Convergence to consolidation

What a difference a few years makes. The convergence of content and communications was the dominant tone in the cacophony of acquisitions, mergers and alliances in 1994.

Today, the deals have different flavors. Rather than pursuing content, carriers are seeking customers and bandwidth. In acquiring Ameritech and SNET, SBC Communications will raise its share to about one-third of all telephone access lines in the U.S. With its purchase of Teleport Communications Group, AT&T adds an attractive set of customers and less expensive access to the local market. In the alliance between U S West and Qwest, U S West brings customers and Qwest brings a 16,285-mile fiber optic network.

WorldCom has strengthened its bandwidth position by buying Brooks Fiber, and GTE has done the same with its purchase of BBN Corp.

One key driver of carrier consolidation-gaining and retaining profitable customers-has been the topic of much study. The other critical component is bandwidth. While consumers may not yet have seen dramatic decreases in rates, the prices and margins in basic telephony are steadily declining.

Established carriers must use their enhanced network capacity to deliver an array of higher-margin, content-rich and quickly accessible information, entertainment and transaction services.

The data difference. Business applications on the Internet and intranets are growing exponentially. Internet traffic on the trans-Atlantic corridor is doubling every year and surpassed voice traffic volume in September 1997, according to the BT World Business Report 1998. Almost unknown in 1994, intranets now have been implemented by more than half of all large corporations and are spurring 100% annual growth in corporate data transfer.

The Internet and intranets are promising to become the backbone of the supply chain. International corporations are integrating customer, inventory and supplier information across seamless supply chains.

The revenues moving across Internet-based supply chains are projected to grow from $160 million last year to $16 billion by 2000.

Bandwidth and technology will transform e-business. What started as simple transactions by which consumers sampled the Internet to buy software and airline tickets is rapidly evolving into a complex global spider web of transactions within and among businesses, and between businesses and customers.

Products and high-technology companies are not the only industries demanding more bandwidth. The entertainment industry is now digitally storing film clips that can be transmitted to multiple markets and modified for location-specific ads and movie trailers.

E-business is changing the retail industry. Simple sales through on-line ads and catalogs will be transformed into highly focused marketing campaigns and "product push" strategies. Selling will be based on identifying and integrating highly specific customer buying patterns gleaned from on-line habits.

The pricing equation. Experts predict Internet telephony will grow into a $1 billion business by 2002, with a constituency primarily composed of price-sensitive international callers and prepaid card users. Carriers rolling out Internet telephony service include AT&T WorldNet, which is planning a pilot project in three U.S. cities by June and 16 additional cities by the end of the year; Deutsche Telekom, which has initiated a pilot program for U.S. customers making international calls; and Qwest, which launched service in seven cities last year.

For most consumers, the lure to Internet telephony is the lower rates-approximately 8 cents a minute less than through traditional channels.

However, carriers must solve some problems, including complexity of access, unpredictable quality and limited availability.

Rapid improvements in gateway hardware and network services will let carriers solve these problems, but the impressive growth of this service may be limited by regulation of services and price.

The emerging class of telecommunications mega-carriers will provide customers with one-stop shopping, offering bundled packages including local, long-distance and cellular telephony; Internet access; videoconferencing and other advanced data and video services. The success of the consolidation strategy will depend on customer base, bandwidth might and innovation. Especially in terms of bandwidth and innovation, the smaller new entrants are not to be discounted.