InformationWeek

June 21, 1999

Telecom's Competitive Culture

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Local Markets
One big target for both new and old competitors is the $100 billion local market, which is forcing the regional Bell companies to react. SBC Communications Inc. (formerly Southwestern Bell) acquired Pacific Telesis Group in 1996 for $16.5 billion and is now trying to acquire Midwestern Bell company Ameritech Corp. Bell Atlantic, which acquired Nynex, is trying to merge with GTE, the largest non-Bell local phone company.

The biggest surprise, however, is the move by Global Crossing, a startup few had heard of a year ago, to buy Frontier Communications Corp. for $11.3 billion and US West for $37 billion. US West has 25 million local service customers in a 14-state region, and Global Crossings has a 35,000-mile fiber-optic network that will link more than 185 cites in 19 countries when it's completed next year.

However, that move was countered last week when Qwest made its own hostile $55 billion bid for US West and Frontier. Meanwhile, Qwest has completed a $4.4 million purchase of LCI International Inc., to create the country's fourth-largest long-distance carrier, while BellSouth bought a 10% equity stake in Qwest.

Don't Forget Service
Customers such as Transport International Pool's Loane complain that "the Bells have spent a lot more effort merging than improving service." In the short term, all mergers in the industry "take the focus off of serving customers," he says. In the long term, Loane says, the industry will end up with four or five large global players, "which is better than a dozen weak isolated carriers."

Many of the new service providers are focused on local service, where the Bell companies still hold 97% of the market. New competitive local exchange carriers--including Covad Communications, Focal Communications, Intermedia Communications, NorthPoint Communications, and Rhythms NetConnections--are rolling out services in major cities faster than the Bells. They're also offering new service-level guarantees and, sometimes, lower prices.

"You are seeing competition where you always see it: in large cities," says Hilary Mine, an analyst with Probe Research. As a result, she says, the cost of bandwidth in the past five years has dropped by a factor of 10 in large cities.

pie chart

Overseas markets are also attracting a lot of attention from service providers. "Everybody is racing to build fiber in Europe now" that the market there is being deregulated and new competitors are entering the telecom industry, says Berge Ayvazian, VP of the Yankee Group. Level 3 and Qwest are both making investments overseas. Qwest just finalized a joint venture with Dutch telecom company KPN, creating a joint venture that has already built 2,100 miles of an eventual 9,100-mile, 40-city network that already has 84,000 customers.

In September, Level 3 announced plans to buy Miknet Internet Based Services GmbH, a German Internet service provider in Frankfurt, and said it's working with Colt Telecom Group to build a European network that includes Paris, Frankfurt, Brussels, Amsterdam, and London.

The new competition is driving down prices. One CIO says he expects to save 40% on telecom costs in Europe this year.

Just Starting
Most analysts say the competition has just started, especially in the United States. Since the passage of the Telecom Act, new local carriers have raised $14 billion in cash and have deployed a combined 47,000 route miles of fiber-optic cabling in major markets across the United States. Those networks currently pass about 24,000 commercial buildings, according to the Federal Communications Commission. As a group, the commission says, the new competitors have only captured about 1% of the local market. But they're making progress. Last year, the competitors generated approximately $2.7 billion in revenue.