Divestiture Plus One Equals New Growth Era.
Life in "the year after' moves ahead on firmer ground and reaches for promising future
Yes, there is life after divestiture, after all. After a somewhat wobbly start, things in the world of communications began to get back on track.
No one thought for a munute that the largest corporate breakup in history would come off without a hitch, but considering the magnitude of what was involved, things did go relatively well. Unless, of course, you're the communications manager who spent the first few months of the year trying to find out who's responsible for what. But even that gradually began to smooth out. Besides, can you think of a better business to be in?
The information industry in general, and the communications industry in particular, is where it's at today, and in the future. It's at the hub of the business universe.
The US information industry alone will approach $1 trillion by 1990, predicts Harvey Poppel, a New York-based senior vice president of Booz, Allen & Hamilton, an international management and technology consulting firm.
Peter Schavoir, director of market research for IBM, points out, "In this country today, the information industry accounts for about 3.3 percent of the Gross National Product, approximately the same as the oil, automobile, electrical equipment and primary metal industries. These industries are proejected to grow between four and nine percent a year for the foreseeable future; the information industry is expected to surge ahead at over 15 percent annually. The result of such growth will be an industry that, by itself, could account for about six percent of this country's GNP by 1994, far outdistancing its closest rival. In other words, the information industry will be enormous.'
Free-world production of communications equipment alone will approach $69 billion in 1985, representing a growth rate of 16.7 percent, compared with a 10.7-percent expansion in 1984, according to Ed Henderson, president of Henderson Ventures, a Los Altos, California market research firm that publishes a monthly electronic market research forecast. The US, he estimates, will account for $30.5 billion of the $68.6-billion market in 1985, the largest share, but one that lags the total growth rate worldwide by a full percentage point (15.7 versus 16.7 percent). Western Europe, the Far East and the rest of the world will come in with 16.8, 18.2 and 18.2 percent, respectively.
Citing Department of Commerce figures, Henderson notes that US exports of communications equipment during the first half of 1984 amounted to $2.9 billion on an annualized basis. At the same time, imports rose to $3.5 billion, resulting in a $0.6-billion annualized trade deficit for the first half.
Actually, the deficit began in 1983. Citing US trade statistics in its 1985 Telecommunications Source Book and Statistical Review, the North American Telecommunications Association points out that the US balance of trade in telephone and switching equipment shows a net deficit of $350 million in 1983. Imports climbed 124 percent, while exports declined by one percent. Statistics show that Japan accounted for the largest share (33 percent) of US imports, and that the Far East as a whole provided 75 percent of the imported equipment. Far East imports also had the greatest percentage increase, with telephone imports leaping 775 percent.
The NATA publication also cites a study released last June by the International Trade Commission, looking at the US telecommunications industry after the AT&T divestiture. ITC figures showed that imports of telecommunications equipment as a percent of the total US market in 1983 ranged from a high of 18.7 percent for customer premises equipment to 6.5 percent in transmission equipment, 2.7 percent in cable, wire and fiber optics, and 0.9 percent in central office switching equipment.
Opportunities far outweigh the risks in telecommunications today, according to a consensus of 35 industry leaders who gathered at a recent executive forum sponsored by EIC/Intelligence of New York City. They saw the greatest potential in the development of corporate private networks, pointing to the trend by corporations such as GE and GM to design and build their own private networks in an effort to transform communications from an expense to a resource. The participants agreed that corporate decisions about telecommunications may determine whether a company profits or not.
This move and others, they felt, requires a new breed of systems integrator, one who will fill the role of the absent central body (AT&T) for planning and installing the complex systems now being designed by many companies.
A recent study of "Trends in Information Technology: 1985' by Arthur Andersen & Company, the Chicago-based international professional services organization, takes it even further. It says that CEOs and COOs who wish to remain competitive will have to incorporate a new person--the CIO, or chief information officer--into their organizational structure. According to the study, "There is a need to coordinate the acquisition and use of the information resources together with its delivery systems. That need is being fulfilled by the trend toward the appointment of a new corporate official--the chief information officer--with broad responsibility for ensuring that the requisite information systems are put in place. The concentration on traditional data processing systems will be replaced by an emphasis on information in its broadest sense, embracing the acquisition, storage, retrieval and distribution of text, voice, image and data--all under the guidance of the CIO.'
It's been a year of transition, a year of challenge, a year of change--with much more of all to come. It's been a year of new entrants, and a year of coming together by some of the participants, small and large alike--with AT&T's agreement with Olivetti and IBM's acquisition of Rolm heading the list of the latter.
It's been a year of technological advancements. As significant as some were, they're only a glimmer of what's in store, due in large part to microelectronics. As Bill Radwill of AT&T Communications told attendees at last September's TeleCommunications Association conference: "After 20 years of doubling the number of components on a silicon chip every year, we are still doing so every 18 months. Today, AT&T Technology is producing a chip the size of your fingernail containing over a half-million components. Tomorrow, we see the possibility of chips containing 100 million components per square centimeter of silicon, and possibly in a few decades, several hundred million, if not billion, such components on a chip the size of a postage stamp.'
Technology is what it's all about--technology to move information faster, cheaper, more efficiently to where it's needed. "During the coming decade,' predicts IBM's Peter Schavoir, "we will see a proliferation of workstations, including terminals, personal computers and text-editing devices. Where there are now five end-user workstations per 100 employees in the United States, by the mid-1990s we'll see one per two. This explosion in workstations demonstrates the pervasiveness of the industry. By the year 2000, we can anticipate approaching the theoretical limit of one multifunction workstation per employee.'
