With attention focused on how last month’s Federal Communications Commission regulatory changes will affect the US Baby Bells, its impact on long-distance carriers has been largely ignored despite the fact that they could spell trouble for some smaller players. The changes in question allow local companies to relate their charges for carrying long-distance traffic over […]
With attention focused on how last month’s Federal Communications Commission regulatory changes will affect the US Baby Bells, its impact on long-distance carriers has been largely ignored despite the fact that they could spell trouble for some smaller players. The changes in question allow local companies to relate their charges for carrying long-distance traffic over the local leg of the call, more closely to costs: previously, the same fee per unit of traffic had to be charged to all carriers. Now, different rates can be charged, depending on whether the long-distance traffic is connected directly to the local exchange, or tandem-switched, using equipment shared by more than one long-distance carrier.
As it tends to be the smaller carriers that share facilities in this way, and as it is an inherently less efficient method than a dedicated, direct connection, smaller companies, such as Metromedia Communications Corp and Houston, Texas-based Wiltel Inc will face higher charges than large rivals such as AT&T Co. At face value, the changes should not have a significant effect on the costs of the small long-distance companies: the Baby Bells estimate that switched access costs should increase by less than 1.8%, which translates as a less than 1% increase in their total operating costs. This estimate, however, seems to ignore the reverse side of the coin, as larger carriers could well find themselves with lower bills, thus widening the gap further. Indeed Courtney Munroe, analyst with New York-based Northern Business Information, predicts that AT&T’s switched access costs could be reduced by 1%, resulting in a differential of nearly 3% between it and the smaller companies: according to Munroe the change is not going to put them [the smaller carriers] out of business, but it could affect them seriously. He also added that AT&T has been getting more aggressive… and this is one more weapon that they have. Munroe sees a trend in the US market towards consolidation of the small long-distance companies, and feels that although the new ruling will not accelerate this trend in any great way, nevertheless, it does fit in. Indeed, he is co-author, with Carole Craven, of a new report called Long Distance Markets, 1992 Edition, which says that 1991 was a trying year for carriers other than AT&T, both because of Ma Bell’s aggressive policies, and the lingering economic malaise in the US.
By Matthew Woollacott
It also notes that for the first time since divestiture, AT&T did not lose market share in terms of minutes of use. The news was not all gloomy for the other carriers, however, particularly for Sprint Corp and Washington-based MCI Communications Corp, the other two companies with significant market share. While MCI, ranked as number two, struggled in the first half of the year, it rebounded in the second six months through an aggressive marketing strategy, which capitalised on AT&T’s network outages, and added innovative services such as the Friends and Family package aimed at the residential market. Sprint’s number three position was maintained – the number four player keeps changing as the current holder reaches a size where it is worth MCI or Sprint’s attention, although the company is seen as treading water, ill-equipped to deal with AT&T’s onslaught and MCI’s marketing blitz. While the Big Three are expected to look to global expansion over the coming year, Northern Business also sees AT&T as concentrating on corporate restructuring and maintaining its market share, while Sprint and MCI try to take business from it. Depressingly for the second tier carriers, competition in the market is thought to have removed the advantage they should have gained with the installation of advanced networks and market structures. The report notes that several of these, including Dallas, Texas-based ATC Inc, Metromedia and Allnet, have moved from offering regional to national services since 1990. The most extreme example of this was believed to be Wiltel, which having faced slow growth in its bread and
butter private line market made a move into switched services. Indeed, for the smaller players, National Business sees a reversal of the situation witnessed a few years ago: whereas previously they tended to go for medium-sized customers and left the big boys to AT&T and co, it antipates that in the future, many of the small players will look to provide niche-tailored services to the top sector of the market. Conversely, the larger players are expected to try and broaden the range of their customer base by looking down the scale and attacking the bases of their smaller rivals. Faced with a broadside attack on their bread and butter business, acquisitions and mergers are expected to continue. While Northern Business sees no major shifts in market share from internal growth, it feels that the banding together of smaller companies could have a profound effect, with one possible merger cited in particular. While Cable & Wireless Plc’s planned purchase of TRT/FTC fell through because of the latter’s financial status, Cables is still thought to be looking for a partner, and the report speculates about the possible effect of a link-up with ATC and LDD, the two companies that merged earlier in the year and, in the process, vaulted to the number four spot.
As mentioned, this is one merger which could seriously threaten the market shares of the top three carriers. The analysis of the 1991 market bears out this feeling, particularly with regard to the virtual private network sector. With a compound annual growth rate of 24%, this segment of the market is to continue as the focus of competition, but is seen as one area, where companies other than the Big Three will struggle. In addition, the report identifies a migration of high-end customers away from the smaller carriers, and towards the new virtual private network services offered by the top three, a migration expected to continue since the smaller companies are not in a position to offer the same level of service. Moves by the smaller players to offer a basic feature set virtual private network service are seen more as a damage limitation exercise than as posing any real threat to the big players. If the report’s predictions for the continued growth of this market are borne out, then the smaller carriers may be forced to work together in order to survive.