid-1998. Like the earlier report, on “Telecommunications Services in Vertical Markets”, this update begins with total telecommunications revenues, divides them between the business and residential markets, and then examines the driving forces in each of the twelve selected vertical markets. This volume utilizes the definitions established in Insight’s 1996 report. Its goal is to draw the reader’s attention to the changes in the telecommunications markets that have occurred in the last two years, while sticking to the format and methodology established in the original report.

The term “vertical” market, as used here, refers to industry-specific markets defined by unique SICs issued by the US Dept. of Commerce. In contrast, ‘horizontal’ markets refer to occupations or functions, like sales and accounting, that are part of many different industries.

Insight has increased the number of leading vertical industries covered from eight to fourteen. We have also updated the revenue forecasts for the various telecom services, now showing the rapid growth of wireless services, plus the impact of competition in local telephone markets. Also, we have almost doubled the number of categories of communications services detailed because of the presence of new families of services based upon newly developed technologies that are being offered by competing communications companies.

The predictions and segmentations in this report are based on data from the Bureau of the Census, a division of the US Department of Commerce, from the publication Statistical Abstract of the United States: 1997. (The study includes information from reports published by the US Bureau of Labor.) Every three years the government counts all establishments in the US and notes which industry they are in by Standard Industry Codes (SICs). The statistics show 6.66 million establishments or places of business in the US in 1998. The data in the following study is based on establishments—offices, warehouses, schools, retail outlets or any place where people work, and thus need telephones and communications. The number of separate corporations or organizations is not counted, as the government does not know whether a site is a stand-alone business, a franchise, or part of a larger organization. Insight estimates that there are 126.2 million civilian workers in all businesses and government agencies. This does not include military, retired or unemployed persons.

There are other existing estimates of establishments, such as from Dun & Bradstreet, that are widely accepted. Insight chooses to work with the Census Bureau’s numbers, rather than any others, for two main reasons:

• They form the basis of all government actions and have become the official number for business establishments; and
  
• The numbers are based upon triennial census counts.

This is not to say that this number is the correct one because definitions can be somewhat amorphous, especially when one examines the self-employed and other forms of small businesses. In fact, depending upon which source one uses, the estimates for the number of establishments may vary by as much as eighty percent, ranging from around 6 million to about 11 million business establishments.

New Ways of Looking at Telecommunications

Growth opportunities in telecommunications have shifted from providing commodity services to customized services, like Asynchronous Transfer Mode (ATM) and packet-based bandwidth on demand. New technologies have transformed the telecommunications business model, which traditionally emphasized horizontal services and carrier control of networks, to a vertical focus that is more customer- rather than carrier-centric. The key reason for this shift is that communications has become much more competitive, based not only on the Telecommunications Reform Act of 1996 but also on technological and service quality improvements from new market entrants. Today corporate customers need to differentiate their services and products by being better or faster, and are turning to Information Technology (IT) to achieve this.

Benefits of Vertical Market Segmentation

Vertical industries are becoming more attractive markets for telecom services because performance is carefully measured, in contrast to general user (“consumer”) markets, or a horizontal market such as generic T-1 lines. In many vertical applications, performance and the impact of telecom services are all measured very carefully, as with nurses in hospitals, police, and field salespeople. Thus the return on new investments in communications can be calculated, making purchases more easily justified.

Carriers and communications service suppliers focus on vertical markets, since they present an opportunity to provide high-margin value-added services. Two good examples are the “value bundles” provided by AT&T’s Advanced Network Solutions unit to insurance, banking, retail, travel and healthcare companies; and US West’s Federal government applications.

In contrast, customers choose traditional telephone services such as dial-tone or T-carrier services based largely on price, since these are commodity services provided by multiple competitors. Industry-specific solutions, however, are a different matter. Here opportunities abound for value-added services that not only have higher profit margins, but also create customer loyalty by developing a close link to the customer's core business.

Vertical Markets Create Global Opportunities

The shift from traditional product marketing to vertical marketing strategies--touting industry solutions rather than individual products and services--means a greater opportunity for value-added sales around the world. The observation made in the earlier version of this report, that firms in these industries often have international operations, continues to be valid, with at least 45 percent of the 2000 leading goods and services firms having operations outside of the US.

About one quarter of the industries are relatively intense users of communications (durable manufacturing, professional business services, non-durable manufacturing, and entertaiment & media). These are the industries that Insight Research recommends communications companies focus their vertical applications development efforts on first. In contrast, about an equal number of industries are relatively light communications users (retail distribution, construction and transportation) and here, Insight would recommend developing new services only if they do not divert resources away from the more important industries.

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