SIC 4813
TELEPHONE COMMUNICATIONS, EXCEPT RADIOTELEPHONE



This category covers establishments primarily engaged in furnishing telephone voice and data communications, except radiotelephone and telephone answering services. This industry also includes establishments primarily engaged in leasing telephone lines or other methods of telephone transmission, such as optical fiber lines and microwave or satellite facilities, and reselling the use of such methods to others. Establishments primarily engaged in furnishing radiotelephone communications are classified in SIC 4812: Radiotelephone Communications, and those furnishing telephone answering services are classified in SIC 7389: Business Services, Not Elsewhere Classified.

NAICS Code(s)

513310 (Wired Telecommunications Carriers)

513330 (Telecommunications Resellers)

Industry Snapshot

Since the invention of the telephone in 1877, the demand for telecommunication services has steadily expanded. Even when competition from wireless systems increased during the 1980s, wireline service sales grew at a rate of more than 5 percent annually, and long distance calling volume expanded by 12 percent. In 2000, total local service revenue exceeded $120 billion, and toll service revenues topped $108 billion, according to figures from the Federal Communications Commission (FCC).

The Telecommunications Reform Act of 1996 made the most sweeping changes in the industry in 62 years. Aimed at reducing segmentation between local phone service, long distance service, wireless service, and cable television, the act sought to lower prices, improve services, drive greater technological innovation, and create new business and jobs for the United States. By the early 2000s, one of the most obvious results of the reform was the rapid pace of mergers and acquisitions in the industry. For example, by 2002 only four of the seven regional Bell holding companies created by the breakup of AT&T in 1984 remained: Verizon Communications, Inc.; SBC Communications, Inc.; BellSouth Corp.; and Qwest Communications International, Inc.

Organization and Structure

The wireline telecommunication services industry includes firms that provide electronic communications using wire networks or fiber optic lines. The massive U.S. wireline infrastructure incorporates 750,000 miles of aerial wire, 3.5 million miles of cable, and, following massive infrastructure build-outs during the 1990s, some 90 million miles of optical fiber. The Federal Communications Commission (FCC) reported that by the mid-1990s all the telephone companies together served nearly 94 percent of U.S. households.

Although the Telecommunications Act of 1996 removed legal barriers in general, the industry is still largely divided into long distance carriers and local telephone companies (telcos). Local telcos provide basic telephone services. They bring telephone access lines into homes, hook up new customers, and service local lines and equipment. Telcos also connect customers to long distance carriers, and sometimes handle intrastate toll calls that are considered long distance.

In addition to basic services, many local telcos also publish phone directories, offer operator assistance, and provide numerous add-on services. Examples of such services are: voice mail, caller identification, call-waiting, touch-tone dialing, wide area telephone service (WATS), separate digital lines, 1-900 billing services, and video conferencing.

By far the majority of local telephone lines are serviced by the Bell Operating Companies (BOCs)—called "Baby Bells" because they are the offspring of the 1984 American Telephone and Telegraph Company (AT&T) divestiture. At the time of the breakup there already were a few established independent local phone companies, notably GTE. Together these companies and the BOCs are referred to as Incumbent Local Exchange Carriers (ILECs), as opposed to new local carriers, called Competitive Local Exchange Carriers (CLECs).

In addition to the BOCs and independents, competitive access providers (CAPs) offer local telephone services. Started in 1992, CAPs typically furnish dedicated fiber optic telephone lines that connect corporations and long distance carriers. Because CAPs are not subject to the same pricing regulations with which the BOCs must comply, they can often deliver service to high-volume corporate customers at reduced rates. Early on some observers feared that these companies would siphon off debilitating amounts of high margin business, but the telcos have not suffered greatly from their presence. The terms CAP and CLEC are now often used interchangeably.

Long distance carriers, the other division of the wireline telecommunication services industry, provide national and international services via wire and fiber optic lines. Their services often utilize satellite and microwave systems as well. Long distance carriers typically pay a hefty fee to have local carriers route long distance calls to their lines, although the rates have steadily declined since 1997.

Since 1984, when its virtual monopoly of the telephone industry was ended by the Federal courts, AT&T has steadily lost market share in the long distance segment. The FCC reported that in 2000, AT&T held a 39 percent share of long distance revenue. Worldcom held about a 22 percent share, while Sprint had about 9 percent.

AT&T, Worldcom, Sprint, and some other large services are referred to as "facilities-based" carriers because they maintain the infrastructure necessary to connect calls. In addition to facilities-based carriers are "resellers," companies that complete customer calls using a transmission facility leased from a large carrier.

