Telecommunications

by Utah Business Staff

At this year’s telecom roundtable, we brought together a varied group of industry players to discuss the most pertinent issues facing the industry, including corporate mergers, Internet Service Provider trends, and regulatory issues. Up-and-coming products such as the Blackberry and other convergence devices, and the overall health of the telecom industry were also discussed.

Participants: Pete Ashdown, XMission; Rick Barlow, Cricket Communications; Ron Beck, AT&T; Shilo Case, Turner Telecommunications; Chad Curtis, Nextel Communications; Jason Ellis, Sprint Communications; Mark Geiselmayr, Integra Telecommunications; John Guifford, Eschelon Telecommunications; Mike Hayter, Verizon Wireless; Steve Proper, Comcast; Laura Scholl, Qwest Communications; Scott Tenney, Comcast; Diania Turner, Turner Telecommunications; Kyle Williams, TelAmerica

Special Thanks to moderator Ted Smith and sponsor Holland & Hart.

What is the health of the telecom industry?

BECK: It would be difficult to argue that the industry has been particularly healthy in the last 18 months. Our shareholders have not seen performance that has matched other industries. At the same time, we seem to be at a jumping-off point with opportunity for growth as we shift from a retail relationship that many of us have had together where we compete. There also is a change in the wholesale relationship behind that. So we here are each other's biggest competitors and biggest consumers. The result of that we are seeing in some merger activity.

HAYTER: I agree. However, the wireless industry has been experiencing tremendous growth. Verizon had a record last year and finished up with a record quarter.

ASHDOWN: I was told by another local businessman that Utah lags behind the economy by two years. So if the rest of the country is recovering, we don't see it until two years later. That also applied to the bubble bursting. We didn't see the effects of the tech bubble burst until two years after it happened. We had a handful of companies that went out of business immediately, but two years later we started to see a flat line in growth, and now we are starting to see that growth take off. We had a really good first quarter, so I think it's turning around.

Are mergers a sign of strength or weakness?

CURTIS: It's very forward-looking for the companies. They are asking, ‘What do we need to do to compete in the industry in a year or two years down the road.’ I think it's a sign of strength that they are taking a look at their businesses and being proactive. 

SCHOLL: I don't think you can treat all the industry consolidation in the same way. Some of them may be consolidation for bigger's sake as opposed to rationalization where the merger really makes sense and synergies are created. We are going to have to wait and see.

BARLOW: I believe it's a sign of competitive pressure in the telecom sector when mergers take place. Everyone is looking for efficiencies.

HAYTER: Consolidation was inevitable in the wireless industry. It’s healthy from a macro perspective. But six or seven major carriers in every market is not sustainable. There will still be four major carriers in every market, so there is still going to be a lot of choice. We're still going to see the competitive pressures in terms of pricing, and it's going to force all of us into a position of advancing new data services, offering new services that will benefit both business and consumer customers.

TENNEY: Demand for residential broadband services has been really strong.  It's a competitive market, but the market is growing so fast everybody is doing really well in that sector.

SCHOLL: There are certainly elements of the market that are growing faster than others. We know, for instance, in Utah, there are a lot more wireless connections than there are wireline connections—something like 1.5 million wireless to about a million wireline connections.

Eighteen months ago we wondered whether corporate America was ready to buy into the next level of technology. Has that happened? As the economy continues to improve, do you see the corporate world being more and more a buyer of services?

ASHDOWN: I think a big advantage right now is voiceover IP, and a lot of companies are going to look toward voiceover IP and have to change out their systems.

BECK: Capital expenditures are starting to loosen up inside our corporation, which is good for the economy. With voiceover IP the voice has become an application that runs over the IP network much as many other applications will, including data, virtual private networks, and the next generation is probably television.

CURTIS: You are also seeing this in the wireless industry.  Somewhere around 37 or 40 percent of our business customers are adding additional data products like GPS or Blackberry or wireless Internet. I think the businesses are willing to go to the next level if the technology proves that it can benefit their lives and make it easier.

HAYTER: We are seeing growth with small, medium, and large businesses, as well  as the government sector, looking to add data into the mobile wireless area—I want to differentiate from the fixed wireless.

TURNER:  All of my companies are looking at voiceover IP to decrease costs and increase efficiency.

Laura, you mentioned that wireless is becoming bigger and bigger.  Do you see more demand on the wireline side, however, as the economy improves?

