The Wireless Telecommunications Industry

I. INTRODUCTION

The wireless telecommunications industry has exploded during the past few years, as consumers who need instant information and don’t have access to a wired port have upped the demand for these services. AT&T has been a major telecommunications provider in the United States since the inception of the telephone in 1875, and continues to exhibit it’s presence in the fast-growing wireless communications industry2. This report will provide detailed, pertinent information on the role of AT&T in the wireless and wireline telecommunications industry.

Wireless carriers allow for users to perform activities such as: transmission of voice, graphics, data and internet access through the carriage of signals over radio tower networks. The wireless industry is dominated by the subsidiaries of large wired telecommunication firms, such as AT&T, Bell South, Qwest and Verizon. The vast size of the aforementioned firms gives them a distinct advantage over smaller firms who lack access to the large amount of capital needed to stay afloat in this highly competitive industry.

There are several yardsticks that can be used to measure success within the telecommunications industry, such as: churn rate (the rate at which customers leave one company for another), EBITDA (earnings before interest, taxes, depreciation, and amortization), and ARPU (average revenue per user) 1.

II. BARRIERS TO ENTRY

Major barriers to entry in the telecommunications industry include: high capital requirements, limited access to distribution, economies of scale, and absolute cost advantages for larger, more mature firms like AT&T, Bell South, and Verizon. In the past, the wireline communications (telecommunications) industry was nearly impossible to get into, however governmental deregulation and studies by the FCC have lowered the barriers to entry in the telecommunications industry.

In capital intensive industries like the telecommunications industry, new entrants face complicated multi-stage financing, investment, and production decisions under the watchful eye of existing industry competitors. New entrants also face a market dominated by ILEC’s (Incumbent Local Exchange Carriers) like AT&T, Bell South, and Verizon. In 2005, 1303 ILEC’s filed with the FCC, along with 768 other CLEC’s (Competitive Local Exchange Carriers); the ILEC’s comprise 63% of all the telecommunication firms3. Despite ILEC dominance, the FCC reported in “Trends in Telephone Service,” total share of industry revenue from 1998 to 2003 has increased for new competitors from 3.5% to 15%; with an inverse relationship for ILEC’s from 96.5% to 85%3. This shows that new competitors may have opportunities in the wireline industry; however ILEC’s still dominate the market with an 85% share of industry revenues. This dominance makes profitability for competitors difficult.

As reported by Yahoo Finance on February 6, 2006, AT&T owns 29.2% (88.8B) of the telecommunications industry market capitalization, with Verizon falling just behind in the industry at 28.7% (87.2B). Bellsouth has 17.7% (53.8B) market capitalization, with Qwest, BCE, and Time Warner falling behind with under 3% or less of the market share. The vast majority of other telecommunication companies aggregately own less than 17% of the market share. This inequality in market share demonstrates another barrier to entry in the industry, as new entrants will likely be hit with huge capital requirements, have no access to inputs, and no access to distribution without going through a major market player.

Horizontal and vertical integration in the telecommunications market is blurry. Companies like AT&T, Bell South, and Qwest own wire suppliers, network equipment companies, and telephone manufacturers. Most large telecommunication carriers also own vast data networks, cellular services, data centers, and cable television networks; most operate as service providers. Consumers and businesses both depend on the telecommunications industry heavily and this dependence has driven the horizontal and vertical diversification amongst the largest telecommunications carriers.

III. SUBSTITUTES

Most telecommunication products and services are not differentiable from one another. Most firms offer similar services like internet access, telephone service (local, long distance, and cellular), and cable television service. Regardless of the provider, all wireline telecommunication companies utilize the same networks, same wirelines, and same distribution channels that were established by the RBOC’s (Regional Bell Operating Companies) after the 1984 divestitures.

IV. BUYERS

The wireless telephone industry includes all operators that offer commercially