On March 20, 2002, a group of top executives in the communications field gathered at the Four Seasons Hotel in Las Vegas to discuss issues affecting their industry and to predict what lies ahead in the rapidly changing area of communications. Those in attendance represented a broad cross-section of the industry, including both local phone carriers and wireless providers, large and small companies. The group engaged in a frank discussion of conditions in the industry, including satisfying customers’ demands, consolidation of companies, the role of government regulation, the future of telephony, and new products and services. Steve Schorr of Cox Communications served as moderator. The following is a condensed version of their free-wheeling discussion:
Deregulation and Competition
Steve Schorr, Cox Communications: Not that many years ago Ma Bell ran everything. Today we see so many companies in the marketplace. How has that changed the environment for the customer in Nevada?
Lou Emmert, Sprint: I’ve been with Sprint for 31 years, and have seen a number of changes. We have gone from a total monopoly to being in an almost completely competitive marketplace. Change is good for the consumer and people have a tremendous number of choices in vendors and in products. They can put together equipment and services from a variety of sources. At the same time, it can be overwhelming to have so many choices. Some people say, “Why can’t it be like the old days – it’s too complicated.” Some small businesses want a vendor to come in and provide a total solution.
Sherry Gilligan, Sprint PCS: I’ve been with Sprint for 13 years. A group of 20 of us formed the company and made the deal with our first three cable partners. It’s been fun to watch us grow. I remember when the first customer signed on, and now we have 14 million.
Clark Peterson, XO Communications: Las Vegas is an early-adopter marketplace. People are willing to try new things. We’ve been able to realize good penetration. Competition has been good for the consumer. Competition makes us all better companies, makes us remember the customer more than we would without it. We’ve had great cooperation from builders here and have had great success getting them to agree to wire their buildings for our broadband network as they’re being constructed. We have 330 buildings here connected to fiber, which is four times what we have in Los Angeles. People have been willing to go with fiber instead of the copper that they were using before. To me, it’s amazing that they are so willing to change.
Rhonda Rae, Pac-West Telecomm, Inc.: I think Nevada’s ahead of the game. It’s a technology-intensive marketplace. Las Vegas is way above most metro areas in the percentage of people who carry cell phones, also in the number of people networking. There is an intense amount of bandwidth in casinos. This is an ideal market.
Shorr: With the Telecommunications Act of 1996 and the Nevada legislative sessions of 1997 and 1999, lawmakers had an underlying belief that driving the competitive market forward would make it faster, better and cheaper for the customer. Did they set the bar too high for the industry?
Peterson: I don’t think so. There’s been a certain amount of shaking out. Consumers have gotten more choices, better pricing, faster speeds, options of either analog or digital, copper or fiber – choices which wouldn’t have come so quickly if they hadn’t passed that act.
Rae: The questions are – how fast can we deploy it to meet customers’ needs, and at what price can we make a profit? Because we are in a competitive market, prices are going down. As profits go down, at some point there isn’t a profit. Our challenge as a group is to bring a price point to consumers so they get what they want and need, but a price where we’re still making money. We’re still all struggling with that.
Corporate Valuations
Schorr: I’ve heard you say that competition has been good for business, but yet we see the valuation of the telecommunications industry go down. Why is Wall Street devaluing what the industry has to offer?
Peterson: I think valuations came down for two reasons. First of all, they were too high to begin with. For our company, the first time I had a stock option it was valued at 43 cents, and taking splits into account, it went to $264. As a four-year-old company, we had half the market capitalization of GE. That’s way too high – it was obviously skewed. If you look at other companies in that same time period, Netscape went from $17 to $240 in one day as an IPO. This is a very incestuous business. We’re one of Sprint’s largest competitors and also one of their largest clients. We are a competitor with Cox, but also a partner and a customer. When we have a falling out, all these relationships suffer, and it’s like the water in the bathtub going down for everybody. The overall industry gets affected. The second part to the evaluation equation is the capital market. You don’t hear people saying, “These are tough times. Let’s turn off our phones and Internet service until times improve.” Our service is the last thing they turn off before they close their doors for good.
Schorr: No, that would be their cable TV service. (Laughter all around)
Don Knuckles, e-spire Communications: The perception from most of the carriers was, “If you build it, the customers will come.” It was a growth industry and everybody was pouring money into it because when the Telecom Act happened and the competition went wild, all these people went out and starting building networks, but they forgot to think, “We have to sell this to somebody.” We’ve reached the bottom now. We see people having to restructure debt, but now we’re seeing growth again. It was just a shakeout following the Telecom Act.
