NEW YORK-Wall Street and stockholders so far have been the biggest beneficiaries of federal deregulation of the telecommunications services industry, which is intended to benefit consumers by fostering competition.
“Whatever the government splits up, the market puts back together,” said Michael Elling, managing director of Prudential Securities Inc. at a recent IBC USA conference called “Valuation for Telecommunications Licenses and Businesses.”
“I say to (Federal Communications Commission Chairman) Bill Kennard, `You’re keeping Wall Street in business because of all the [merger & acquisition] activity you generate’.”
The market opportunity is evidenced in the performance of telecommunications services stocks, which began in April 1997 to rebound from a slump. In the first quarter of this year, the sector has outperformed the broader Standard & Poor’s Industrial Stock Index, he said.
“As we all know, the Bells made a farce of the [1996 telecommunications act] because they obfuscated everything in the courts,” Elling said.
Within five years, however, he predicted that the federal law will achieve its mandates for unbundling, interconnection, resale, network access, signaling interconnection, dialing parity, resale requirements and phone number portability and assignment neutrality.
In the meantime, Elling said he believes we will close out the decade having moved from about 20 large carriers to six at most, with hundreds of value-added resellers. However, that development by no means will be the final chapter in the saga of telecommunications services evolution in a deregulated environment.
“The big end-to-end guys are totally unwieldy, and the industry will begin to devolve through spin-offs and become more like the computer industry,” he said.
As a result, from 2000 on, horizontally integrated intranets defined by applications and bandwidth requirements will enter the mix of a handful of major carriers and hundreds of resellers. Sprint Spectrum L.P. and Nextel Communications Inc. already offer intranets and extranets.
Taken together, these developments will put the final nail in the coffin of a century of telecommunications monopoly that has put a significant damper on demand, he said.
The domestic telecommunications market today is a $200 billion a year industry, with unit growth of 15 percent to 20 percent for each of the next 10 years and annual price declines of 5 percent to 10 percent, Elling said. He forecasted that wireless telecommunications, which comprise about an eighth of the current market, will grow to about a fifth of the larger, future market.
Capacity on narrowband and wideband networks is adequate to meet the demand growth. Call quality on digital telephony networks already is better than that of many pay phones and is moving in on that of wireline business and home phones, he said.
However, there are hurdles to overcome, not only by the wireless industry but also by the investment community.
“Wall Street analysts have had a wireline view of the world. Wall Street confused price per minute with average revenue per unit and thought ARPU would decline if price per minute drops,” he said.
“Au contraire,” he added, noting that as prices decline, minutes of use increase more so.
Elling also took aim at the paging and personal communications services sectors for their failure, in his view, to market their services adequately as an effective and cost-efficient methods of telecommunications.
Holding up a pager, he gave out his 800 number and said: “I live and die by this number, but do you think the paging companies have figured this out? No.
“The capacity and applications coming on narrowband will be mindboggling if the paging companies can get their act together.”
Elling also displayed a cost comparison chart indicating that an average three-minute call on a PCS phone is significantly cheaper than the same call on a cellular or a wireline pay phone.
“The PCS guys are either terrible marketers or are afraid of showing charts like this,” he said.
However, Elling said he opposes price promotions because they don’t increase minutes of use over longer periods of time.
“All-you-can-eat plans don’t expand revenues among high-volume users, and ultimately you clog your network.”
Instead, he offered his own brand of “PoWeR Pricing” that includes zone-based charges and different per-minute rates for mobile, residential and business calls.
“I’m selling you a minute at (an average cost of) six cents each,” Elling said.
With overhead of 4.5 cents per minute, a carrier can make a tidy profit by encouraging greater use over longer periods of the day, he said.
“You’re way off. I’ve done the math,” said Joe McMonagle, director of strategic planning for SBC Communications Inc., San Antonio, Texas, during the question and answer period that followed Elling’s presentation.
“It was a good theoretical discussion, but I take issue with the four-and-a-half cents overhead unless it’s a large carrier with a national network to spread it over,” McMonagle told RCR.