Digital Communications. Most telephone networks transmit voice and data communications using analog technology, which sends a type of sound wave over the phone line. A digital system sends bits of numeric data, making it much faster, cheaper, and more reliable than analog transmission. In addition to the data communication options offered by the standard carriers and the CAPs, a new breed of wireline service companies is providing data communication services. Value-added network (VAN) providers furnish contract services such as electronic mail, credit card verification, and electronic data interchange. These companies typically lease lines—which they use to set up data communications networks for their customers—from carriers at bulk rates. Many VANs are able to efficiently link a company's global computer networks. By contracting with a VAN, a company also can avoid incompatible national regulatory and technical communications standards and receive consolidated billing.

Background and Development

The first attempts at an electrical telegraphing system occurred in the mid-1700s in Europe. One experimental system used 26 wires—including one for each letter of the alphabet. Numerous telegraph models were developed with limited success during the late 1700s and early 1800s. American Samuel F.B. Morse introduced the first commercially successful telegraph in 1844. "What hath God wrought?" were the first words to be transmitted on the 37-mile pole line between Baltimore, Maryland, and Washington, D.C. Under Morse licenses, open-wire pole lines were soon erected all over the United States and Canada.

Alexander Graham Bell is credited with inventing the telephone in 1876, although fellow American Elisha Gray's work closely paralleled Bell's efforts up to that time. The technology was immediately put to use in sophisticated telephone systems by the National Bell Telephone Company (originally the Bell Telephone Company). Western Union Telegraph Company also began offering phone service, using technology developed partly by Gray and Thomas Edison. But as a result of an out-of-court settlement regarding a patent dispute, Western Union sold its phone operations to Bell in 1879.

The public embraced Bell's phone service immediately. By March of 1880, there were more than 30,000 U.S. telephone subscribers and 138 telephone exchanges. By 1887, just 10 years after the commercial introduction of the telephone, there were more than 150,000 subscribers and about 146,000 miles of wire. In addition, nearly 100,000 people had phone service in Europe and Russia.

As telephone services proliferated, a demand for long distance services arose. Bell established the American Telephone and Telegraph Company in 1885 as its long distance subsidiary. Important equipment and wire advances allowed commercial service to be implemented between Boston, Massachusetts, and Providence, Rhode Island, by the 1890s. Distances gradually increased with the introduction of new equipment, such as relays, loading coils, amplifiers, and repeaters. Although microwave systems allowed limited telephone communications with overseas telephone users in the 1940s, large-scale wireline telecommunication was not available until the 1950s.

Bell Telephone and AT&T. Broad patent rights enabled the National Bell Telephone Company, which became the American Bell Telephone Company in 1878, to completely dominate the telephone service and equipment industry throughout the late 1880s and early 1900s. Bell built a nationwide network by licensing local operating companies to deliver service for 5 to 10 years. Bell received $20 per phone each year and reserved the right to buy the local network at contract expiration. Although Bell's patent rights terminated in 1894, only a few independent companies emerged as competitors. By 1899, Bell maintained a network of 800,000 lines.

AT&T became the parent company of the Bell system in 1899. Subscribership ballooned to 3.12 million by 1907, boosted by an overwhelming demand for phone service from isolated rural Americans. Moreover, new management during the 1910s was able to drastically improve the company's performance. AT&T adopted a strategy of expansion, centralized management, and increased research and development. AT&T management also followed a monopolistic course, believing that competition had no place in the telephone industry.

AT&T began buying up independent operators in the 1910s and 1920s. It also started delivering telegrams over phone lines. In 1915, AT&T completed the first telephone line that connected the east and west coasts of the United States. By 1921, AT&T served 64 percent of the 21 million phones installed in the United States and owned many of the networks used by almost all of its independent competitors. By 1929, the company was generating annual revenues of more than $1 billion. Despite setbacks during the Great Depression, AT&T service continued to expand at a rate of more than 1 million new customers every year during the late 1930s and 1940s. In 1955, it laid the first transatlantic cable, linking its customers to Europe.

AT&T grew quickly during the 1950s and 1960s, meeting surging demand with an influx of new products, services, and technological breakthroughs. By 1966, the company had over 1 million employees and served about 85 percent of the households in the areas in which it operated. Despite pressure by antitrust regulators to cede its market dominance, AT&T continued to grow during the 1960s and 1970s, becoming the largest company in the world. By the early 1970s, AT&T was serving roughly 80 percent of the phone users in the United States and providing 90 percent of all long distance service. Antitrust suits filed separately by MCI and the Justice Department in 1974 signaled an end to the company's unfettered reign.