SCHOLL: It's been  pretty flat. We see people substituting DSL for a second line. Instead of getting a teenager line, they are buying wireless phones. The business side is definitely still growing, although they are more interested in the more advanced services. Qwest introduced its VoIP service late last year for business and will have a residential one out this year. Clearly, that is the direction things are headed.

GEISELMAYR: I don't see wireline growth in the business sector as much as the residential. We may end up with is a handful of competitors fighting for a market that is not growing as quickly as some of the others.

What are the big up-and-coming services,  for residential as well as business customers?

WILLIAMS: Everybody is upgrading their networks to replace T-1s with VoIP, both between central offices and connecting our customers to the central offices. So we don't see it necessarily in terms of calls going out over the Internet, but using the IP technology between central offices between switches on a private network, and that will create tremendous efficiencies for all the carriers.

BARLOW: On the wireless side, voice is still king. There hasn't been a killer app that has come out. We are enjoying great success with ring tones and camera phones and whatnot, but the latest data I've seen shows that of the average subscriber revenue today, only $2.50 is coming from a data application. And voice usage is up over four times from ten years ago. We are looking to add other services, but at the end of the day people still just want to talk on their wireless phones. That's where the bulk of the usage and revenue comes from.

TENNEY: We have switched voice now in about a third of our footprint, and next year we will launch VoIP services.  And it won't go over the Internet. It will use the IP technology. The advantage is price and functionality.

TURNER: The picture phone is probably one of the greatest inventions ever made. My customers are finding new ways to use them all the time. I see the future in picture phones and that type of technology being completely untapped at this time. Right now, a lot of people think a picture phone is something where you can show the spaghetti on the plate, and doesn't that smell good?

HAYTER: The picture phone has been a huge consumer hit. It's been important in the business community. Though, we've had to be sensitive to some businesses and especially government and not giving up all of our non-picture phones because of security reasons. So we still have had customers come to us and say, "Don't take away our standard phones.  We can't have picture phones in our business or our operations."

What percentage of the new wireless phones sales are picture phones?

HAYTER: I think it probably would be in the range of 70 to 80 percent. I don't have any specific numbers, but in the last six months we've seen a huge increase in the number of picture phones and the demand in the number of picture phones coming out from the various manufacturers.

BARLOW: Just to take that to a higher level of comparison, there are more digital camera phones than there are standalone digital cameras, much to the chagrin of Nikon and Pentax and those folks.

HAYTER:  And the quality is getting better.

Pete, how does VoIP fit into Xmission’s business plan?

ASHDOWN: We view it as just an additional application. We don't try to charge for voiceover IP service. Once voiceover IP becomes more ubiquitous, telecom providers are going to find that voiceover IP to voiceover IP is very difficult to charge for, and they are going to start seeing a loss of revenue in that area.

BECK:  Voiceover IP as a product itself probably isn't sustainable. But all of us have it as part of our portfolio because it is, again, a service, an application that will run over the IP network.

What are some other developments in multi-purpose consumer devices?

HAYTER: The standalone Mp3 player, the standalone phone, and the digital camera are now all coming together in one device, as well as the PDA functionality that you had in other devices before. It's not perfected yet, but it's making real progress.

In the late 1990s, companies built big fiber networks across the country, resulting in over-capacity. With the expansion of broadband, is the capacity still so huge it's going to take years and years to fill?  Will those companies ever get a return on their investments?

TURNER: I don't think so. I think we are going to go to a wireless world. Everyone has been saying we are going to go paperless, and it hasn't happened yet because we always need a hardcopy. But wireless is really possible in so many applications.

Most of the high-speed Internet I've done has been through cable, been through satellite, things like that.  So I think that in the future, to hardwire anything, people would go, ‘Why would you do that?  Why would you trench it? Why would you even go to that extreme, when through microwave or satellite or something you can do the same thing?’

It's always been my perception, at least in terms of moving massive amounts of data, fiber still is the technology that gets that done.

BECK: It really is. At the high-end of the market, fiber access is still what our customers are buying from us. We continue to deploy fiber. There has been really good business justification for it. We'll move to the wireless access world as WiMax and other technologies get there.

BARLOW: The customers have spoken, and they want mobility. If they can get mobility for the same price and the same quality, anything that is wireless is going to have an advantage over anything that is hardwired to a fixed location.

SCHOLL: To add to that, companies want diversity. Wireless still has its vulnerabilities, so most big companies have a good mix of technologies.

