TELECOMMUNICATIONS:
THE BATTLE OF THE INDUSTRIES April 24, 1999
Econ 635

There have been many changes in the way telecommunication companies have been doing business- not only to satisfy the needs of the consumer, but to compete with other telecommunication services, too. Advances in technology have led to the integration of several telecommunication services which enter a home through existing copper wires or newer optical lines. New laws are even allowing companies to merge or acquire smaller companies for the purpose of increasing their leverage in the market.
Cable Industry
Currently, the cable industry relies heavily on the use of coaxial cable to transmit its signals, through radio waves, to consumers. This is the cable that is already installed in millions of homes throughout the country.
However, compared to other recent technological advances, the coaxial cable has many set backs to overcome. First, the number of signals that it can transmit simultaneously is limited. Second, the signal transmitted by the cable gets worse as distance increases.
As an additional option, fiber optics have emerged which can carry hundreds of video, data and voice channels. I will go into further detail on fiber optics later in my research.
This traditional cable responded by implementing the use of digital compression. Digital compression allows a broadcaster to squeeze in more channels of programming in each single coaxial cable, although picture quality diminishes with each additional channel. Like fiber optics, this technology provides, "a fast and economical way to usher in a whole new era of broadcast services." (More Warning Signs…). By condensing to signal, it frees up more room for other telecommunication services.
Few cable companies are converting over, though. In fact, Telecommunications, Inc. is the only one aggressively changing over. Most other cablers are moving slow for the fear that the set-up boxes (about $350 each), will be obsolete in the near future.
Broadband Access
As consumers spend more time at home on the Internet, they are demanding faster access speed. Therefore, telecommunications service providers are implementing new broadband (high-capacity) systems to meet the demand. To boost network capacity, "two of the primary broadband product solutions are cable modems and digital subscriber line (DSL) technologies." (Industry Surveys).
Cable modems are used to connect a personal computer to the cable TV network to offer high-speed Internet access. The modems are sold separately or integrated into set-top boxes.
One drawback to this technology is that most cable networks are not yet equipped to control two-way Internet traffic.
"Only 20 percent of the nation’s cable TV infrastructure has been upgraded to support two-way traffic," according to Telecommunications magazine. (Industry Surveys).
The two main Internet providers, which use cable modems, are RoadRunner and At Home. They currently have 300,000 subscribers, but research firms believe that the number of users could increase to 10 million between 2001 and 2004.
Another option in response to higher-speed Internet access is how, "telephone companies are pushing telecom equipment vendors to release products that exploit the telephone companies’ greatest asset: their existing copper wiring." (Industry Surveys). The diffusion of DSL has been held up by lack of trained installers, competing standards and the poor quality of copper networks. The DSL industry will receive a major boost when retail store will have DSL-compatible modems on the shelves.
Forrester Research predicts that one-quarter of all on-line U.S. households (about 16 million), will use broadband connections to the Internet by 2002. Twenty percent of this broad band market will be serviced by DSL, with cable modems secure the rest of the market.

Fiber Optics
Fiber optics transmit high volumes of telephone, data and video signals as laser-generated light pulses over "hair-thin" strands of specially conditioned glass. A single strand of glass can carry up to 8,000 simultaneous telephone calls and data transmissions- far greater than current copper wires.
Telecommunications remains the predominant utilization of fiber optics, accounting for over 80 percent of the total market. Part of this success of fiber optics is due to greater integration in recent years. According to the U.S. Industry & Trade Outlook:
Telecommunication networks and fiber distributed data interface for LANs have gained universal acceptance among deployers of fiber-optic systems and equipment. These standards have created a more uniform environment which allows competing manufacturers to create compatible products for deployment in telecommunication networks, contributing to market growth.
Mergers and Acquisitions
1996 began a new era as major forces within the communication industry began to merge. During this year, many competitive barriers were taken down encouraging the consolidation of different companies. For example, telephone companies and cable providers can now use each other’s lines of business to compete on the same level.
New technologies are also helping consolidation. Fiber-optics, wireless and compression technologies are difficult for cable companies to finance. Even the large cable companies can have trouble competing with the smallest telephone service providers of the Baby Bells. Therefore, size is an important factor if cablers want to remain in the business. This was made possible in part of the Telecommunications Act of 1996. A primary part of the ruling was the relaxation of rules limiting the absolute size of a company as well their relative size in any market.
So, it comes as no surprise that radio, television, cable and telephone systems had overwhelming amounts of transactions in 1996 and 1997.
One of the largest acquisitions occurred when AT&T bought TCI, the nation’s largest cable provider, for $51 billion in 1998. This was the first time in years that a non-cable company has taken such a large piece of the cable industry.
Other acquisitions have included: US West’s $10.3 billion purchase of Continental Cablevision, and TCI’s $2.3 billion purchase of Viacom plus other purchases totaling over $1 billion. Mergers have included TCI with @Home and Comcast with MediaOne.
Future Outlook
New laws and legislation have played a critical role in promoting competition among telecommunications services in the United States. The primary role telecommunications now plays in, "the operations of all businesses and its importance in promoting economic growth and increasing trade assure its future growth." (U.S. Industry & Trade Outlook).
Growth in the telecommunications industry will also be accelerated by expanding opportunities in foreign markets. In return, as the market expands, so will the need for additional equipment. This will supply more jobs and create more revenue in the years to come.
Also, as competition increases, accounting rates will fall closer to the actual cost of the service. It will affect future prices, traffic volume and revenue growth.
At this point, it appears that the demand for telecommunications services will remain strong. U.S. Industry & Trade forecasts that the market will maintain an eight percent annual growth, and so operating revenues could reach $270,000 million in 1999.
In addition, the amount of jobs in telecommunications increased only slightly between 1992 to 1996, but increased seven percent in 1997. Even more job opportunities can be anticipated as the market moves into foreign sectors.
As long as monopolies don’t emerge from the acquisitions of powerful companies, or one company gains control of all the local telecommunications choices that a consumer has, the new advances in telecommunications look promising for the consumer and economy. Telecommunications is an industry that will continue to expand with further advancements in technology and an increase in consumers’ demands.
Bibliography
Broadband Week, "More Warning Signs of Slow Rollouts". April 12, 1999.
The Economist, "Sexy cable". March 27, 1999
Industry Surveys: Vol. I A-D, December,1998.
Info World, "Cable giants on merger path". March 29, 1999.
Info World, "Cable Broadband Forum addresses high-speed Net access". May
11, 1998.
Investor’s Business Daily Inc., "AT&T Prepares For Life After Big TCI Purchase".
March 25, 1999.
PCWeek, "Cable Access Gets Converts". January 18, 1999.
PR Newswire, "Bell Atlantic Fiber-Optic Network". March 30, 1999.
U.S. Industry & Trade Outlook ’99, 1999.