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Good Afternoon.
I thank you for the privilege of speaking with
you about the state of the telecommunications industry, and the impact of
regulation on the health of the sector. My perspective on the sector is derived from my 10 years as
an industry financial analyst at Lehman Brothers and Sanford C. Bernstein, and
my nearly four years as a financial analyst at MCI Communications prior to that.
My clients include mutual funds, pension funds, investment advisors,
banks, hedge funds, and others who commit capital to the sector.
I would like to focus my comments today on four
topics: the evolution of the telecom industry since the 1996 Act; the impact of
telecom regulation on capital investment; the state of competition in the
consumer market for telecommunications; and, finally, the impact of these issues
on how investors view the telecom sector.
I.
The evolution of the telecom sector since the
signing of the Telecommunications Act of 1996 has been profound.
At the time of the Act, the revenue composition of the services sector
was 90% wireline voice, 5% wireless, and 5% data.
Voice calling was distinctly separated between local and long distance
for both wired and wireless calling, and the industry structure in each
geographic market largely consisted of monopolies, duopolies, and very
well-behaved oligopolies. Every
sector of the services industry grew at or above the rate of growth of the
overall economy. Not surprisingly,
investors were very keen on the telecom industry for its combination of growth
and stable operating performance.
In the last seven years the industry has evolved
dramatically. The industry’s
revenue composition is now 40% wireline voice, 30% wireless, and 30% data.
Voice services for wireless callers very rarely distinguish between local
and long distance, and this type of “any distance” offering is taking hold
in the wireline industry as well. The
telecommunications sector – across wired and wireless, voice, and data – is
now robustly competitive, with customers in virtually all geographies enjoying a
range of supplier choices and technology choices to meet their rapidly evolving
and growing needs. Investors are
considerably less enthusiastic about committing capital to the sector, and
industry valuations are among the lowest they have been relative to the market
since the 1984 breakup of AT&T.
II.
On the impact of telecom regulation on capital
investment, I believe there is compelling evidence that deregulation of telecom
sub-sectors has led to strong growth in spending.
Since the 1996 Act, the growth in telecom services revenues has come
predominantly from wireless and data services, as I highlighted earlier.
These are two areas that are substantially deregulated, and where the
capital investment and technological evolution
has been most dramatic. Since
the ’96 Act, capital spending on wireless networks has grown at nearly three
times the rate of growth of spending on wireline.
Capital spending in the cable sector has also grown substantially since
it was deregulated in the mid-1990s, with cable spending growing twice as fast
as telecom spending and giving birth to a range of new services including high
speed internet access and video on demand.
III.
In my view, the analysis of the
state-of-competition in the consumer market for voice and data communications is
often muddled because of an unwillingness to look at the impact of inter-modal
competition between wired and wireless and the growing importance of data
communications to residential customers. Current competition for consumers’ share of wallet is
intense.
In each major metropolitan area, customers
seeking voice services have a choice of six wireless providers, the local
telephone company, one or two of the national long distance providers, and, in
many cases, the cable company. Customers
wanting high speed internet services largely need choose among the RBOC and the
cable company. Customers have
embraced the opportunity for choices of providers and technologies.
In each of the last 3 years, 2-3 million customers per year have
discarded their wireline phones in favor of wireless, which can offer “any
distance” packages and mobility. Noteworthy
is that wireless pricing is currently below that of wireline, with a package of
1000 anytime/any distance minutes at $40-50 per month, versus the packages from
the national long distance companies at $50-60 per month and the RBOCs at
comparable levels. I see nothing
that would reverse the trend towards more and more customers choosing wireless
over wireline, particularly if wireless carriers are given the incentives to
continue substantial investment to bring their network voice performance in line
with wireline networks. One major
opportunity for the wireless companies would be the 10 million customers over
the last 3 years who have chosen a UNE-P based competitor for service.
On the data side, cable companies have taken
two-thirds of the 16 million residential lines for high speed internet access.
I believe the number of consumers choosing broadband access will grow to
40 million by 2007, and that ultimately these broadband networks will carry
packetized voice. Notably, the
cable industry has taken fewer than 2 million telephony customers, due to the
uncertainty about technological evolution and the type of regulatory
environment that will exist for telephony in the coming years.
Without question, the cable companies would look more favorably on
investing in telecom voice service if regulation favored facilities-based
competitors.
IV.
Finally, the impact of the current environment on
how investors view the telecom sector – investors despise uncertainty and
excessive competition, two things they believe exist in abundance right now in
telecom. Investors are encouraging
companies to enter a “bunker” mentality: conserve cash until the regulatory,
competitive, and demand landscapes show greater clarity and investors can be
more confident in return on invested capital.
I believe the FCC and the state commissions will play a critical role in
the weeks and months ahead in clearing away some of the regulatory uncertainty,
creating an environment which favors facilities-based investment, and embracing
a market of fewer – but perhaps stronger – competitors.
I would be happy to answer any questions you
have.
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