I do think that that capacity will get used. Think about what we were doing 25 years ago when it was a big deal to have a 300 baud modem. It's a matter of time, not a matter of whether.

ASHDOWN: There is no way I would replace our optical-based connections with wireless. The optical cable has realized a capacity increase over the years, so we haven't needed the extra capacity. I think it's going to be a long time before they need to start trenching again.

HAYTER:  Even the wireless companies depend on fiber to transport a lot of the traffic. It's in that last mile that mobile starts to really play a role in the overall network and the services provided.

We've all started to learn that you can't just throw out a technology for technology's sake because it's faster, better, bigger. We've got to provide some real solutions. We've got to show the customer why it makes sense to invest.

What are the next big regulatory issues, either in the states or at the FCC level? 

WILLIAMS: The impacts of the review are just being felt in cost increases going into effect on March 11th. So any access to the Arbuck network is going to be more expensive, and that will have a big impact on the bottom line of the Celex's and pass it on to the customer, or not. Beyond that, we are talking about entrance and access into the Internet for voice.

You know, Vontage starts a call over the Internet, but ultimately it ends up on the public switch telephone network. So there is going to be a whole new round of regulation. Companies like Vontage will have to be deeply effected by that.

SCHOLL:  I would agree that access charge reform is going to be big.

BECK: The regulatory issues around the consolidation of the industry are certainly key. We've had such a “Hatfield and McCoy" relationship between the interexchange carriers and the local exchange companies for a long time. While we've been battling in court over issues, other industries, like wireless and the cable industry, are spending good, earned income on advancing technologies. We've got to get beyond spending so much money in regulatory matters so that we can invest that money in  technology, else we are not going to be able to provide the services that customers need.

What about universal service?

TURNER: They are going to find a way to add a universal service fee to everything. You look at your phone bill, there are so many fees on there now. And so the feds will find a way to add a universal service fund fee to everything you do, even if they have to add it to your power bill.

ASHDOWN: They are going to realize that it's hard to regulate the Internet because it's like a chameleon. If you regulate one kind of voiceover IP service, what happens to things like SKIP, which is another type of voiceover IP service. If one thing gets regulated on the Internet, it's going to disguise itself as something else that isn't regulated and take the path of least resistance.

What is the role or the impact of the Internet on your business plans?  Is it central or peripheral?

HAYTER: It's difficult to overstate the impact that the Internet has had on all of our businesses, including wireless.  Certainly, as we roll out higher speed data and broadband services, the Internet is driving that. It is very much a central part of what is driving our services and technology, now and over the next few years.

SCHOLL: It's another channel for consumers to get to your business, to learn more about your products and services. That part of it is huge. It's got a potential for every kind of business's operation business plan.

TURNER: I think the Internet is another unsung hero. Even though we all use it, as with the picture phone I don't think we even know how we can use it yet. We are going to discover in the next 10 to 15 years so many ways to use the Internet that we going to look back to this meeting and go, ‘Can you believe we were still using it that way then?’

BECK: The deep economic impact of the Internet has been the speed at which product life cycles move, from invention to commoditization.

What changes will ISPs see in the next two to three years?

ASHDOWN: A lot of businesses are seeing the value of outsourcing things like their e-mail server. Instead of having an on-staff IT person, they are seeing more value in going with an Internet service provider and using their outsource service. 

Colocation is another resource that a lot of businesses are seeing value in. If they put in a colocation data center, then they've got 24-hour power and a much higher level of reliability for their customers to assess their Website. That's a realization a lot of companies are coming to.

What are the consolidation trends in the ISP world?

ASHDOWN: In the late 1990s, early 2000, we were seeing a lot more of the merging and the consolidation, but I think we are done with that for the most part. The thing I'm seeing is that broadband deployment continues to be popular and continues to be a trend throughout business, whereas dial-up is all but dead. Nobody wants to use dial-up anymore.

As far as regional providers go, I still think that the small regional provider, like the small restaurant, has an advantage over the conglomerates in that they can run circles around them in service. They have local service and support, and a lot of people look for that when they buy Internet services.

TENNEY: It's driven a lot of our growth over the last four years, and I think helped us lay a platform to do voiceover IP. Longer term, it's both an opportunity and a risk on the video side with IP video services.

What changes do you see in marketing and pricing?

CURTIS: The wireless industry got away from bundling for quite a while. It seems like we are almost trending back to that with Blackberry, where you get your voice minutes and your e-mail for one pool of minutes. You get a better rate if you bring it all together. I think you are going to see some creative things with bundling.