The Communications Act of 1934 established telecommunications as a regulated industry under the jurisdiction of the FCC. The act directed the FCC to regulate the industry based on "public interest" rather than free market competition. For most of the twentieth century, the FCC believed that a regulated monopoly that could establish a standard nationwide telephone network was in the best interest of the public. The FCC and state regulatory bodies set the rates that AT&T could charge for their services, allowing the company to cover its costs but not generate excess profits. In addition, the Justice Department kept an eye on AT&T to make sure that it did not illegally compete in other industries.

In the 1970s, antitrust pressures began to change regulator's attitudes toward AT&T. Many people felt that AT&T and its Bell companies did not have enough of an incentive to install new technology and improve efficiency. Furthermore, potential industry competitors were pressing for permission to compete with AT&T using proprietary technologies. MCI, for example, wanted to compete using its microwave long distance technology. Although MCI received permission to offer limited service during the early 1970s, its 1974 suit was the regulatory turning point.

In 1982, after a lengthy court battle, AT&T agreed to divest its operations. The monopoly was broken in 1984, when AT&T was divided into eight pieces. Under the Modification of Final Judgment (MFJ), AT&T became a regulated long distance carrier and its 22 BOCs were organized into seven regional holding companies. Among other results of industry deregulation, competitors were allowed to enter the long distance service industry. Federal and state regulators planned to slowly remove restrictions on AT&T as competitors became established. When AT&T was divided in 1984, it had sales of $36 billion from long distance toll services. This represented 88 percent of U.S. wireline long distance services sales. In 1995 its toll service revenues were $47 billion, but this represented only 55.6 percent. By 1998 its share was down to 43.1 percent.

Regulators began to loosen restrictions on AT&T and the Baby Bells in the late 1980s. In 1989 they removed profits caps on AT&T, and in 1991 they reduced pricing constraints. In 1995 the FCC ended its classification of AT&T as a "dominant carrier." The Baby Bells, though still hampered by state price and profit regulations, were enjoying greater flexibility and competing in some new markets in the mid-1990s. For example, U.S. West formed partnerships with several CAPs outside of its local service region to offer data-transport services.

The Telecommunications Act of 1996, signed into law February 8, 1996, swept away 62 years of regulation of the telecommunications industry. The legislation was intended to promote competition across the industry, resulting in the development of new technology, the creation of new business and new jobs, and ultimately lower prices. Local telcos, long distance providers, wireless companies, and cable television operators would be free to offer any and all telecommunications services.

A major provision held that the Baby Bells—and any new local telephone network developers—must allow competition for local service using their local networks. They are also required to allow the resale of their services, much like long distance service is resold by a great number of small long distance companies. Finally, they must provide the customers of these resellers the same type and quality of service that they provide their own customers.

The major benefit of the new regulations for the Baby Bells is freedom to enter the long distance market upon demonstrating that they have opened local networks to viable competition. Having done so, they will also be able to join with other companies, local or long distance, to form subsidiaries to offer long distance service jointly. The goal is to provide "one stop shopping" for all telephone services.

One of the goals of Federal regulation continues to be universal service. Companies that provide service in a region must make it available to everyone at an affordable price, even in areas where the costs of providing the service are much higher. Companies that offer such service receive subsidies from a fund that, under the new legislation, will be supported by all interstate telecommunications providers.

Other provisions of the Act allow BOCs to manufacture telecommunications equipment. It further allows telephone companies to offer video programming and other utility companies to offer telecommunications services through subsidiaries set up for that purpose.

Adefining characteristic of the telecommunications industry throughout the 1990s was the large number of mergers, acquisitions, and joint ventures. In anticipation of deregulation, many companies joined with companies in other segments of the industry. In 1994, for example, AT&T acquired McCaw Cellular Communications, the largest cellular provider in the United States at the time. Altogether, 746 such transactions were announced in the industry between January 1994 and June 1996, with a value estimated at $110.7 billion. Nearly 73 percent were mergers of service providers, that is, wireline, wireless, and cable TV operators. The rest involved equipment and software providers.