Business Needs Growing Rapidly
Ever since the Carterfone Decision of 1968, there's been a headlong rush by vendors to offer an increasingly wider array of more-sophisticated business communications equipment. The increasing demands on communications managers to keep their organizations on top of the information wave, coupled with the period of uncertainty leading up to and following the AT&T divestiture and the flood of choices, have made difficult choices the norm for users. Yet the choices will be even greater in the future, but then so will the opportunities they bring.
Talk of the mythical "office of the future' has finally abated, as communications managers realized that the "here and now' is where it's at. They're moving rapidly into more-sophisticated communications and office-automation systems, making the best decisions with the best information available at the time.
Analyzing the types of office and communications equipment buying patterns, a study by Venture Development Corporation (VDC) of Wellesley, Massachusetts found that PBX systems, local-area networks and facsimile machines are the communications products most likely to be acquired in the near future. Personal computers, small business computers, electronic typewriters and copiers lead the list of office equipment to be obtained in the next year. The survey also found that some types of equipment (voice mail and local-area networks) are more likely to be new purchases by current nonowners. VDC also discovered that executive workstations and portable computers have great appeal for first-time users.
The PBX/key system market has always drawn considerable attention, but especially so in the past couple of years due to divestiture and the new wave of sophisticated systems. The North American Telecommunications Association (NATA), trade association of equipment suppliers, notes that competitive telecommunications equipment suppliers achieved record sales and revenues in 1983, exceeding projections by nearly eight percent. NATA adds, however, that the market forces that produced this surge for the interconnect (non-AT&T-IS/BOC) industry were unique to 1983, and says that projections for the industry "indicate a near-term, potentially sharp slowdown in new sales to end users in the next few years. As a result, continued interconnect growth will depend heavily on innovative new offerings, increased sales of peripheral equipment and upgrades to the installed base.'
Pointing to some industry trends, David Keeler, NATA's market research manager, notes that "The BOCs not only are marketing new CPE aggressively, they have successfully resurrected Centrex. Unlike the two previous years, when the total number of Centrex lines declined, 1983 saw an increase of approximately 150,000 BOC Centrex lines. At the same time, AT&T is taking a number of steps to leverage its $10-billion installed base of old Bell System equipment into new sales.'
A summary of NATA's projections for interconnect industry development over the next five years (contained in the latest Statistical Review, which is part of NATA's 1985 Telecommunications Sourcebook, and available to non-members for $75 from NATA's Washington, DC office) shows that the installed base of key station instruments will average 12.9 percent between 1984 and 1988, down from 39.3 percent average annual growth between 1979 and 1983; market share of installed key telephone station instruments will rise to 28.8 percent in 1988, up from 19.2 percent in 1983; installed base growth of PBX station instruments will average 7.1 percent between 1984 and 1988, down from 22.2 percent average annual growth between 1979 and 1983; and market share of installed PBX station instruments will increase 43.3 percent in 1988, up from 39.2 percent in 1983.
Much of the emphasis on coming years will be on the expansion of data communications networks. A new report on "Data Communications Market Trends' published by Newton-Evans Research of Ellicott City, Maryland found that while many large organizations plan to continue private network expansion as required, almost twice as many of the data communications managers surveyed believe that future expansion will be hybrid in nature, with installation of private facilities in highvolume traffic locations, and use of public data network services in other locations.
The survey found that leased lines continue to dominate the data transmission scene, representing about 70 percent of the datacomm transmission investments among those surveyed. However, the trend to decrease reliance on private lines seems clear, says the report. By 1987, the respondents expect leased lines to account for only about 53.5 percent of the total investment. Dial-up (switched) lines currently account for about 21 percent of the transmission investment among the respondents. By 1987, they believe that dial-up lines will account for about 18.7 percent of the budget. The study also found that the use of value-added networks is likely to increase to more than twice the current level of usage--rising from the current 5.4 percent of the datacomm budget to about 11.4 percent by 1987.
According to Newton-Evans, the use of statellite services currently represent less than one percent of the datacomm budget, but will increase to about 7.7 percent in 1987. Microwave links, now about 3.1 percent of the budget, are seen increasing to around 8.6 percent.
Among the respondents to the survey, equipment accounted for some 45 percent of the datacomm budget, services for 35 percent and staff resources the remaining 20 percent.
In its recent "Data Communications Market' report, Frost & Sullivan of New York City sees the constantly increasing demand for modems as one indication of the current explosion in data communications. According to its figures, modem sales will amount to $4 billion in 1988, up from 1984's $1.18 billion. Multiplexer sales are expected to reach $2.09 billion by 1988, a large jump from 1984's $500 million.
The report predicts that local-area networks will have a market value of $512 million in 1988, up from $128 million in 1984.
As other industry observers, the New York City-based investment firm of L.F. Rothschild, Unterberg, Towbin sees strong growth for integrated voice/data terminals (IVDTs). A recent research report on the terminals points out, "Conceptually, IVDT systems make a lot of sense: an office worker with one unit can perform all telephone functions, access information rapidly and, in some cases, create and transfer files.' Its figures show that by the end of 1984, approximately 60,000 to 70,000 units will have been shipped, representing a $90 million to $100 million end-user market value, versus 20,000 units and $30 million in 1983.
According to the investment firm, the capability of newer systems and the expected lower pricing of the first generation of IVDTs will accelerate market acceptance and produce sales of up to $500 million by 1986 and possibly double that by the end of the decade.
Electronic mail will be on a fast track during the coming years, with virtually all industry watchers projecting great gains in usage. One of the most recent studies, "Report on Electronic Mail,' from the Eastern Management Group (EMG) in Parsippany, New Jersey, predicts a soaring market, with voice mail doing particularly well. During 1984, it says, only 12 percent of corporations with over 50,000 employees used voice mail. But 82 percent of those companies not currently using voice mail either have it in their plans or will be considering it in the future. The report also assesses the roles of computer-based message systems (CBMS), facsimile, communicating word processors and intelligent copiers.
