Telecommunications for Small and Medium Business

Industry Overview:

The first step toward getting full value for a business telecom investment is to gain a basic understanding or the telecom industry and its various participants.

Local Service Providers: Most of the people in the U.S. get their local telephone service from an RBOC (Regional Bell Operating Company). These companies were created in 1984 when the Federal Government forced the break-up of AT&T. The twenty-two Bell Operating Companies that specialized in providing local service were spun off into seven RBOCs - NYNEX, Bell Atlantic, Bell South, Ameritech, Southwest Bell. US West, and Pacific Telesys. Recent Mergers and acquisitions have reduced the number of RBOCs to four: Verizon in the northeast, Bell South in the southeast, SBC in the southwest and Midwest, and Qwest in the West.

There were two large independent telephone companies (United and GTE) and many hundreds of small independent telephone companies that served all those outside of RBOC territories in 1984. While larger industry players have purchased many of these companies, they still influence the industry in several ways.

If your business is in an RBOC territory, your will have a large number of competitive choices, many different features and services, and low prices for many services. There are fewer competitive choices, a more limited selection of services, and generally higher prices in the former United and GTE service areas. Finally, the areas served by the small independent telephone companies have the fewest competitive choices, limited service and feature availability, and relatively high prices. Competitive Local Exchange Carriers (CLECs) are newcomers to the local service market and generally provide more competitive rates than incumbent carriers. These carriers may resell RBOC service or offer service over their own facilities.

Long Distance Service Providers: AT&T, MCI, and Sprint are the largest Inter-Exchange Carriers (IXCs) - that is the telecom industry's name for long distance carriers. There a more than a thousand other IXCs divided into three broad categories of companies as follows:

• Facilities Based Carriers - these companies own switches and transmission facilities (usually fiber optic cables) along with the entire infrastructure to design and support networks as well as bill customers. They may lease or swap facilities with other carriers for diversity or economic reasons. AT&T, MCI, and Sprint are examples of facilities based carriers. Facilities based carriers are more likely to provide a full line of services including high end data services such as T1's, DS3's, frame relay and ATM services. Qwest, Global Crossing, and Broadwing and many other lesser-known carriers are also facilities based.
• Switch Based Resellers - these companies resell service from other carriers but have at least one switch that allows them to aggregate service from several wholesale carriers, do least cost routing, and provide features in addition to those offered by the wholesale carriers. They also have care groups and render bills to their customers. Access Point and Global Telecommunications are examples of switch based resellers.
• Switchless Resellers - these companies do not own switches or facilities. They resell the services of one or more facilities based carriers. They provide customer care and billing for their customers and may add value with specialized pricing, or aggregating a number of suppliers services into "bundles". TNCI, Capital Communications, and ECG are examples of switchless resellers.

Many telecommunications companies are combinations of the three types of carriers outlined above. They may own facilities serving some areas and resell service in other areas or they may resell advanced capabilities such as conferencing and data services.

Full Service Providers: Many carriers, especially the larger ones, are moving toward providing a full line of telecommunication services including local, long distance, data services, and wireless. The large long distance carriers are moving to provide local service and the RBOCs are moving into the long distance markets. The primary benefits to customers are a single point of contact, a single bill, and potentially lower prices. Examples of full service providers are AT&T, Sprint, and Z-Tel.

Niche Service Providers: There are a significant number of carriers and resellers that focus narrowly on particular markets or specific product sets. These carriers can often provide significant value in their areas of concentration and are worth considering if your business fits their niche or you need a service in which they specialize. Some common areas of focus that are of interest to business are as follows:

• Business Carriers - some carriers focus on providing services only for businesses. Business customers are generally larger and change carriers far less often than residential customers. Additionally, business customers need a broad product set and usually add additional lines and services over time. Business customers can benefit from dealing with a business only carrier by having a telecom partner that is very knowledgeable about business applications, has many service alternatives, and generally aggressive pricing. Business carriers' customer care is usually extremely responsive in recognition of the importance of telecommunications to most businesses. Examples of business carriers are Trans-national Communications Inc.(TNCI) and W2COM.
• Tele-conferencing and Video-conferencing services - there are a number of companies and divisions of larger companies that specialize in conferencing services. Many of these companies do not require contracts or commitments for their services and the services may be used in addition to those provided by your regular carrier. Examples of these companies are ILD and AccuLinQ conferencing services.
• Regional Carriers - many CLECs (Competitive Local Exchange Carriers) serve limited geographical areas. Veranet, for example, serves the Eastern U.S. and Grande Communications serves Texas. Many long distance resellers serve only RBOC territories. These carriers can provide regional businesses very good values but may have to be augmented or replaced as businesses outgrow their original regions.

Agents and Master Agents: In addition to the types of carriers outlined above, telecom customers may be supported by agents or master agents (large agents supporting thousands of customers). Agents represent one or more carriers and add value by helping customers with buying decisions, performing design work, and doing bill audits. Agents do not generally provide customer care beyond the buying process and do not bill customers directly. Business Telecom Specialists is an example of a master agent.

Market Share: The local residential voice market is dominated by the RBOCs and other Incumbent Local Exchange Carriers (ILECs - local carriers that were in place prior to 1984). These carriers have a 90%+ share in most of their markets with CLECs, primarily resellers, having the remainder. CLECs have made substantial inroads into the business local service market to the tune of around 22%. This trend is projected to continue with CLECs having a 30% share of the business market by 2005. One of the largest sources of change in the local market has to do with the adoption of wireless. Many people are dropping their wire lines altogether in favor of wireless phones - this trend caused total local lines in use to drop in number for the first time ever in 2002.

The long distance market share is split across more players as can be expected for a market that has been open to competition for nearly twenty years.

The latest market figures from the FCC (May 2000) show AT&T with 34.8%, WorldCom/MCI with 20.6%, Sprint with 8.3%, all other long distance carriers with 28.1%, RBOCs with 5.5%, and other local telephone companies with 2.7%.
The most significant expected market share shift is the increase in share for the RBOCs as they enter the long distance market. Some forecasts show the RBOCs gaining nearly 35% of the market by 2005. There may be a shift of share out of MCI as a result of their financial and legal problems with the most significant impact in government accounts. The likely beneficiary would be AT&T.