Peterson: XO has a positive cash flow here and we’re in great shape in the Las Vegas market, even though on the national level we’ve experienced a capital crunch. We are putting buildings on net in 63 markets. I think it would be difficult even as a monopoly to be cash-flow positive quickly when you have to spend the money to build up networks. It costs a huge amount of money to wire a customer, and you may not see a return for a year or two, even with rate increases.
Rae: Capital was very prevalent at the beginning and investors had a lot of high hopes. We overbuilt our networks. If you look at a market and see five vendors that have overbuilt, you know somebody’s not going to make it. Some of them have adopted a marketing strategy to provide niche products instead of trying to provide everything to everybody. The challenge for Sprint or any other ILAC is that they have a huge investment in legacy equipment. If they’re going to make a change, it requires another huge investment to do it. It’s easier for the CLACs to push forward and make adjustments to our product line. It’s a race right now. We need to bring products to the marketplace and make sure they are profitable.
Schorr: We’ve seen the demise of the dot-com companies that all hit the marketplace at the same time. Do you all agree that there will be fewer, but larger, companies in order to survive?
(General agreement.)
Emmert: We saw the same thing in the long-distance market in the 1970s and ’80s when everybody jumped into it. Over time, the startup companies either merged or consolidated. I think we’ll see the same thing in the local market.
Schorr: We have two so-called “mom and pop” companies here today. Do you see yourselves being able to survive in these devalued times in the telecom industry?
Cheri Hickman, Hickman Telcom: Definitely. The market we deal with is companies with 30 phones or less. If they have a problem, they like the idea of being able to talk to the owner. Personalized service is an asset in this market. As we are growing and looking at making sales to larger companies, we lose the control we had when we were small. Our biggest challenge is making sure we continue to focus on customer service.
Lorinda Bucchieri, Pre-Paid Phones: We are the first re-sellers in Las Vegas to get into the cellular prepaid, credit-challenged customer market. We now also offer prepaid local phone service. I service the customer who has been unable to get service elsewhere or who has been disconnected for credit reasons. I resell the services that others here today offer, and we are providers for all five of the cellular carriers. I just keep putting in more things into my “business basket” so that if there is a buyout or sellout I still have things left to offer.
Schorr: The media advertises potential bankruptcies and companies buying each other out. Has this created a problem?
Bucchieri: I don’t think so. I think the consumer is keeping abreast of the situation and that’s a good thing. It’s important for everyone to realize that things are changing quickly.
Rae: It forces people to do their homework.
Gilligan: I think media hype produces higher highs and lower lows. When companies were way overvalued, the media talked them up. When they went down, the media talked them down further. It creates more of a churn.
Pricing for Services
Emmert: There is going to be a period when it’s not all pleasant for the consumer, especially the residential customer. Prices have historically been kept below cost so everyone could afford basic phone service. From the first Telecom Act in 1936 we were told to keep prices low so people could afford the basic phone, and subsidized this service with revenues from long distance and other features.
Schorr: Does the consumer demand too much for too little?
Emmert: When you’re used to paying a certain price, it’s very difficult to increase that price, for whatever the reason. We’ve had some of the lowest utility rates in the country for telephone service. Consumers get used to it and that’s what they set aside in their monthly budgets. If you try to raise rates, they don’t like it.
Rae: We like to use the old sales closing, “You can have quality, service or price – pick two. Which two do you want?” As a consumer myself, do I want to pay more? No. But I am willing to pay more to get the quality and service I need – to know that I can make a clear cellular call or have the bandwidth I need. If the consumer has received four bids and has four different prices, we have to show him the value in what we’re offering. Because we’re all after market share, it’s driving the price down, but we don’t want to drive ourselves out. We have to be competitive but we can’t always offer the lowest price.
Hickman: It’s our job to educate consumers and show them the value and talk about our service.
Deb Carmachel, Exp@net: I tell my employees, “Don’t go in there pushing a price anymore. You’re a consultant for this customer. You help them make the right decision. If you can’t show the client a return on his investment, he’s not going to buy from you. It is about value.” If I do all that and can’t get a break-even number on the price, I’ll walk. I have to worry about my bottom line and I can’t give away my product.
Knuckles: Everybody wants instant gratification. They want faster speeds on Internet, better communications. It takes time to build, but there’s more and more pressure to do it now. We’re in a difficult phase, especially with price decreases. There has to be a point where we say, “This is where the pricing needs to be. We can’t make it lower and still stay in business.” It’s a critical time.