EMG President John Malone points out, "Though 70 percent of the nation's businesses indicate they use electronic mail, only 126,000 are regular users of the public networks. By 1991, computer-based messages will be sent by 621,000 regular users on a public network, compared with over 5.36 million CBMS users on the corporate in-house networks.'
Looking at the composition of the electronic mail market in 1987, the EMG report shows CBMS accounting for 32 percent, facsimile 24 percent, telex 20 percent, voice mail 18 percent and intelligent copiers 6 percent.
International Resource Development in Norwalk, Connecticut sees electronic mail as a $4.3-billion industry by 1990. That amounts to a 30-fold increase from the current market, which IRD sees at $148 million for 1984. IRD also estimates that 400,000 communications software programs were sold in 1984, spurred by the explosive growth of personal computers.
A survey of "Microcomputer Usage Trends in "Fortune' Corporations' by Newton-Evans Research found that almost half of the respondents indicated having 50 or more microcomputers, while over one third cited a base of 100 or more within their corporations. The report says that by year-end 1984, one-half of the "Fortune-type' corporations in the US are likely to have more than 100 microcomputer installations, and that about one in four corporate giants will have more than 250, with nearly one half of this subgroup having more than 500 such installations.
The survey found that about 52 percent of the desktop personal computer base is used by the companies' professional ranks, with managers/executives using 23 percent of them and clerical staff members the other 25 percent. Spreadsheet analysis was the most frequently mentioned application (95 percent), followed by word processing (91 percent).
Telcos Position for a New Era
Early in 1984, virtually all of the nation's telephone companies were united as never before, with the Bell-independent division resolved by the newly divested Bell operating companies joining the US Telephone Industry (USTA), which had already dropped the word "independent' from its name. Today, USTA represents nearly all of the telco industry, with 114 million access lines and revenues of $84 billion, slightly over half of which is from toll revenues.
After a "win-some, lose-some' first year on their own, the divested BOCs faired pretty well during 1984.
In the "lose-some' category, Federal Judge Harold Greene had some strong words for the BOCs in categorically denying any ventures into the long-distance service market. He also told them to "go slowly' in trying to expand beyond their primary business of providing local phone service. The judge said that he won't even consider their entry into long-distance until "they lose their bottleneck monopolies and there is substantial competition in local telecommunications service.
As for other waiver requests, he gave them four basic conditions: they have to conduct new ventures through a separate subsidiary; they have to ensure telephone customers are insulated from any financial consequences of any problems resulting from new ventures; they must limit revenues from outside ventures to no more than 10 percent of total net revenues; and they have to allow the Justice Department to monitor their competitive activities.
According to a stern Judge Greene, the regional holding companies can diversify "on a significant scale only as they demonstrate the centrality to their corporate life of the responsibilities imposed upon them by the decree, their firm commitment to low-cost, high-quality telephone service and the improbability of their involvement in anticompetitive conduct based upon their monopoly status.'
While they lost on the long-distance issue, the BOCs did manage to pick up some wins during the year. Late in November, for example, the FCC granted a partial waiver of the Computer II rules to provide certain types of protocol conversion to customers within their basic telephone networks.
The BOCs asked for authority to provide protocol conversion in connection with their planned deployment of packetswitched networks. They intend to provide X.75 network access interfaces to allow interconnection with other X.25 packet networks. The BOCs also wanted a waiver of the structural separation rules to offer transmission services between asynchronous and X.25 terminals.
The FCC acted only on those portions of the waiver requests seeking authority to provide X.75 network interface and associated X.25-to-X.75 protocol conversion, deferring requests for other types of conversion until the Common Carrier Bureau analyzes responses to its requests for information. The commission noted that it expressly conditioned the grant of the waivers on the effectiveness of interstate access tariffs that offer the X.75 interface, and X.25-to-X.75 protocol conversion can't be offered by the carriers in conjunction with any services, intrastate or interstate, until such tariffs become effective.
After earlier plans were suspended for residential and single-line business phones (but implemented for multi-line business customers), the access-charge issue appears to be resolved. In mid-November, the Federal/State Joint Board unanimously staff recommendations concerning the recovery of non-traffic-sensitive costs, with a $1 monthly charge starting next June, and increasing to $2 in 1986. Adoption seemed assured at this writing (the FCC was to consider the proposal in December), since the joint board consists of four state and three FCC commissioners.
The monthly $6 maximum charge for multi-line businesses will not be changed, nor will the $2 charge for Centrex lines placed in service before July 1983).
The state commissions will have responsibilities in three main areas: states are encouraged to develop experimental tariffs; they're given the flexibility, working with local telcos, to implement optional alternative interstate tariffs for recovering carrier common line costs to deal with bypass; and they're given the authority to institute a partial (50 percent) interstate subscriber line charge waiver and matching local rate reduction for lifeline-type programs.
Concerning the optional alternative interstate tariffs to combat bypass, a maximum 35-cent monthly subscriber line charge would be allowed in the study area.
The joint board also recommended further proceedings, starting late in 1986, to examine the effect of subscriber line charges and the anti-bypass tariffs on universal service, bypass, economic efficiency and interexchange competition.
Bypass is one of those industry buzzwords that will continue to be heard throughout 1985, with sharply divided views on how extensive it will be; whether or not more large users will defect from the local loop and look instead to such technologies as microwave, fiber optics, satellites, coaxial cable and infrared.
