Consolidation in the US Telecom Industry – What Will it Mean for

AMI-Partners writes: In late October, the United States Federal Communications Commission (FCC) gave approvals, with minor conditions, to Verizon Communications Inc.’s $8.5 billion takeover of MCI Inc.
and SBC Communications Inc.’s $16 billion purchase of AT&T Corp. The FCC approval followed the Justice Department’s sanction by a few days. Together, these actions clear the final major hurdles to completing the deals by year end or early next year, marking a major consolidation milestone in the US telecom industry. With total SBC-AT&T revenues expected to exceed $67 billion, and Verizon-MCI sales forecast to top $59 billion, these two newly consolidated telecom giants will control a large segment of the U.S. telecommunications market.
Both AT&T and MCI were attractive to their buyers because they are the two largest US suppliers of telecommunications services to large business customers. Both firms also have valuable nationwide networks and strong direct sales forces. New monikers will have to be found for these giants, as the terms Regional Bell Operating Company (RBOC) and Incumbent Local Exchange Carriers (ILEC) developed after the 1984 break-up of AT&T no longer apply. The consolidated Verizon/MCI and SBC/AT&T will offer services on a national scale, and local service will be just one part of a comprehensive bundle of voice, Internet, data, and video services. SBC has announced that it will adopt the better known AT&T brand, and all indications are that Verizon will keep its own name.
In addition to their strong presence in the large business
market, these giants also play a substantial role in the small
and medium business market. According to AMI 2005 surveys, 51%
of small businesses (SBs) with 1-99 employees currently use one
of these four carriers (Verizon, MCI, SBC, AT&T) for their local
telephone service, and 46% use them for long distance service.
Medium businesses (MBs) are even more likely to do business with
these four carriers: 56% of MBs are local customers, and 50% are
long distance customers. The bottom line is that these two
mega-carriers will soon do business with half of US SMBs. With
such large penetration among SMB customers, the actions of the
new AT&T and Verizon will likely have major impact in the
marketplace.
Analysis
AMI believes that in the near-term these mega-mergers will
likely create more opportunities for up-starts in the SMB
telecommunications market, for several key reasons.
First, both consolidated companies face big internal challenges.
Merging networks and ordering, provisioning, customer service
and billing systems will take significant effort and time. This
could cause these firms to lose momentum in the SMB space,
particularly as they are likely to devote the lion’s share of
their focus on the lucrative, large enterprise business
customers that drove the acquisitions in the first place.
This potentially creates new opportunities for other players
that are more focused on the SMB market, especially in the
regions served by the former Verizon and SBC. Most notably,
cable multi-system operators or MSOs will threaten their market
share. The MSOs are increasingly active in the SMB market,
recognizing that it represents one of the last untapped
frontiers for rapid growth through the sale of digital voice,
Internet access, business video, and even wireless solutions.
Just 16% of SBs use cable for broadband Internet access today,
compared to 50% of SBs using DSL. The MSOs’ penetration rates
among SMBs for voice services are even lower, at under 5%,
giving them plenty of opportunity for significant growth. Over
the past year several MSOs have aggressively pursued the
consumer voice market with digital voice offers, and have taken
significant share from the incumbent carriers. If they launch
similar marketing programs to the SMB market, they are likely to
realize similar results.
Furthermore, the evolution of IP-enabled communications offers
the potential to transform the dynamics of the
telecommunications industry. In the past, the barriers to entry
in the phone business were prohibitively high. IP-based
communications technologies have lowered the barriers to entry
in the phone business and leveled the playing field. By
leveraging the ubiquity of Internet access, a formerly local
CLEC or systems integrator can easily offer IP telephony
services on a national scope.
As a result, in 2006 SMBs can look forward to increased choice
in the telecommunications market, with a variety of offers
targeted specifically at their needs from a slew of existing and
new players.
And the outcome of the upcoming battle for the SMB
telecommunications market will depend on the strategies and
tactics of the incumbent and upstart players. It will be an
interesting year ahead.

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Ramon Ray, Editor & Technology Evangelist, Smallbiztechnology.com . Editor and Founder, Smart Hustle Magazine Full bio at http://www.ramonray.com . Check him out on Google Plus, Twitter or Facebook