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Industry OverviewWhile the telecommunications industry is more than 100 years old, the industry today finds itself at the beginning of a new communications revolution as broadband and wireless technologies radically transform the industry. In the United States:
The mega-trends in telecommunications – the shifts from analog to digital technology, from wired to wireless platforms, and from narrowband to broadband services – have fundamentally changed the way people communicate. This is a social phenomenon that is already shaping the telecommunications industry of the future. Around the world, traditional telephone companies are evolving into providers of full-service communications networks that deliver high-speed, mobile connectivity to customers wherever they are.
Continue ... Global Markets
Global MarketsGlobally, telecommunications wireline and wireless revenues totaled an estimated $1.65 trillion in 2007, with industry projections of single-digit percentage growth over the next five years. Growth is expected to be dominated by wireless and broadband, which estimates suggest may total two-thirds of an estimated $2.27 trillion market by 2012.
High-growth telecommunications markets outside of the U.S. include China and India, as well as Latin America and developing regions that have previously had an under-penetration of telecom services relative to other regions. Of note, regarding growth in broadband access services, the countries with the fastest-growing online populations in the world today are Brazil, Russia, India and China. China has already passed the U.S. in the number of Internet users. And at current growth rates, in three years more than 40 percent of the Internet users in the world will reside in Asia.
Continue ... The U.S. Market
The U.S. MarketThe U.S. is, and will continue to be, the largest global telecommunications market in terms of revenues. In 2007, analyst estimated that the U.S. telecommunications market generated approximately $568 billion in revenues and that this will rise to approximately $710 billion by 2012.
These revenues are generated from a variety of products and services: wireline and wireless voice and data services, plus other areas such as online advertising, and video and content.
Segmented by markets, the overall U.S. revenue picture shows that more than half of telecommunications spending is still in the Consumer market segment, although the General Business and Enterprise (large-business and government) markets continue to grow.
In the U.S., a number of incumbent and emerging competitors offer some or all of these products and services. Some of these labels no longer accurately describe the present-day companies they are applied to:
Continue ... Case Study: Verizon
Case Study: VerizonThe changes in the industry can be illustrated by a more detailed look at one of the largest U.S. telecommunications companies. Verizon, a full-service communications provider, generated 2007 revenues $93.5 billion.
A bellwether for the industry (added to the Dow Jones Industrial Average in 2004), Verizon has a nationwide presence in wireline and wireless markets, with an estimated 100 million or more Americans connecting to a Verizon network daily.
Changing Revenue Mix A look at Verizon's revenues demonstrates the change in demand for telecommunications services in the U.S. over the past several years. Wireless services are becoming a larger part of Verizon's revenue mix, while traditional local wireline services are shrinking as a percentage of Verizon's total revenue. Within the wireline market, however, Verizon has seen growth in revenues from data and broadband services (including DSL/Digital Subscriber Lines and new fiber-optic-based services marketed under the brand name FiOS).
At year-end 2002, Verizon reported annual operating revenues of $67.6 billion -- with wireline services generating $40.7 billion and wireless services generating $19.3 billion (directory publishing and international operations predominantly accounted for the remainder of revenues). Five years later, at year-end 2007, Verizon reported annual operating revenues of $93.5 billion -- with wireline services generating $50.3 billion (including revenues for a new Verizon Business unit formed after the 2006 acquisition of MCI, Inc.) and wireless services generating $43.9 billion.
Growth MarketsThe growth businesses for Verizon have evolved as the industry has evolved. More than five years ago, long-distance services provided revenue growth in wireline markets, even as some customers began migrating away from traditional landline phone services. Long-distance had been a mature market for traditional long-distance carriers (sometimes called Interexchange Carriers, or IXCs). Verizon and its peers (anachronistically called Regional Bell Operating Companies, or RBOCs) were prevented from offering long-distance services at the 1984 divestiture of AT&T.
The Telecommunications Act of 1996 paved the way for RBOCs to begin offering long-distance services, and Verizon benefited from being an early insurgent in the market. It was the first of its peers to re-enter the long-distance market in January 2000. Verizon also benefited because in June 2000 its predecessor company, Bell Atlantic, merged with the nation's largest independent telecommunications company, GTE, which was already offering long-distance services. After 2000, Verizon became one of the largest long-distance carriers in the nation.
However, technology was beginning to have a dramatic impact on wireline markets at the beginning of the decade, and Internet access services provided the potential for greater future growth than traditional telephone services. For Verizon, these broadband wireline services include both DSL and FiOS services. The technologically more-mature DSL service is based on copper wire connections to customers’ homes. Newer FiOS broadband service, which is based on fiber-optic connections to customers’ homes, is growing at a more rapid pace in recent years. Verizon added more than 1.25 million wireline broadband connections in 2007, and this number included more than 850,000 new FiOS Internet connections.
The greater capacity of fiber optics also gave Verizon the opportunity to offer FiOS TV in addition to FiOS Internet, and by early 2008 Verizon already had more than 1 million FiOS TV customers – a growth market that didn't even exist for the company a little more than two years earlier.
To further accelerate growth by focusing on core network assets, in 2006 and 2007 Verizon took several additional steps:
Verizon WirelessVerizon's most dramatic growth in recent years has occurred in the wireless market.
In general, U.S. wireless penetration has shown steady growth throughout the decade and is approximately 80 percent today, with continued growth projected for the foreseeable future.
For all wireless carriers, this growth is occurring in an evolving competitive landscape. In late 2003 under a program called Local Number Portability (LNP), wireless customers for the first time were able to change carriers and keep their existing wireless phone number. Also, wireless carriers are continuing to improve their spectrum positions through acquisitions, swaps and leasing. In the first quarter of 2008, the Federal Communications Commission completed the auction of more than 1,000 licenses in the 700 MHz band. "Auction 73" raised a total of $19.1 billion in winning bids.