Last March, the FCC issued a request for information pertaining to bypass, and received responses from 56 parties. Final comments were filed in October. Among the responses was a filing from the US Telephone Association (USTA), based on a survey of its members. Results represented 77 percent of all US access lines. According to the study, "Under current pricing, long-distance customers with over 20 hours of toll usage per month (interstate and intrastate combined) generally save money by leaving the local exchange public switched network to access interexchange carriers . . . When a customer reaches 1200 minutes of toll use per month (roughly $420 of toll charges), the tariffed price of switched access begins to exceed that of dedicated facilities. Additionally, as resellers and PBX suppliers begin to aggregate smaller individual users into larger user groups, one must expand the analysis to consider residential and business customers with toll bills greater than $25 per month but less than $420. Furthermore, one must be aware that other bypass alternatives provided by non-regulated vendors are available for less money than tariffed dedicated facilities.'
According to USTA, the study "confirms empirically that the magnitude of bypass potential poses a significant threat to the economic viability of the local exchange companies in the study group.' The association said that of the $2.37 billion in total monthly access revenues, some $850 million (35.9 percent) were vulnerable to bypass. It also pointed out that 40.5 percent of its business customer base was vulnerable to bypass. To recover this amount from end users through a flat monthly charge, says USTA, local exchange rates would have to rise by $7.73 per line. If the revenue shortfall is recovered from the interexchange carriers, the common line charge would increase by nearly six cents per access minute.
In comments filed with the FCC in response to USTA's study, the International Communications Association said it believes the USTA survey "is of limited value to the commission's analysis of the bypass issue because its underlying results are not capable of meaningful assessment.' The large user organization added, "USTA admits that its potential revenue diversion study is intended to reflect only the avoidance of toll loading in inter LATA access charges, and that it does not measure technological or qualitative factors in the results. In other words, the USTA survey is not designed to measure reasons other than economic, such as the quality and/or availability of exchange carrier service, which could explain why bypass may or may not occur.'
Earlier in the year, ICA polled its own members on the bypass issue. The results: "There is no bypass problem that endangers carriers or universal service, either now or for the foreseeable future (see story, July 1984 CN, page 30B). According to ICA, the survey showed that the use of bypass facilities is not perceived as a significant opportunity by most ICA members. Some 29 percent of those surveyed now use some type of bypass facilities, while 60 percent said that the use of bypass facilities would not provide an adequate option for most users at most locations. In addition, two-thirds of those even considering bypass have not reached a decision stage requiring major economic commitment.
A study completed by the FCC's Office of Plans and Policy last September, however, concluded that "bypass is a serious threat if usage-based access charges continue to be used to meet revenue requirements similar to the 1984 level. The necessary usage charges are high enough to make alternative access facilities profitable for the largest business customers.'
Long-Distance Market Booming
Long-distance carriers continue to jockey for an increased share of the long-haul services market, positioning themselves through competitive rate reductions and increased services. Existing carriers are expanding, new ones seem to enter the market almost weekly and usage continues to spiral upward.
The continual sophistication of transmission media and technology are expected to lead to the near doubling of long-haul communications revenues by 1988, according to International Data Corporation of Framingham, Massachusetts. A recent IDC report explains that doubling in this case means an 11.2 percent annual growth rate that should lead to $82.5 billion in 1988. IDC feels that the expected influx of new networks will create an oversupply of transmission facilities, a surplus capacity that should lead to further pressure for lower service rates. It expects resale vendors to take advantage of the surplus by acquiring equipment at lower prices and marketing it as discount rates.
Meanwhile, the existing long-haul carriers continue to expand and modernize their networks, with emphasis on digital and fiber-optic facilities.
AT&T Communications, for example, recently announced plans for a digital construction program that by 1990 will connect major US cities and span the Atlantic and Pacific Oceans with lightwave technology. New routes will total almost 21,000 miles. AT&T presently has plans to build more than 4200 miles of new lightwave routes projected for service in 1987. It already has lightwave systems connecting Boston and Washington, DC, and San Francisco and Bakersfield. More than 3700 miles of lightwave routes are scheduled for service by 1986, including major routes from Philadelphia to Chicago and Atlanta to Richmond.
According to AT&T, by 1988 its singlemode lightwave systems will operate at 1.7 gigabits of information per second and will transmit up to 169,344 simultaneous conversations. The same system would be able to send the contents of the Encyclopedia Britannica over one strand of glass fiber in less than two seconds.
By the end of 1984, AT&T also had more than 1600 miles of digital microwave radio routes in service.
MCI, too, has been busy expanding and upgrading its system, spending more than $1 billion per year in the process. It now has plans to expand its fiber-optic routes to more than 7300 miles in the US. It's already completed a high-speed digital optical network between Washington and New York.
As some of the other major carriers, MCI has grown from a regional microwave carrier to a full-service company. MCI, in particular, is also in the worldwide telex market and is expanding into international voice. It's also involved in cellular radio systems, radio paging and electronic mail.
GTE Sprint is also entering the international market, starting with Canada.
After eking out a market share gradually over the last decade, the competitive long-distance carriers now see a new window of opportunity for stronger footing with AT&T Communications through the equal-access provisions of the AT&T Modification of Final Judgment. As telco facilities are converted nationwide over the coming years, users of competitive services no longer have to dial up to 22 digits to place a long-distance call. Instead, they simply designate a carrier of choice, and access that carrier by dialing "1' plus the number.
The first equal-access cutover took place on July in Chesapeake & Potomac Tel's Charleston, West Virginia office. Under the MFJ, all of the BOCs were to have begun offering some equal access by September 1 of last year, upping it to onethird of their access lines by this coming September 1, with full implementation by September 1, 1986. Obviously, that encompasses some substantial capital outlays for the BOCs, although waivers can be requested for low-density area with older-technology central offices.