Peterson: Customers always have a right to ask for more-for-less, but there has to be a point at which they get the price they want and we still make money. Our job is to get as close to that as possible. Cell phones were pretty much given away free a few years ago because we really wanted those contracts, but it hurt the industry. People were switching around like crazy because phones would work on anybody’s system. We had to find a happy medium where nothing was given away free, but we gave good service and made a little money. Free market forces finally reached a leveling-off point.
What’s Ahead for Communications?
Schorr: Twisted pair, wireless, IP (Internet Protocol). Where is the future for telecom?
Peterson: The future is ever-changing. I see the convergence of different mediums – of the computer, the television and the telephone. The TV or monitor will be our communications center for both voice and video. As providers, we won’t care what is going over our network. We will provide the pipeline and they will use it to carry either voice, video or data.
Emmert: I agree. The telecom industry is very strong, despite what you might see or read. Telecom revenues reached about $350 billion in 2001 and they are expected to grow to $470 billion in 2005. That’s very strong growth. Technology is going to continue to grow rapidly. We see a definite shift in our company in going from voice to data, and customers want speeds as fast as they can get them. I see a very bright future for Southern Nevada with lots of new products and services.
Gilligan: In the wireless world, we continue to launch new technologies. The biggest thing coming up is third-generation technology (3G), which will be available in mid-2002. The initial phase will take data speeds from 14.4 to 144 kilobites per second. It will increase capacity and battery life. By 2005 it will be three megabits per second. It essentially turns your cell phone into a computer. We take great technologies and make them mobile. I’ve got a card I can stick in my computer and go 14.4 over the air and it’ll be 144 kilobits per second by this summer. There is a camera out now that lets you take a digital photo and send it instantly to somebody over your cell phone – it’s a beautiful photo and it’s wireless. In the future, phones will come with a camera. We have a machine at our headquarters where I can use my phone to get a soda pop from a vending machine. They have these in Europe, too. I just push numbers on my handset, the soda comes out and the charge shows up on my phone bill.
Carmachel: The challenge is to keep up with all the new technology. I have to constantly read about and research all the new products and services.
Hickman: One of the reasons we decided to branch out into computers was because we saw that everything was becoming integrated. At least we have a little bit of an edge over some of our competition that isn’t involved in computers.
Schorr: What’s ahead for the next 12 months and the next five years for the consumer?
Knuckles: I started a small business 10 years ago with a 386 computer and a 2400 baud modem, which at that time was state-of-the-art. Now customers are asking us for multi-megabit connections, gigabit and 10 gigabit Ethernet connections to connect their offices together. In 10 years, it is truly amazing how fast the technology has changed, and it just gets faster and faster. I don’t foresee any huge short-term changes. It will continue to be a challenge to provide more bandwidth. In five years we’ll have one handheld device that provides all our telecom services, but the future is still an unknown.
Rae: We’re all looking for what the customer wants, which at this point looks like more bandwidth. We’ll have devices with a built-in GPS so we’ll know where our kids are. Maybe I’ll have a communications device implanted in my hand – who knows? The future will be determined by whatever the customer is pushing us towards.
Gilligan: In wireless, a year from now we’ll have the 3G products, good streaming video and camera accessories. We’ll have 2.5 to 3.0 megabits per second. It will be a whole different world. We’ll have real-time access to news on our handsets. We can already send and receive emails and open attachments on our handset. My child can play Nintendo in real time with a cousin who lives across the country. The technology is available now for advanced 911 service, so the emergency services people will be able to pinpoint where your phone is through GPS technology. We’ll have full-motion video phones like the Jetsons. The possibilities are limitless.
Emmert: In the short term, we’ll see more bundling of services and more choice in bundling. There is a “need for speed,” even among seniors, who are online now and want high speed connections. There is also a changeover from circuit to packet switching. We are increasing our footprint to reach 90 percent of our customer base with high-speed products by 2006. There is also a transition of people from local phone service to wireless only. Currently about 20 percent of the people on Southern Nevada use their cell phone for all calls and don’t have local phone service.
Peterson: The number one change I see is that everything is becoming digital. Number two is information-on-demand. Time, distance and geography are things of the past. There will be no long-distance calls, since everything moves at the speed of light. A call to Pahrump would be the same as a call to New York. The Internet will grow and diversify. It will divide into different sectors with different levels of security. Broadband will definitely explode.
Gilligan: Whether its wireless or wire line, it takes telecom to hook everything together. Working together and communicating with each other is what makes a civilization. Different technologies go away over time but communications will never go away. Telecom will continue with faster and better technologies. I can’t imagine where else you’d want to work except for the telecom industry, because it’ll be here forever and it just continues along.
Schorr: In 12 months we’ll have more consolidation and more products. In five years we’ll see more home networking and employees working from home. It will be exciting to see what the future holds.