Nowhere has wireless growth and market expansion been more evident than at Verizon Wireless. The company gained 7.7 million net new wireless customers in 2007. One reason for this market-share gain is that Verizon Wireless operates the most reliable wireless network in the country. The Verizon Wireless network has been ranked highest in network quality performance among the largest wireless providers by a national research organization over the past several years. In total, over the past 10 years through year-end 2007, the Verizon Wireless customer base has grown from about 6 million to almost 66 million.
While the total number of customers for Verizon Wireless has grown, monthly service revenue per user (sometimes called ARPU, for "average revenue per user") has also grown for Verizon Wireless -- even as the retail price for voice wireless service has decreased over time.
This is because the wireless industry is evolving rapidly from voice to data -- and data use is having a significant positive impact on wireless revenues. During 2003 SMS (short messaging service) was the major non-voice contributor to revenues, but by 2004 downloads and picture messaging had begun to contribute a greater percentage. In the first quarter of 2008, Verizon Wireless reported that its customers alone sent more than 58 billion text messages and 1.1 billion picture and video messages. This compares with 2.1 billion text messages and 21 million picture messages (video messages weren't available) in the first quarter of 2004.
The deployment of broadband wireless network capabilities has accelerated the development and use of wireless data services. Verizon Wireless was the first carrier to build a national wireless broadband network. In 2003, Verizon Wireless launched BroadbandAccess, an ultra-high-speed wide-area broadband network and service in two U.S. markets, giving customers wireless access to the Internet, intranets, e-mail and other applications at broadband speeds. This was based on EV-DO (Evolution-Data Optimized) technology and was quickly deployed nationwide. In early 2007, Verizon Wireless launched its next-generation high-speed wireless broadband network, based on EV-DO Revision A (Rev. A) technology, giving customers the ability to upload files eight to nine times faster than before and giving them faster Internet and e-mail access. Rev. A technology has been made available throughout the entire EV-DO network and at year-end 2007 covered more than 240 million people.
BroadbandAccess customers in enhanced broadband wireless coverage areas can expect average download speeds of 600 kilobits per second (kbps) to 1.4 megabits and average upload speeds of 500-800 kbps. Verizon also offers V CAST services, based on EV-DO technology. V CAST is the nation’s first consumer wireless broadband multimedia service, bringing high-quality video, 3D games and music straight to cell phones. Verizon Wireless introduced of wireless video services in early 2005 and music services in early 2006.
In 2008, Verizon Wireless made two announcements that will enable its network to provide even more robust data capabilities. First, the company announced its Open Development Initiative, sometimes called the “any apps, any device” initiative. The goal is to give customers the ability to use the wireless device, software and applications of their choice on the Verizon Wireless network. Subject only to meeting minimum technical standards, any device will work -- and any application can be downloaded.
Second, Verizon Wireless announced the roadmap to an even faster and more convenient wireless broadband experience. The company is embracing a technology called “LTE” (Long-Term Evolution) for its next-generation wireless network. The goal is for LTE to achieve more than 100mbps upstream and more than 50mbps downstream, and both Verizon and its overseas partner, Vodafone, have chosen to develop applications on this common platform.
Network EvolutionOn the wireline side, several factors involving the evolution of Verizon's core networks have positioned the company well in growth markets: ubiquity and reliability, commitment to investment, and advanced technology deployment.
1. Ubiquity and Reliability. Verizon's network plays a key role in the convergence of all telecom networks. Verizon and its peers own and maintain their networks, provide a full range of services and, perhaps most importantly, provide last-mile access to customers. In 2007 alone, Verizon Wireline operated wholesale businesses generating $11.4 billion in annual revenue, as other telecommunications companies used the Verizon network to connect to customers' homes and businesses.
As of year-end 2007 -- before the spin-off of New England access lines -- Verizon's network included 41.4 million wireline access lines. Access lines are connections from a customer's premises to the Verizon network. Even after the recent spin-off, Verizon provides wireline access lines in 25 states in virtually all areas of the country. Over 1.2 billion phone calls and trillions of bits of data are carried over this nationwide network on an average business day, with a reliability factor of over 99.99 percent. Verizon's U.S. wireline network also includes approximately 13.1 million miles [UPDATE NEEDED] of local, inter-city and long-distance fiber-optic systems to help carry calls and data for customers around the country. That's enough to circle the Earth more than 500 times.
Meanwhile, Verizon's wireless network operates in nearly all top U.S. markets (49 states) and reaches more than 260 million Americans. Verizon's wireless network is 100 percent digital, with more than 175 switching facilities nationwide. Like the company's wireline network, the wireless network is built for reliability in emergencies, with industry-leading redundancy and maintenance measures.
2. Commitment to Investment.Over the five-year period from 2003-2007, Verizon has invested more than $74 billion -- more than any other telecom or cable company in America -- to maintain, upgrade and expand its technology infrastructure. This includes nearly $30 billion on the Verizon Wireless network alone.
Buoyed by these significant network investments, Verizon Wireless has become the nation's leading wireless provider according to many important industry measures -- customer satisfaction, innovation, network reliability and cash flow generation.
In response to a general industry decline in the early part of the decade, most other telecommunications companies sharply reduced capital spending on network infrastructure. During this time, Verizon emphasized overall expense control as newer technologies made networks and operations more efficient. Verizon also sold non-strategic assets, both domestically and internationally, and the company maintained strong, consistent cash flows from operating activities ($26.3 billion in 2007). This has enabled the company, unlike its peers, to maintain a healthy level of network spending in growth areas – i