As it's done in the domestic area, the FCC has now adopted procedures for implementing the detariffing of embedded non-telex customer premises equipment owned by Western Union Telegraph and the other international record carriers, as well as embedded telex CPE owned by Western Union, consistent with the provisions of the Second Computer Inquiry. The FCC previously approved the detariffing of AT&T's CPE, CPE used in providing mobile service, CPE held by independent telcos and all telex equipment held by IRCs.
The commission will allow record carriers to determine individually the fair value of their CPE for transferring the equipment to non-regulated accounts. Detariffing plans are due by July 1, 1985, and all CPE must be removed from regulated accounts by December 31, 1987.
New Heights in Satellite Usage
Satellites typify the giant leaps made by communications in recent times, beginning 20 years ago for international services, and little more than 10 years ago domestically. Carriers and services have multiplied rapidly during the last decade in particular. Predicasts, a Cleveland market research firm, estimates that satellite service revenues have topped $700 million since the first domestic communications satellite was launched in 1974. Between 1983 and 1995, it sees services distributed via satellite experiencing average annual gains approaching 19 percent. Revenues are projected to near $2.2 billion in 1988, and to top $5.6 billion by 1995.
During that same period, Predicasts sees the number of domestic satellites more than tripling--from a couple dozen to 69--driven by the increasing demand for their voice, data and video service capabilities.
The domestic satellite field has become so competitive that, last August, the FCC decided to extend forbearance from regulating non-dominant carriers--those lacking market power to charge unreasonable rates--to domestic satellite carriers.
The international communications satellite arena, however, has remained under the control of Intelsat, the consortium of nations created in 1964 to govern and operate international satellites (Comsat is the US signatory). Over the protests of Intelsat, that could be changinging if a number of petitioners have their way. In March of 1983, Orion Satellite filed for the launch of satellites to provide international services, as did International Satellite Incorporated that August. Last February, RCA Americom proposed modifying six transponders on its Satcom VI satellite (to be launched in July 1986) for international transmissions. Still more applications were filed by Cygnus Satellite in March, PanAmSat in May and Systemics General in June. The FCC was expected to take up the matter in December.
The recent capture of two wayward satellites proved once again that NASA has the right stuff to play a major role in the future of communications satellites-- through both launching and retrieval operations. Space Shuttle missions have contributed greatly to the reduction in launch costs, and the return of the Westar and Palapa satellites paves the way for future rescue missions that, if nothing else, certainly will lower the insurance costs to carriers.
It's far from over for expendable rocket launches, however. Arianespace, the European commercial space transportation company created in 1980 by a consortium of European manufacturers and banks, has had an active program of launching satellites from its space center in French Guiana, where proximity to the equator and powerful rocket launchers contribute to cost-effective launches, including the capability to launch two simultaneously. The company plans at least seven launches per year over the next three years, with a number of them involving multiple satellites.
Some of the rosier projections for direct broadcast satellites have been tempered somewhat by the withdrawals of CBS, RCA and Western Union from active participation in the DBS field. Venture Development Corporation of Wellesley, Massachusetts feels that the withdrawals of those firms will mean that high-power DBS will achieve a lower level of initial sales in 1986, the first year of expected service. VDC says that the potential revenue for DBS service "could top $800 million annually by 1990,' although it expects actual revenues to be closer to $600 million annually by the end of the decade.
VDC believes that, ultimately, highpower DBS service will provide an effective alternative to cable TV service in rural areas.
New York City-based Frost & Sullivan sees nearly 48 million North Americans tuning into programs broadcast directly from satellites in 1994. Its recent study of the DBS market sees a good long-term potential, with 1994 revenues from satellite transponder rentals reaching $764 million, programming fees of $2.8 billion and equipment sales of more than $3 billion.
Satellites are also expected to play a significant role in mobile two-way radio services. Among a series of land mobile actions taken by the FCC late in November (see two-way radio section) was a proposal to establish a mobile satellite service (MSS), Docket 84-1234. MSS would be a network using one or two satellites, with antenna towers serving terrestrial mobile radio services. Proponents note that such a service can cover large areas with a distance-insensitive service by increasing the effective line of sight between transmitters and receivers, with no requirements of population density or accessibility.
Two years ago, NASA asked the FCC to allocate spectrum for an MSS, requesting allocation of 20 MHz of UHF spectrum (821 to 825, 845 to 851, 866 to 870 and 890 to 896 MHz), which was being held in reserve for land mobile services. Applications for developmental licenses have been submitted by Mobile Satellite Corporation and Skylink. NASA points out that frequency reuse, similar to terrestrial cellular radio, could be achieved by the use of spot beams.
In its recent action, the FCC has proposed an initial allocation of 8 MHz (821 to 825 and 866 to 870 MHz) and raised the issue of an additional, or substitute, allocation at 1.5 GHz.
Commenting on the FCC action, Motorola said that the spectrum in the 1.5-GHz band would provide "far superior technical performance for satelliteground communications' than the 800-MHz band. The manufacturer also feels that "it is not clear that mobile satellite service will be economically viable, nor is needed by any meaningful segment of the American public.'
Two-Way Radio Getting Channels
Advancing technology has provided two-way radio users with increased flexibility and other benefits in recent years, yet land mobile users and the FCC have continued to wrestle with the spectrum shortage/congestion issue for decades. In Docket 18262, the FCC determined that increasing use of land mobile systems required allocation of federal government and broadcast spectrum in the 806 to 947-MHz band. It released 70 MHz immediately and divided it into 40 MHz for the common carrier cellular radio service and 30 MHz for private conventional and trunked operations. The remaining 45 MHz was set aside specifically for future land mobile growth. Of this 45 MHz, 41 MHz remained in reserve.
