Communications Transmission Market About to Speed Up Evolution Process.
That may be about to change. Divestiture has triggered a barrage of regulatory hearings, and at the same time spawned a corporate attitude that's both innovative and aggressive. Some rather substantial changes in the transmission industry look to be in order as participants tighten their belts and gird for ambitious and, in some instances, vicious competition.
A good deal of industry concern has surfaced in the past 12 to 18 months. The Eastern Management group (EMG) has fielded countless questions, and at a rate that seems to be increasing weekly. Ten of the most frequent questions are addressed here. The answers are drawn from an EMG research document entitled "Transmission Media, Markets and Forecasts." This study involves a detailed look at the North American voice and data transmission market.
What are the parameters of the transmision market?
The transmission market covers switching as well as communication lines and trunks that connect subscribers and end offices (Class 5), and end offices and toll offices (Class 4 and above). Transmission facilities are constantly being upgraded to handle new and innovative services as well as providing the everyday functions of telephone and data communications. When exploring transmission, terrestrial wire and cable communication must also be evaluated. Radio transmission, which includes cellular, microwave and satellite segments, also fall in these parameters.
How big is the transmission sector in terms of telco purchases?
The telco capital equipment budget in North America, in 1984, was estimated at $23.47 billion. Of that amount, approximately $1.77 billion (US) was spent by Canadian carriers. The exchange rate used was $1.00 US equals 76 cents Canadian. Of this total amount, $9.59 billion was spent for central office switching, and $7.07 was allocated for transmission. Canadian firms channeled $0.57 billion (US) into transmission (at the above exchange rate) in 1984. During the same period, US carriers spent $6.5 billion. This latter figure excludes satellite transmission, earth stations and communications provided (or paid for) by subscribers, as well as private microwave networks.
The transmission segments represent wire (aerial, underground and so on), cable and related transmission media. Of this, aerial wire is relatively small product line that in the US has been in a state of decline since 1962. Aerial wire is also declining in Canada. Overall, the US aerial wire decline is expected to be approximately 40 percent over the next 10 years. Fiber Growing Rapidly
Where is the largest transmission growth likely to occur over the next 10 years?
There are two answers to that question. The first is in wire cable. Growth in that product line has been ongoing and will continue upward. Specifically, the rise will be at a rate of 84 percent over the decade. This reflects strong steady growth at an overall four to five percent range annually.
The second is within the cable product line that includes the "hot" growth area of fiber-optic transmission. This product line will mushroom at a rate of several times the growth of the overall cable sector. The expected growth in fiber optics on a yearly basis is in the double-digit range, and that will occur throughout the forecast decade (until 1994).
It must be understood that this growth is starting from a relatively small base. The small base means that this phenomenal pattern (13 times current expenditures) can occur. When coupled with a product-declining cost trend, the expected total sales growth allows for total expenditures that equal less than one-third of the overall transmission sector expenditures.
The growth is predicted on the assumption that fiber-optic equipment and installation costs will continue to decline across the decade, that inflation will be moderate across the period and that local-loop transmission will be converted to fiber optics.
Are there many fiber-optic transmission facilities installed?
That depends on the measure used. When compared with the amount installed two to three years ago, yes, quite a lot more. When compared against the total North American communications network, the amount is quite modest.
An evaluation was conducted to determine the amount of total digital transmission installed and what portion was using fiber as its transmission media. In Canada, about 27 percent of the local-loop connections are digital. This 27 percent is composed of microwave, cable and a small fraction of fiber optics. There are a few locations, such as Saskatchewan, where a large amount of fiber has been and is being installed. On the long-haul Canadian networks, about 38 percent of transmission is currently digital. Here again, a small percentage is fiber optic. Much of this digital transmission is microwave.
In the US, there are several lenghtly fiber-optic segments. The Boston-Washington corridor has both an AT&T and MCI fiber-optic backbone transmission segment already installed. On the West Coast, AT&T has a newtork connecting San Francisco, Los Angeles and San Diego. Not all of it is complete, but it will be shortly. GTE also has fiber-optic routes in California, and MCI has a few short routes that are fiber. In addition, Southern New England Telephone is installing a fiber network through the state of Florida. These are just three examples of some projects currently underway or nearing completion.
What about other terrestrial segments?
If one assumes that all announced routes will be installed, then four of five full transcontinental-US networks will be installed by the end of the decade (1990). The Eastern Management Group does not believe that all announced projects will be built. Nevertheless, there is no doubt that two full transcontinental routes (AT&T and MCI) will be established.
Some of the announced projects will wind up being regional networks. Of these there will be several routes in the southern tier states (Florida across to Texas). It is expected that the railroads that have announced separate projects may end up as common carriers (as well as transportation carriers) with sizeable networks of their own.
Will fiber displace other transmission media?
The Eastern Management Group has performed bypass studies for several telephone companies. The studies included cost comparisons of the various media, and reveal fiber to be extremely cost-competitive. Although not much fiber is installed in the local loop, the studies demonstrate that it can be installed and will perform suitably in this environment. And it is priced competitively.