HAYTER: We see more and more parents start to pay for phones for their teenagers, and as you can start tracking teenagers with phones and keeping them in touch for safety and other reasons, I think there is opportunity in that area.

WILLIAMS: That's where GPS functionality will come in.

HAYTER: That's driving things like the fleet administration, the vehicle locator services, that kind of thing that actually plays into real value, on both a consumer as well as business level.

Are you still spending a lot of money to expand wireless coverage?

CURTIS: Yeah. With Nextel, particularly in Utah, we increased our footprint probably by 50%, mostly to rural markets. If you are driving out to recreational spots, you want to have continuous coverage so you can do business while you are going to your recreation spots. So there is a lot of capital improvement going there.

Is it difficult to put technology where you want it to provide the kind of customer service that you want?

PROPER: In my experience, it's a community-by-community issue. Obviously, there is a need and an obligation for cities to manage right-of-ways as best they can. On the other hand, we want to be able to provide services and upgrade them where we can.

We've seen some instances where Utopian communities tried to enact an ordinance requiring developers to put in excess conduits, capacities, underground for, presumably, Utopia usage. As a private entity, we have to go in and negotiate with those developers to get in that same service area.

SCHOLL: Is it the proper role of government to compete with private industry? I think the wireless carriers here would be as up in arms as we were if all of a sudden there was a State of Utah wireless network, subsidized by tax dollars.

Will we see more consolidation on the wireline side of the business?

BECK: There has to be, because at some point when a whole industry is struggling to make profits and margins, players will have to come and go. We certainly have seen a lot of that. The consolidation that's taking place right now, I think, is a very natural and important event between different groups. We've got to realign the battlefield here and get innovation into the marketplace.

TENNEY:  I think on the cable side, consolidation will continue, too. Cablevision probably will be up for sale in the next couple of years. Charter, it's unclear how long they can make it.

BECK: Ultimately, a consumer and a business want a bundled package. Right now they have to, in some cases, pick from each one of us. But we are, again, each other's customers, so ultimately what we will provide to the business customer is an access vehicle to the network and a bundled offer for their applications. We used to be partners, and so maybe we will be again. Who knows.

SCHOLL:  I agree there will be additional consolidation. I hope it's done in a rational way. I hope it's done because there are synergies, because there are new efficiencies, because it makes it easier to bundle and give consumers what they want instead of size for size's sake.

Jason, you can offer a different perspective than others around this table as the head of Sprint Communications.

ELLIS: Back to some of the consumer experiences with wireless, we are seeing a trend of consumers going to an all-in-one device. Consumers are really interested in getting rid of the palm pilot and the cellular phone—converging into one device.

Something that wasn't talked a lot about today was messaging. In the youth market and probably to the mid-20s, we are seeing text messages outpacing voice. A lot of probably your children send more text messages than they make phone calls. And messaging is a big service that will compete, and we are attaching messaging at least one-to-one with every product we are selling right now.

We are excited about all the consolidation. For us, it's been a consumer win. We were experiencing the major carriers competing on price. More important is a major focus on the customer experience. The carriers now have to focus on retaining customers, providing the highest quality of customer service, and making sure that their networks are reliable.  All of which is a major win for the consumer, and for us being a distributor of the product for these guys, it's a win for us.

Will text messaging eventually have as much impact on the business community?

ELLIS:  I think it will in an all-in-one converged device. I send as many text messages a day.  It's a really convenient way to not have to make a phone call. You can text message multiple people with one distribution message. It is already a part of the business community.

BECK:  It's what we do on conference calls now.

HAYTER:  It has its use. It depends on what you need to do, and we are seeing more and more businesses adopt text messaging for their communication needs but not for everything. But if you need to get a one-to-many message out, it's a great way to do that if you need to communicate shortly and quickly while you are in a meeting.  When I get contacted by my boss, he expects a text message back very quickly to let him know if I'm in a meeting or something else and let him know my availability. So it certainly drives what we are doing internally in our business, and we are trying to help the business community understand how they can find some efficiencies by using it, as well.

But the biggest growth driver right now is definitely the youth market. In fact, I think the world champion speed text message sender lives in Utah County.

Is the youth market driving technological development for other markets?

ELLIS: What you see now are messaging devices, devices that are built more as a messaging device than a voice device. T-Mobile has the Sidekick. The Nokia Engage. There are even more that are just gaming and text messaging devices. The youth market picks up on that.

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