Fixed-line telecommunication

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ine or fixed-line telecommunication is over 125 years old and, up until the recent past, was defined as a telephone line that traveled through metal wire or optical fiber as part of a nationwide telephone network. These days, a lot more travels through these lines than the sound of your mother's voice yelling at you for not calling more. Because revenues will continue to decrease for traditional local and long-distance voice service due to the advent of wireless telephony and VoIP, fixed-line telephony companies now also provide broadband data and voice as well as managed networking services to enterprise customers, as well as wholesale network capacity, all over fixed wirelines.

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Though Voice-over-IP (VoIP) services are rapidly emerging, this US$110 billion (as of 2005) market continues to be dominated by circuit-switched voice technology.

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Data transport services account for the next largest fixed-line revenue stream, and consists primarily of DS1s and DS3s (types of dedicated high-capacity lines), and SONET (a dedicated high-speed solution for multi-site businesses) technology. These transport services largely serve the needs of enterprise customers who have large bandwidth requirements.

A third income stream, Internet and IP, includes revenues earned from Internet, DSL, IP-VPN, and other IP services such as hosting. Most of this revenue consists of Internet backbone and DSL services. Also, while declining in number, slow-speed dialup Internet access users using fixed-wireline still make up a significant percentage of total Internet users.

VoIP technology has enabled the fixed-line cable industry to directly compete with traditional voice carriers because they too can now offer voice and data services, along with video, which is called a "triple-play." Phone carrier have also made it their goal to offer these three "bundled" services through high speed DSL or Fiber-to-the-premises lines. In the short run, there is enough demand for fixed-line broadband that both cable and DSL providers are still seeing high subscriber growth, and most analysts agree that the phone carriers will be able to offer a triple play soon enough, if not already to select markets.

Winners

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Comcast (CMCSA) and Time Warner Cable are the two largest cable companies currently offering the triple play, and broadband internet over cable is currently winning the race against DSL technology offered by carriers in the U.S. Although they have an edge on carriers now in the U.S., DSL is much more popular worldwide because of weaker cable infrastructures outside of the U.S. Most likely in the short to medium term, both industries will grow as demand for broadband grows.

AT&T (T) and Verizon Communications (VZ) are the two largest fixed-line telecommunication players in the States, and while they will ultimately lose local and long distance revenue and may struggle in the DSL/cable competition, they both still control high growth wireless businesses, AT&T mobility, and Verizon Wireless, respectively. Additionally, as both players have upgraded their networks to mostly fiber-optics, they're poised to offer a triple play, thus cannibalizing their weakening circuit-switched voice technology.

Cisco Systems (CSCO), Alcatel-Lucent, and Nokia-Siemens are examples of major telco equipment vendors who benefit from increased sales as telcos upgrade their wireline networks to compete with wireless and VoIP providers. Equipment vendors often also sell equipment to cable companies, meaning that they see dollar signs from increased competition between the telcos and cable providers.

Pureplay VoIP providers like Level 3 Communications (LVLT), Vonage Holdings (VG), and EBay (EBAY) (owner of Skype) are all currently offering high-demand VoIP. Theoretically, they should see revenues increase as demand for VoIP grows. Vonage Holdings (VG), however, recently lost a patent-infringement battle to Verizon Communications (VZ) that could put it out of business for good.

Corning (GLW), the largest provider of optical fiber, and Amphenol (APH) and CommScope (CTV), who both sell cable wire, should continue to see sales grow as their customers both build and upgrade their networks.

Losers

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Embarq (EQ), CenturyTel (CTL), and Consolidated Communications Holdings (CNSL) are all smaller carriers currently serving mainly mid-size to rural markets. Their ability to make up for declining local and long-distance revenues may be tougher because they don't have wireless offshoots, and enterprise/consumer demand for data service may not close the gap, especially if a cable company in their area offers a "triple-play."

EarthLink (ELNK) is an example of a large ISP that offers broadband internet and VoIP, but doesn't have the network to offer a wireline video service. Their response is to bundle satellite TV in their triple play offering, but satellite is not as reliable as wireline video. Other ISPs are in the same boat.

Drivers for Fixed-line Telecom Success

Transitioning from Voice to Data

Fixed-line telecommunication will continue to be a huge industry, because the major players provide the backbone, i.e. fiber optic network, for the Internet, and fixed lines still provide the fastest data speeds by far. However, consumer business models are changing due to the evolution of voice and data transport technology. People are moving from fixed wireline phones to mobile phones and opting for lower-priced VoIP service in their homes--thus causing local and long distance revenue growth to decline. On the flipside, fixed-telephony players are seeing an explosion in data service revenues, and are ultimately looking at providing the famous triple play-broadband Internet, voice, and video over an IP network-to consumers. If carriers can increase data sales faster than their declining circuit-switched voice revenues, they should survive. Unfortunately, competition is steep among those providing data services.

Triple-Play

The "triple-play" is the goal of both cable and fixed-line telephone operators. Cable has largely achieved it first, but phone companies are upgrading their networks so they'll have the capability to offer video as well. The slower they get there, the more subscribers they'll potentially lose to their cable competition . Now really???

Regulation

Cable companies were long ago deemed "natural monopolies", and were thus highly regulated by government. They are forced to sign franchise agreements with local governments which give governments a percentage of their gross earnings in return for the government allowing them to install their cable networks. Telephone operators looking to provide video services in a "triple play" may be required to sign franchise agreements with local governments much like cable operators do today. Many cities are currently in litigation with phone companies over this exact issue. Future court decisions and/or legislation that force phone companies to sign these franchise agreements could make the infrastructure development necessary to deliver a triple play much more costly and time consuming as phone companies may ultimately have to negotiate agreements with individual local governments.

Competing Technologies

While traditional phone companies will continue to lead the pack providing internet backbone services throughout the country, they will have to compete with more than just the cable companies for "last mile" [5] broadband services. Wireless broadband is now a reality, as can be accessed through wireless 3G networks, WiMax service providers, or by satellite. Although fixed-line speeds are generally faster and more reliable than wireless, some consumers will still opt for the convenience of mobile broadband if given a choice. In rural areas and emerging markets, wireless broadband is often the only broadband option.

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Security

VoIP does have its drawbacks. Because it is run over the Internet, it is inherently more vulnerable to viruses and internet hackers than a dedicated circuit-switched phone line. A well-publicized attack on a VoIP network could hurt VoIP adoption, especially among enterprise customers worried about losing proprietary information, could push the market back to traditional circuit-switched telephony.

Notes

  1. http://www.cisco.com/en/US/products/hw/optical/ps2006/products_white_paper0900aecd803e9eb5.shtml
  2. http://www.cisco.com/en/US/products/hw/optical/ps2006/products_white_paper0900aecd803e9eb5.shtml
  3. http://compnetworking.about.com/od/dslvscablemodem/ss/broadbandtutor.htm
  4. http://www.itu.int/osg/spu/newslog/CategoryView,category,Indicators%20and%20Statistics.aspx
  5. http://en.wikipedia.org/wiki/Last_mile
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