In 1998 mergers and acquisitions in the U.S. telecommunications industry were valued at $234.8 billion, four times the figure for 1997. Among these were the merger of MCI and WorldCom, Ameritech and SBC Communications, AT&T and TCI, and Bell Atlantic and GTE. Early in 1999 the trend continued as AT&T made a deal for MediaOne Group, a major cable company, MCI Worldcom made a bid for Sprint and Sprint PCS, and Vodafone AirTouch announced a merger with Bell Atlantic, the largest U.S. local phone company. A relative newcomer, Qwest Communications International, primarily a long distance provider to business, closed a deal for U.S West, the Denver-based BOC. Industry analysts expected the trend toward consolidation to continue into the new century, including more international ventures as the European market moved toward deregulation beginning in January 1998.

The industry as a whole continued its steady growth. Total local service revenues in 1998 were reported by the FCC at $101.9 billion, an increase of 5.6 percent. Competition, however, had not developed to any great extent, as the ILECs accounted for more than 96 percent of the revenue. Even so, there was some improvement, as in 1993 they accounted for 99.7 percent. The long distance segment of the market showed similar growth, with an increase of 6.1 percent in long distance conversation minutes. Long distance showed somewhat more competition than local service, with AT&T holding only 43.1 percent of the market. MCI Worldcom garnered 25.6 percent, and Sprint captured 10.5 percent. All other long distance carriers together held the remaining 20.8 percent.

The growth in popularity of the Internet, as a business tool as well as a medium for nonbusiness consumers, was having an impact on the strategy of industry players. AT&T's bid for MediaOne, the leading cable company, as well as other cable carriers, had in view cable's potential for carrying large amounts of digital data, as well as local telephone traffic. Other wireline industry powers were acquiring wireless cable companies and other new companies developing Local Multipoint Distribution Systems (LMDS) and Multichannel Multipoint Distribution Systems (MMDS), both for their potential to provide a way to bypass the local telephone company and for their potential to provide the broadband delivery of data necessary for the Internet.

Current Conditions

During the mid- to late 1990s, telecommunications service providers engaged in massive infrastructure build-outs in anticipation of the coming convergence of voice and data communications via a single network. However, by the early 2000s, a capacity glut—and high levels of debt—developed when demand did not materialize as expected. For industry players, this led to falling profits and stock values. In its assessment of the overall telecommunications services industry—which also includes wireless providers—Value Line reported that while industry revenues increased, net profits fell drastically. Revenues rose from $289 billion in 2000 to $291.2 billion in 2001. However, net profits fell from $24.5 billion to $10.2 billion during the same time frame. Value Line estimated that revenues would fall to $285.5 billion in 2002 and reach $288.5 billion in 2003. During the same period, net profits were expected to fall to $8.6 billion, and then reach $10 billion.

As profits fell, so did capital investment levels. For example, according to The Economist , in late 2002 investment bank Morgan Stanley indicated that capital spending might decrease as much as 34 percent for the entire year. Coupled with an already weak economic climate, this led to challenging times for the industry.

By the early 2000s, the Telecommunications Act of 1996 had not achieved the intended effect of getting Baby Bells to open their markets to competition. These firms had successfully limited competition through a variety of means. According to Standard & Poor's, research firm IDC reported that the Baby Bells controlled more than 77 percent of local and long distance wireline revenues in 2001. This percentage was expected to be 74 percent by the year 2005. By early 2002, Verizon had obtained FCC approval to provide long distance service in Connecticut, Massachusetts, New York, Pennsylvania, Rhode Island, and Vermont. SBC had obtained long distance rights in Arkansas, Kansas, Missouri, Oklahoma, and Texas. Although the other two Baby Bells had submitted applications, they had yet to win approval from the FCC to provide long distance in any state.

For the Baby Bells, the outlook was relatively positive as the industry moved toward the mid-2000s. In addition to their solid positioning in the local telephone service market, three of these companies—BellSouth, SBC (Cingular), and Verizon (Verizon Wireless)—benefited from ownership stakes in the nation's two leading wireless telephone companies. However, long distance providers faced a more competitive landscape as they lost market share to wireless telephone companies offering free nationwide long distance plans, and to Baby Bells entering their markets. The rising use of e-mail, chat, and Internet telephony offered additional competition for long distance players.

Industry Leaders

Though it steadily lost market share in the highly competitive long distance market after 1984, AT&T remains the largest company in the industry, with about 39 percent of the market. In 2002, AT&T reported revenues of $37.8 billion. Since 1984 its toll revenues have rarely declined from quarter to quarter and have dipped only twice from one year to the next. As of 2003, AT&T claimed to serve some 50 million consumers, as well as 4 million business customers.

WorldCom's MCI Group, which includes the company's long distance services, reported 2001 sales of $13.8 billion. WorldCom had been a rather small reseller of long distance in the early 1990s, but followed the path of mergers and acquisitions to become the second largest U.S. long distance carrier, with 22 percent of the market in the early 2000s. In 2002, two of WorldCom's senior executives, including CEO Bernard Ebbers, left the company following allegations of fraud and an investigation by the Securities and Exchange Commission.