In an attempt to handle many requests totaling more than 80 MHz, the FCC took a series of related actions late in November to assure the most efficient use of the reserve between 806 and 947 MHz. Noting that the radio services that could be provided through additional spectrum include private land mobile, common carrier cellular and mobile satellite, the FCC pointed out that only 32 of the 41 MHz in reserve is pairable for conventional land mobile uses. Recognizing the high priority of Private Land Mobile Services, it proposed making 12 MHz available for their use, and, in separate proceedings, proposed allocations of 12 MHz for cellular operations and 8 MHz for a land mobile satellite service.
One of the FCC's recent actions, in response to a request by the Land Mobile Communications Council (LMCC), proposed additional spectrum in the 896 to 902 and 935 to 941-MHz bands for Private Land Mobile use. It also proposed a narrowband channelization plan for this spectrum. Under the proposal, the new channels would be aportioned among four pools as follows: 30 percent for Public Safety, 20 percent for Industrial/Land Transportation, 20 percent for Business Radio and 30 percent for Specialized Mobile Radio Systems (SMRS).
The FCC explained that while most private land mobile services in the US use 25-kHz channels, it was proposing a 12.5-kHz channeling plan for the new spectrum, due to the limited amount available. The commission will also consider channel spacings other than 12.5 kHz or 125 kHz, and is requesting comments.
Among the other options, the FCC reallocated 6 MHz in the 932 to 935 and 941 to 944-MHz bands for low-capacity fixed system use by government and nongovernment fixed services. The commission also provided for similar private systems and for continued operations of existing broadcast auxiliary stations at 942 to 944 MHz. The FCC noted that the 932 to 935 and 944 MHz bands are not particularly useful for private and common carrier two-way mobile services. With current technology, it said, such services require 30 to 45 MHz of frequency separation, rather than the 9 MHz recommended for the fixed service. "Thus, the 6 MHz of spectrum being reallocated from land mobile to fixed services could not be used productively in mobile applications.' The FCC held off on issuing procedural and technical rules, and has invited comments on the proposal, Docket 82-243.
In its other late-November actions, the FCC tentatively proposed to allocate 12 MHz in the 845 to 851 and 890 to 896-MHz bands to the Domestic Public Land Mobile Service for use by cellular radio systems to handle future growth (Docket 84-1231). It also decided not to adopt the proposal in Docket 83-26 to allocate 8 MHz of 900-MHz spectrum for a new private radio communications service (PRCS) for personal communications use. Pointing to the spectrum shortage, the commission held that much of the service to be provided by PRCS would be "in the nature of a convenience or luxury.' The FCC also denied a proposal in Docket 83-30 to allocate the frequencies of 896 to 898 and 941 to 943 MHz for use by domestic public land and mobile stations to provide air-ground public radiotelephone service, again pointing to "the pressing requirements for additional private land mobile spectrum.' The proposal for a new mobile satellite service is covered in the section on satellites.
RCC Growth in Cellular/Paging
The nation's radio common carriers finished 1984 on an upbeat note, with bright prospects for service expansions being created by cellular radiotelephone systems, increased radio paging forecasts and other service opportunities.
During 1984, the FCC rewrote Part 22 of its rules to simplify some of the requirements imposed on RCCs. By the first of this year, the FCC is deregulating provision of conventional mobile telephones and those already installed in customer autos. In 1986, carriers will not have to submit channel-loading information to the commission on existing systems when seeking new channels.
At last October's annual conference of Telocator Network of America, the industry trade association, President Jim Smith explained, "Our industry is growing fast. By 1990, radio common carrier operations will support more than 10 million paging subscribers and nearly two million cellular and mobile telephone users. This growth presents challenges and also creates new opportunities.'
Radio paging has been one of the RCC industry's staples since its founding in the 1940s. And while commonly linked with the medical profession in the general public's mind, its use has broadened considerably in recent years. Echoing the figures cited by Jim Smith, Clifford Bean, manager of telecommunications marketing for the Cambridge, Massachusettsbased consulting firm of Arthur D. Little, said the 1990 figure of 10 million pagers in the US is substantially higher than its 1975 forecast of 2.9 million and its 1980 forecast of seven million.
According to Bean, despite some predictions to the contrary, tone-and-voice pagers will not be displaced. He estimates that some one million will be in service in 1990. Also in 1990, there will be three million tone-only pagers and six million display pagers in service. "The number of display pagers represents a substantial increase over the 500,000 in use today, especially considering that virtually no such pager was available just two years ago,' he explains.
A recent study of the "Radio Pager Market' by Forst & Sullivan of New York City has even more-optimistic projections. It sees the units growing to more than 20 million in 1993, generating over $1.2 billion in revenues. The study also projects a significantly changing use mix, "as non-commercial consumer applications become commonplace.'
Over the next decade, it sees the service segment holding its current 28 percent share, and the sales and executive segment is projected to stay at 25 percent of the market. However, the share of the medical and hospital segment is seen decreasing from the current 12 percent to 10 percent.
Frost & Sullivan sees prices of pagers continuing their downward spiral. "Even the price of digital display pagers will drop way below current levels; in 1985, the price of digital display pagers will be approximately $450, and by 1993, the price will be less than one-third of that at approximately $100. The price of tone pagers will fall from 1985 levels of $110 to only $45 in 1993.'
Anyone who's been in this business for the last few years is well aware that it's cellular radio that has captured the spotlight in the mobile communications market. Cellular service is operational in virtually all of the top 30 US market areas as of the first of the year, and cellular carriers are now either licensed to operate or authorized to construct systems in all of the top 90 cellular markets.
The first 30 were applied for in 1982, with comparative hearings slowing the implementation. Accelerating the pace for other markets--particularly markets 31 through 90--are settlements among applicants, spurred by the FCC adopting a lottery selection process. A smaller piece of the action seems better than no action at all to most applicants. Last October, more than 140 competing applicants reached settlement agreements to serve markets 31 through 90. So far, only two markets have been licensed through the lottery procedure--Northeastern Pennsylvania and Fresno.
