Customer demands to drive telecommunications market
By increasingly placing priorities on reliability, value and responsiveness for telecommunications equipment and services, customers will eventually control the business
William B. Smith
Telco Systems Inc.
Deregulation is bringing the same customer-centric, demand-driven movement to the telecommunications industry that is transforming contemporary retailing, consumer packaged goods, manufacturing and other highly competitive industries. Customers are placing new telecommunications applications, such as virtual local area networking, Internet access and videoconferencing, on their mission-critical list. In this new competitive landscape, consumers are shaping business markets, demanding lower costs, asking for a greater array of flexible products and insisting on high-quality, reliable services--and they want them fast. Whoever meets their needs--telecommunications companies, cable operators, software manufacturers, utilities or financial institutions--will win their business.
No longer can telephone companies call the technological shots, specifying when and where new products and services are introduced. Building networking infrastructure will be justified on a pay-as-you-go basis, with little credit given to the benefits of sensational services that may be possible in a few years.
Fiber optics technology, the major transmission medium over the past decade, will be advanced when it benefits customers rather than because it is the right technology for the future. Advanced technology applied at the end points of copper, such as high-bit-rate digital subscriber line and asymmetric digital subscriber line, will compete for scarce capital dollars on a cost/benefit basis, as will various wireless alternatives--from satellites to personal communications services and fixed wireless loops. In an open, competitive marketplace, popular standards, such as asynchronous transfer mode, or ATM, and synchronous optical network, or Sonet, will be proven by operations or first-cost savings.
Considering the changes that are about to unfold in the local exchange carrier marketplace, a look at the decade that began with the 1984 divestiture of the Bell System and the corresponding opening of the long-distance marketplace to competition is illuminating. In only a few years, AT&T`s market share of long-distance services dropped considerably from almost 100% pre-divestiture. Business services moved quickly to competitive long-distance providers. Residential market share loss was slower in shifting, in part, because the appropriate infrastructure to serve this market was more expensive than for business, and available revenues were lower.
Hundreds of interexchange carriers and other common carriers entered the marketplace. Prices came down fast, and successful carriers were able to supply high-quality service. The early notion that pre-divestiture blocking service levels were "too rich" proved untrue. Instead, toll has become almost non-blocking--even on Mother`s Day. As the protective monopoly walls begin to come down once again, this time for local exchange service, customers with choices will demand exceptional service. It will be an age of market economics, not dogmas.
Keys to the future
The new competitive environment for local access will display six key phenomena:
Demand for bandwidth to the customer will skyrocket. Transmission rates of at least 6 megabits per second will be required for business personal computer use to obtain multimedia information and for home/office environments. Current skyrocketing demand for integrated services digital network is an early manifestation of the need for economical broader bandwidth. As the cost of bandwidth decreases, 128 kilobits per second will prove insufficient for multimedia applications such as interactive data retrieval (surfing) and entertainment. DS-3 services at 44.74 Mbits/sec will begin to replace DS-1 services at 1.544 Mbits/sec as the standard. Voice, data and video will be combined, leading ultimately--as costs decline--to ATM as the integration vehicle. Similarly, integrated network access devices will be designed to give higher speed (6- or 45-Mbit/sec) outputs toward the network, often on fiber. Technology to increase the bandwidth carried by copper (high-bit-rate digital subscriber line, asymmetric digital subscriber line and carrierless amplitude-modulation phase-16) will be widely deployed. Wireless technology will be widely deployed and will begin to replace older copper facilities.
Private data networks will significantly diminish, just as private voice networks have. Carriers that are competitive in data communications will have no difficulty offering price points, responsiveness and service that will surpass the ability of companies to provide service for themselves. The ability to customize services to meet individual customer`s requirements will be critical to the carriers` success. This customization, in turn, will imply software configuration control of all network elements.