Most fiber in the local loop has been installed as pilot projects. IT would seem from the experiments completed to date (and the pricing), that a significant move to fiber should occur within the next two years at the local level.
The local telephone companies are aware of the need to migrate toward fiber to reduce their cost, but seem unsure of the business strategy they wish to pursue. There is little mystery behind their public posture. IT would seem that these firms see a variety of options and are unsure of the options to select. The initial reaction has been toward regulation. The Eastern Management Group believes this short-term strategy is correct for a year or two, but does not fully address this important issue. We believe the telephone companies will modify their current business posture, but the changes will have to manifest themselves within two years unless hte telephone companies wish to court market-share erosion. The competitors--resellers, VANs and Interexchange carriers, et al, are watching carefully for opportunities overlooked. Bypass and Telcos
Will bypass be a major problem for local telcos?
The current bypass providers, principally the interexchange carriers (previously) called the other common carriers), are actually leasing facilities from the local telcos. As a result, the telcos, although they are not receiving full subscriber revenues, are not losing total revenues.
When ENFIA rates are dropped, the providers of the bypass service will be faced with an option: continue to lease, but at market prices, or install alternative capabilities. IT is felt that the telcos will price the leased ciruits at rates that will cause the service providers to install their own facilities. Such a strategy will drive the Interexchange customer revenue stream off the local network.
The impact of htis base moving totally or partially off the network can be either beneficial (if there is replacement traffic) or disastrous (excess or underused capacity). However, in the aggregate, the strategy seems to be harmful to the telcos. In many cases, the biggest and most profitable portion of the large subscriber's traffic will leave the network. These revenues may not be replaceable, because for every price increase more subscribers will find it profitable to leave the network. Even OPEC learned this lesson.
there are alternative strategies available to the telcos. Some appear short-sighted, or less than ideal, but when faced with the option of part of a pie or no pie, the "part" may be attractive.
The Eastern Management Group feels that the telcos will weigh the available options before applying them on a case-by-case basis. To perform the analysis and select the best option will, of course, require new tools and techniques. Some of the tools will involve pricing models for alternative technologies that can be applied to specific situations. Other options will require strategy analyses. These too could be modeled and the multiple options factored so that weights could be applied. These weighted options could possibly be used in marketing to these customers or in structuring competitive responses to specific cases. Constraints on All-Digital
What are the constraints to a totally digital network over the next 10 years?
surprisingly, the two major factors holding back the installation of fiber-optic transmission are personnel and the physical ability to complete the task.
The difficulties with personnel stem from the disturbing fact that there is not a large cadre of engineers who have "hand-on" experience with fiber optics. LAck of personal experience has spawned a reluctance to commit to the technology. In time this situation will be corrected, but only with a strong commitment by management. Once the inexperience is overcome, installation of fiber should accelerate.
The physical ability to complete the task involves signing up contractors and designing and installing new equipment, facilities and plant. All of this work involves engineering, contractual and facilities personnel. Coupled with the replacement is the redesign of the network pieces for efficiency, planning for future growth and shrinkages, plant/people movements and a myriad of similar doubling, tripling or even quadrupling of staff, all at a time when resources should be curtailed to improve profit margins.
this synopsis points out only the major elements that prohibit an all out rush to convert to digital or fiber. It should be remembered that in some instances there is little business need to convert residential segments of the network to digital until the plant is either fully depreciated or worn out.
Are the manufacturers capable of delivering the transmission products needed?
The manufacturer profiles in our study indicate a strong tie by the larger firms to analog technology. although the number of firms offering only analog products were in a minority, in all of the categories evaluated (11), the numbers are quite high. About 41 percent of the transmission product suppliers offer only analog products. It would seem that many suppliers have experienced neither a slackening in demand for their products, nor a strong request for digital units. This would indicate that the firms are courting short-term trouble, because when the market moves to a "buy-only-digital-products" posture, the shift will be dramatic. Vendor Profiles Changing
The shift has recently occurred for central offices. In our research it was found that 29 percent of the switching equipment suppliers still offer only analog products. Our research of the carriers indicated that several carriers intend to purchase only digital units in the future. This movement is expected to accelerate, and a few firms will find they are unable to convert their product lines fast enough to retain their customer base. This will cause significant alterations in the profile of manufacturers over the next 10 years.
A similar situation is occurring in the transmission sector. When the migration begins toward digital only and optical products in the local-loops segment, some firms will be shut out. Because of the amount of products involved, it will be nearer the end of the decade before some of the manufacturers feel the pinch, particularly the component manufacturers.
How would your characterize the opportunities for transmission vendors and service providers over the next 10 years?
There are significant opportunities for firms well positioned in the various product and service segments. But with competition comes the potential for failures. Still, for many of the firms this is not new. HoweveR, parallels in the deregulated airline industry suggest that a few big firms could crash.
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|Date:||Feb 1, 1985|
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