According to Graham Randolph, managing director of Telocator's Cellular Telecommunications Division, "Getting up and running quickly may be the single most crucial factor in assuring a nonwireline system's chance to compete with the wireline for subscribers.'
With two cellular systems being authorized in each market--one for telcos (wireline carriers) and one for RCCs (nonwireline) --the race for market position is hotter than ever. A recent report on "Cellular Mobile Radio 1984-1990' from Venture Development Corporation of Wellesley, Massachusetts sees the market for cellular telephone sets as especially turbulent. VDC says that while unit shipments of cellular phones will rise 65 percent annually through 1990, "pricing will be far from stable. The total factory value of shipments will grow more slowly than unit shipments because fierce competition and price-sensitive consumers will drive prices down. At the same time, technological developments in the latter 1980s will foster the emergence of a portable cellular telephone market.'
Observing that service providers can expect some unprofitable years due to large capital investments and marketing campaigns, VDC says that "those with the patience and the pocketbooks to survive the lean times will be able to enjoy the fruits of a billion-dollar-per-year industry in the 1990s.'
According to VDC's survey, cellular phone non-owners are extremely price sensitive. "More than half of the respondents stated the most they are willing to pay for a monthly cellular telephone bill (access fees plus monthly charge) is under $50. Cellular telephone prices would have to drop to under $500 to attract any significant share of the consumer market.'
With the nation's first commercial cellular system barely a year old in Chicago, Ameritech Mobile Communications has plans to double its size by midyear. The company currently has about 12,000 customers. Ameritech's Chicago system went operational in October 1983 with 17 cell sites. That number increased to 29 last year, and by mid-year plans call for 56 cell sites serving the Chicago/Gary service area.
Ameritech is also finishing a twomonth trial of cellular service in taxicabs, with some 35 Yellow and Checker cabs testing the demand.
Looking at the future, William Finnegan, general sales manager for Mitsubishi's Communications Equipment Division, says, "Eventually, we'll see cellular phones used as pagers outside of the car, and the truly personal phone is not far away. The owner of a portable phone will be able to pack his phone in his suitcase, fly cross-country, and still have callers reach him on the same number as he used at home. We'll also see features like visuals, and data handling in which people obtain the latest financial information, such as stock prices.'
Bill Darnton, in the Chicago office of Arthur Andersen & Company, points out, "Some people in the industry see cellular telephones as an alternative to eventually establishing a central office switching system in new areas.' The accounting firm has published a study in which forecasters predict that cellular phones will be purchased at the rate of 550,000 per year by 1990, and, with leasing, the study predicts seven million units will be in service in the top 90 US markets.
The FCC gave the RCCs more good news in October when it eliminated the separate frequency allocation structure of the Public Land Mobile Service (PLMS). Under the separate frequency allocation, known as "the fence,' frequencies were assigned to RCCs and the wireline carriers. The commission commented that fence had been established to create and foster competitive alternatives to the wireline carriers. Today, it said, "the non-wireline carriers have proliferated, providing real competition with the wireline carriers, and artificial restraints are no longer necessary.'
CATV Progress from New Areas
The cable television industry became "legitimate' in 1984, with the "Cable Communications Policy Act of 1984' taking effect on December 29. Establishing a national policy for cable TV for the first time, legislation amended the 50-year-old Communications Act to include "Title VI--Cable Communications.'
James Mooney, president of the National Cable Television Association, points out that the new law specifies for the first time limits on federal, state and local regulation of the industry. "After years of congressional debate over provisions in the bill, the cable industry is now firmly on course toward economic stability,' he explains.
In addition to deregulation of most basic cable rates in two years, the bill's principal features include creation of a renewal process for cable systems and a strict limit on the fees paid by systems to cities and towns that will "prevent imposition of unfair, hidden taxes paid by cable subscribers,' says Mooney. The law also prohibits cable from being regulated as a common carrier or a utility, and enacts into permanent law the FCC's ban on telephone companies entering the cable business in their own service areas. Local cross-ownership of cable by TV broad-casters also is prohibited.
NCTA was particularly happy with the establishment of an orderly process for franchise renewal that protects a cable operator against "unfair denials of renewal where the operator's past performance and proposal for future performance meet the standards established by the bill.'
The federal ceiling on franchise fees was raised to five percent, and is no longer tied to costs of regulation. In addition, the FCC is no longer empowered to grant waivers.
The new law also puts some teeth into actions against service theft--the unauthorized reception or interception of programming provided over a cable system. Even unauthorized reception by individual viewers (such as by backyard earth stations for non-commercial purposes) is prohibited if the signal is scrambled or if the provider of the service "makes available an agent or other marketing mechanism to authorize such reception.' Unauthorized reception by any other person (such as SMATV operators, landlords and hotels) of any satellite-delivered cable programming, whether scrambled or unscrambled, is prohibited.
According to figures compiled by the National Cable Television Association, there are approximately 35 million subscribers to basic cable TV services, representing about 42 percent of the nation's 85 million television households. Of those basic service subscribers, nearly 60 percent also take additional pay-TV premium services.
Citing the latest available FCC statistics, for 1981, NCTA notes that the average subscriber rate is $7.94, pay cable revenues were $1.17 billion and operating revenues were $3.6 billion.
Cox Cable has the largest individual system--nearly 250,000 basic service subscribers in San Diego.
Although around since the late 1940s, cable TV has yet to be seen in some of the nation's top 30 markets. New York, for example, has only two systems operational in Manhattan, with franchises now awarded for eight other areas. Los Angeles has 10 of 14 areas operational, Chicago is awaiting service in five areas. Among the other major cities awaiting cable are Philadelphia, Detroit, Washington, DC, Cleveland, St. Louis, Tampa, Baltimore and Sacramento.