Through its subsidiary Sprint FON Group, Kansas-based Sprint Corporation is another industry leader, with about 9 percent of the long distance market. Sprint's wireless subsidiary, Sprint PCS Group, is an established player in the wireless phone business, with almost 13 percent of the market during the early 2000s. In addition to its involvement in the long distance and wireless segments, Sprint's Local Telecommunications Division "provides local telephone service to 5 percent of the nation's domestic local exchange market," via 8.23 million phone lines in 18 states, according to the company.

Qwest Communications is the fourth largest long distance carrier, with 2002 revenues of approximately $15.5 billion. VarTec Telecom, Inc., the parent company of long-distance direct-seller Excel Telecommunications, was another industry leader, with 2001 sales of $1.3 billion.

In the local service market, the Baby Bells continue to dominate, although their number is diminishing. Prior to 1998, Bell Atlantic had merged with NYNEX, and SBC Communications had emerged out of the union of Southwestern Bell and Pacific Telesis. During 1999, SBC acquired Ameritech, the Midwestern Baby Bell, leaving only U.S. West and BellSouth. Bell Atlantic also completed a merger with GTE, the largest non-Bell company, resulting in Verizon Communications, Inc. Finally, Qwest made a deal for U.S. West, leaving BellSouth Corp. as the sole remaining Baby Bell.

Research and Technology

Besides capital spending on labor-saving automation, U.S. wireline telecommunication service industry investments were targeted at several emerging technologies in recent years. During the mid-1990s, the most important area of research and development was digital transmission. Both long distance and local carriers raced to develop and integrate new digital technology that would increase line capacity and speed and allow the efficient transmission of data, voice, and video. ISDN deployment was being retarded by the lack of agreed standards in the United States. Telcos also invested in other data transmission technologies, such as Switched Multimegabit Data Service (SMDS), frame relay, and asymmetric digital subscriber line (ASDL). These technologies, combined with advancing fiber optic and ISDN efforts, resulted in vast data transmission improvements. Technologies not traditionally associated with wireline networks were also attracting attention from the industry, including fixed wireless systems and cable modems.

An important element of the move to digital transmission was the development of a fiber optic network, the basis of the much-touted "information superhighway." Fiber optic networks can carry a lot more traffic than copper, making them much more suitable for the transport of large volumes of data and video. In 1998, local carriers increased their deployment of fiber by 21.5 percent, with ILECs deploying 2.1 million miles of fiber and CLECs deploying 1.3 million. The effort by the CLECs represented an increase of 73 percent over the previous year. By the early 2000s, some 90 million miles of fiber optic cable had been deployed. However, some analysts considered this aggressive deployment overkill, estimating that less than 10 percent of this capacity is actually used.

Further Reading

"Business: Out of the Ashes; American Telecoms." Economist, 12 October 2002.

Chen, Kathy, and Leslie Cauley. "AT&T Expects to Complete MediaOne Purchase." Wall Street Journal, 11 October 1999.

Federal Communications Commission. Common Carrier Bureau Industry Analysis Division. Second 1999 Trends in Telephone Service Report. Washington, DC: September 1999. Available from http://www.fcc.gov .

Girard, Kim. "Baby Bells Call in New Data Pipe Technology." Computerworld, 26 August 1996.

"Leaders: A High-Wired Act." The Economist, 9 October 1999.

McElroy, Coleen, and Andrew Brooks. "Qwest and Global Crossing Compromise: Both Get What They Want." National Post, 19 July 1999.

Pappalardo, Denise. "IXCs Turn to Wireless for Local Service Options." Network World, 10 May 1999.

Ribbing, Mark. "Va. Firm Vies with Bell for Business; Teligent Offers Phone, Internet Services in 23 Markets Now." The Baltimore Sun, 9 February 1999.

"SBC Communications Purchase." Wall Street Journal, 11 October 1999.

Standard & Poor's Industry Surveys—Telecommunications: Wireline. New York: Standard & Poor's Corporation, 30 May 2002.

"Telecommunications Equipment Industry." Value Line Investment Survey, 4 October 2002.

"Teligent Levels the Playing Field for Small and Mid-Sized Businesses in Charlotte, Nashville, and Portland." PR News-wire, 13 October 1999.

Todd, Karissa. "The Heat Is On." Wireless Review, 15 July 1999.



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