Transmission and switching will continue to jockey for position in the market. Transmission nodes will get smarter (that is, contain loadable software) and will provide limited switching capability. This evolution will be done at price points considerably below those of switches. In turn, switches will become increasingly global in service provisioning and routing.
Innovation will be led by small, startup companies that match market opportunities with technology in new ways. Large telecommunications manufacturers will buy or ally with the most promising companies to provide standardization and mass implementation. It has been estimated that the local access market will grow by 60% over the next decade. However, the smaller competitive and alternative access providers are projected to sustain much larger growth, on the order of 40 times over the same period.
Alliances will be formed to propel the opening of the local exchange market. Interexchange carriers will ally with competitive and alternative access providers and cable-TV companies to offer local service. Unregulated regional Bell operating company subsidiaries will also join the fray and provide the requisite local service knowledge to compete effectively outside their regions. In the future, there may even be Bell/interexchange company alliances to provide nationwide or worldwide local service. Businesses will have the incentive to buy and lease back facilities to the carriers.
The deregulation and opening of competition, led by the United States and the United Kingdom, will spread rapidly to Asia, especially to the Pacific Rim. Success there will drive similar changes in the rest of Europe and in other parts of the world.
Current service providers typically have two major advantages. First, they have name recognition with an established customer base and well-developed channels. Second, they have an embedded infrastructure of copper loop and central offices. Current service providers will have to leverage these advantages via technology. This leveraging will lead to significant re-engineering of processes and systems that support the channels and technology to enhance the copper loop, such as high-bit-rate digital subscriber line and economical multiplexing. At the same time, it is critical to maintain high service levels. Customer dissatisfaction with service is strongly correlated with a willingness to switch to another service provider. Service providers should aggressively offer new services at low prices, to make it harder for a competitor to gain a foothold. Their access to a rich customer database can lead to detailed understanding of customer needs.
How will new competitors enter the market? In spite of formidable advantages, entrenched service providers are vulnerable in several areas.
Be nimble, be quick. Despite the best efforts of large telephone companies to change their monopoly culture during the past decade, they continue to be burdened by bureaucracy, which can retard decision-making and product-development processes. On the other hand, the high-growth, market-driven companies of the 1990s can turn on a dime. Rapid penetration in high-value markets will test the telephone companies` ability to react. Systems developed in a "green-field" environment can provide a base for superior service levels compared to the slowness of modifying legacy systems and processes. Consequently, new entrants will be able to provide better services at lower costs than can current providers.
Get close to the customer. The new competitors in telecommunications focus on customer needs rather than on technology dogma. Each decision will be made on the basis of who will buy and what it will cost. These decisions will be based on extensive dialog and listening to customer needs.
Exploit new technologies to the fullest. With 60% of U.S. households already wired, cable companies also have a high-bandwidth, one-way infrastructure to exploit. Technologies based on hybrid fiber/coaxial cable networks will provide a cost-effective means to add high-bandwidth, two-way telephone service at falling prices. On the other hand, new opportunities will favor switched-digital video networks for the highly interactive new broadband services that will soon be in demand. Worldwide, wireless is making great gains; approximately 17% of all new telephone subscribers have a mobile phone. In Eastern Europe, consumers are circumventing the months-long wait for a fixed line by buying cellular phones. The flexibility of wireless is matched by a lower cost for both equipment and operating expense. Industry analysts have estimated that a wireless connection to the home would cost between 50% and 150% less than copper on a total cost basis.
Fast but reliable. For a new entrant to local exchange access, speed of response is just as vital as price in obtaining a competitive edge against the entrenched provider. Service reliability is also important to long-term success; a new competitor needs to be careful not to cede the quality "high ground" to the current provider. Successful interexchange carriers have learned this lesson in their competitive efforts with the original monopoly supplier. The new entrant can take advantage of the 15% of the market that is looking for a change of supplier, but further penetration requires better price performance and better service levels. u
Dr. William B. Smith is the president and chief operating officer of Telco Systems Inc. in Norwood, MA.