As mentioned many times over past years, it has been communications satellites that gave wings to more-rapid cable TV system growth over the last decade, with the latest figures showing some 50 video services, 12 audio services and six text services now relayed to CATV systems via satellites.
Two-way interactive cable, introduced in Columbus, Ohio by Warner Amex nearly a decade ago, still is a service whose time hasn't fully come. Strategic, a San Jose research firm feels that the economics of the industry are being eroded by newly emerging competitors--telco bypass companies and the telcos themselves --"as well as the wildly escalating plant and cable costs such as pole attachment costs, which have risen over 500 percent in the last 15 years.
A study conducted by Strategic found that the cable industry is still primarily a one-way provider of video transmission service. "There are only approximately 20 activated two-way subscriber cable systems servicing five percent of the existing subscriber market, primarily in urban areas with newly constructed cable plant. High costs and confusion in the industry will keep growth relatively slow.' The study firm estimates that by 1990 the two-way cable segment of the market will have expanded only to the point where 25 percent of the subscriber base will have access to two-way capability.
According to Strategic, "The explosive proliferation of home computers has forced the industry to reevaluate its role.' Its study found that cable operators consider data-base delivery, computer interconnection and software downloading as major markets; they view transactional services such as home banking and home shopping as less significant. The single biggest issue confronting industry providers, says Strategic, "is determining what business they are in: providing everything; providing services over leased (from telcos and others) lines; or offering competing services through joint ventures or acquisition.'
It's time for cable TV and local telephone companies to "overlook historic rivalries and consider working together,' suggests a recent joint study conducted by Coopers & Lybrand, an international accounting and consulting firm, and International Communications Research (ICR), a CATV market research and consulting company. The study indicates that joint ventures could improve the partners' financial performance and speed the introduction of new services in local markets.
"Each industry has something the other wants,' says Jeri Baker, ICR senior vice president. "Cable TV companies excel in programming, marketing and selling advertising. Local telephone companies are unsurpassed in equipment installation, maintenance and repair, and customer billing. We've found that their operating strengths are a very good fit.'
The study points out that cable TV and local telco joint ventures are already occurring. Pacific Bell has advised city officials in Palo Alto that it's ready to build and lease facilities to a local cable operator, and Chesapeake and Potomac Telephone has made a similar offer to officials in Washington, DC.
Last May, the FCC granted Section 214 authorization to allow exchange telcos or their affiliates to provide three categories of lines in areas where they do not provide exchange phone service. The categories include lines for their own cable TV services, lines that they use solely to provide non-common-carrier services, and lines they sell to unaffiliated parties on a non-common-carrier basis.
With an eye cast over the shoulder for competition from new technologies such as direct broadcast satellites and others, the cable TV system operators continue to embrace ways to increase their share of the viewer's attention, and business.
Broadcasters Go into New Fields
As in the other segments of the communications industry, computerization continues its inroads into the broadcast business, bringing miniaturization coupled with cost and performance benefits. Broadcasters also continue to look upward for improved services through satellite technology. As in the cable TV industry, both radio and television stations have been embracing satellite distribution for greater programming capabilities.
A recent independent survey commissioned by Television Videotape Satellite Communications, a Pittsburgh-based subsidiary of Group W Productions, found that 82 percent of TV executives nationwide plan on taking additional programming via satellite. Conducted by ASI Market Research, the survey of 404 executives showed that 92 percent of them currently receive some programming by satellite. Of those people, 33 percent receive up to half of their total programming by satellite, while eight percent receive more than half of their total programming that way.
Broadcasters in recent years have also been looking toward new revenue-producing opportunities opened up by use of the vertical blanking interval--the unused portion of the TV signal. In April of 1983, the FCC amended its rules to authorize transmission of teletext by TV stations.
One of the newer companies in the field, for example, is Satellite Network Delivery (SND) of New York City, which has been signing up commercial and public broadcasters for its Business Teletext Network Service. SND expects its signal to reach 90 to 120 of the top markets by September 1985. Agreements with stations allow SND to lease vertical blanking intervals to distribute time-critical business information, such as newsletters and financial quotation services.
In 1983, the FCC expanded the permissible uses of FM subcarriers to include a variety of broadcast and nonbroadcast services. Several months later, it proposed allowing TV broadcasters to use the TV aural band for such new services as multi-channel TV sound, paging services, electronic mail delivery and facsimile services, among others.
Gary Arlen, who heads Arlen Communications, a Bethesda, Maryland research firm specializing in interactive media, predicts that by the end of the decade almost every new TV set sold in the US will include a teletext receiver. He expects broadcasters to tailor services to reach the 20 million homes equipped at that time with teletext facilities.
New Challenges, New Opportunities
So, another new year begins much as the last one did: coping with the challenge of change. Only this year, with the confusion of divestiture fading, we're entering a period of even brighter promise and opportunity.
Table: 1983 Exports-Imports
Table: Information Industry Forecast
Table: Key System and PBX Installed Base
Table: PBX-Centrex Phones
Table: Data Links
Table: Electronic Mail Technology
Table: Telco Growth
Table: Data Transmission Services Growth
Table: Intelsat Circuit Growth
Table: Service Use of Domestic Satellites
Table: Land Mobile Radio Sales
Table: Cellular Sets
Table: 10-Year Cellular Radio Growth
Table: Cable Revenue for 1990
Table: On the Air
Photo: RCA's solid-state camera is an example of the new technology available to broadcasters. It uses three charge-coupled devices (CCDs), like the one being held, to replace a conventional camera's three tubes, shown in right foreground.
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|Date:||Jan 1, 1985|
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