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Key word in telecom future: Broadband


The telecommunications industry has changed substantially over the last 20 years. When AT&T Corp.’s stranglehold on the U.S. marketplace was dismantled in the mid-1980s, I don’t think anyone thought that one of the new “Baby Bells” would eventually grow and swallow its former parent. But SBC Communications Inc.’s recent acquisition of AT&T proves that virtually anything is possible in this industry.

Similarly, I once thought that the open competition between cable providers and telephone companies would end up with phone companies dominating the marketplace and the eventual death of cable systems. Obviously, that was wrong, and in fact I would now argue that in many respects the opposite has occurred.

Traditional telecommunications providers have lost market share as the demand for fixed landlines has decreased and the demand for wireless communications has mushroomed. The only exception to this trend has been the strong growth of broadband Internet connections. The need for rich connectivity in a networking applications has buoyed an otherwise floundering fixed-line marketplace. Recognizing these market realities, most telecommunications providers have stepped up their expansion in the wireless arena, via network installations, mergers and acquisitions.

So where does that leave us today? More important, where will technology and consumer demand take us in the future? In the short run, bandwidth is still a limiting factor for wireless connectivity. We live in a media-rich environment and simple text connectivity is not adequate. That bodes well for the continued success of cable systems that provide not only entertainment options, but also broadband Internet access. Traditional telecom firms compete in this niche with a variety of digital subscriber line (DSL) options and to a lesser extent with integrated systems digital network (ISDN) plans. But neither of these has been as elegant or simple for consumers as broadband access via cable. They are nearly always costly and often require some additional hardware device to implement and support.

Telecom firms are betting heavily that wireless bandwidth technology will continue to grow and that they will soon be able to provide wireless broadband connections comparable to those offered by cable systems. If and when this ability arrives, the demand and strategic high ground will quickly shift from landline-based providers (cable systems) to wireless providers (cellular and satellite firms).

The consolidation taking place today – Sprint Corp. acquiring Nextel Communications Inc., Verizon Communications Inc. and Qwest Communications International Inc. vying for MCI Inc., and others – have both market share and technology motivations. Sprint and Nextel had become vulnerable to competitors with larger market shares and are better positioned to compete as one. Verizon has a very strong cellular market, but a limited wired infrastructure – and vice versa for Qwest. These two complement each other very well. MCI has a presence in both arenas and would enhance the market share of either suitor.

Once the consolidation settles and bandwidth improves, we can expect to see industry players begin to expand into value-added services such as entertainment delivery. The three or four large firms remaining will compete initially in terms of bandwidth efficiency, delivering better connectivity at less cost to the consumer. But at some point, we should reach bandwidth saturation, and firms will seek new ways to attract and retain customers. I believe that will lead to consolidation in both broadcast and switched-channel communications systems. This day will come sooner than we might think.

In the short run, industry players will continue to wrestle with consolidation issues. The capital requirements for wireless network expansion are tremendous and the payback periods are fairly lengthy at today’s cellular rates. Firms will continue to conduct a two-front campaign in their attempts to aggressively expand their network and simultaneously gather market share. Both efforts will continue to squeeze current profits in the quest for positioning to become a market-dominant survivor when the dust finally settles. In the meantime, consumers can enjoy the buyers’ market and hope for amazing capability in the future.

Tony Hendrickson is an associate dean of the Iowa State University College of Business and an associate professor of management information systems.

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