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Industry Outlook -- High Technology: TELECOMMUNICATIONS


Long distance, local, wireless-every sector will be wide open. In an already turbulent industry, that means still more wrenching changes

The telecommunications industry is beginning a great adventure. Thanks to last year's deregulation law, 1997 will mark the first time that every sector of the industry becomes truly competitive. Long-distance carriers and local phone companies will enter one another's markets, and as many as six wireless operators will start up in regions that have had only two.

AT&T began testing local consumer service in Sacramento in December--after eight grueling months of working with Pacific Telesis Group to open the network. Redoing local phone systems for competitive connections is "a massive systems job," says John D. Zeglis, AT&T's general counsel. "It's never been done in 125 years." Since local companies can't offer long distance until they face local competition, a delay in one delays the other. Still, Bell Atlantic Corp. Chairman Raymond W. Smith predicts that some Bells will enter long distance in their regions in late 1997. They could offer out-of-region long distance as soon as last year's telecom act was signed.

MANY MARKETS. That's good news for customers--competition is sure to bring lower rates. But it's a wrenching process for phone companies accustomed to cozy monopolies or oligopolies. "In the near term, telecom is going to be less profitable," warns Deborah McMahon, a consultant with Mercer Management Consulting Inc. "The pie doesn't grow as fast as the marketing campaigns."

Yet the pie is growing. Northern Business Information, a unit of The McGraw-Hill Companies, forecasts that long-distance revenues will increase 6.6%, to $84.4 billion. Local-calling revenues will gain about 1%, to $105 billion, despite lower charges to long-distance carriers for interconnections. The number of wireless subscribers will grow by 24%, to 54.2 million, estimates Salomon Brothers Inc.

No large phone company worth its dial tone will tie its fortunes to just one market segment. Most carriers plan to offer a full array of local, long-distance, wireless, and data-transmission services. The quickest way to gain share in a new market is to buy it, so look for merger mania to continue. Analysts say targets include second-tier long-distance carriers such as Frontier Corp. and LCI Communications. Likely suitors? The Bells and GTE Corp.

Government remains a central player. "The regulatory and legal confrontations surrounding the implementation of the telecom act are the most important issues in the industry right now," says Chicago Corp. analyst Eric Strumhinger. Some 30 states and the Federal Communications Commission have issued rules for opening markets, but phone companies are fighting them in court. The timing and outcome of those challenges will determine the shape of competition in 1997.By Catherine Arnst in New YorkReturn to top


Prognosis 1997


-- Fueled by Internet growth and deregulation, telecommunications traffic around the world will zoom

-- The rules for entering local and long-distance markets in the U.S. will finally be spelled out


-- Increased telecom competition in all sectors will put pressure on prices and profits

-- Capital spending will soar as phone companies build wireless, local-calling, and data networks, and upgrade systemsReturn to top

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