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Calls to the future

What were once layouts for phone service are quickly becoming transports for voice, video, and data traffic.

    During the summer doldrums, Sprint unveiled a multibillion-dollar network to carry voice, video, and data over a single phone line, heralding it as a "Big Bang that expands the universe of what telecommunications can do."

    The industry, however, greeted the news with a collective yawn.

    Such is the state of the telecom industry in the chaotic Information Age, where even giants such as Sprint risk irrelevancy unless they embrace the technological whims of the market. What were once connection-oriented layouts perfectly fit for telephone service are quickly becoming multidimensional transports for a variety of traffic, zipping around as voice, video, and data "packets."

    This technology free-for-all in turn has inspired a slew of mergers, hailed by telecom executives as necessary to deliver a so-called one-stop shop for voice, video, and data services to business and residential customers. The results are combinations once unthinkable in a highly regulated industry.

    This year's examples include:
    • The $48 billion merger of long distance giant AT&T and cable industry stalwart Tele-Communications Incorporated, a not-so-subtle attempt by AT&T to take advantage of a new network technology--broadband cable--to offer an all-in-one package of converged communications and media technologies while potentially avoiding regulatory barriers to local access.

    • SBC Communications' continued acquisition push, which resulted in a $62 billion buyout of Ameritech in May that followed the purchase of Pacific Bell two years ago. The deals underscore SBC's efforts to become a giant in not only the local and long distance markets but also in the burgeoning area of data communications.

    • The rise of what is now MCI WorldCom out of Mississippi, stemming from the merger of WorldCom and long distance giant MCI Communications. The deal, yet another example of an attempt at universal telco services, creates a Net-oriented powerhouse because the two firms together control a substantial portion of the Internet's backbone networks.

    If convergence is ever Small companies make their mark going to definitively reach the home, it will be because the back-end networks being built and connected by these carriers have enough capacity to handle all the content delivery services that consumers need.

    Behind the all-in-one bluster trumpeted by telcos and scrutinized by regulators are market realities and technological changes that will force these multibillion-dollar giants to be quick on their feet in the face of rapidly commoditizing businesses.

    How did all this happen? The federal Telecommunications Act of 1996 essentially opened up the industry to competition, facilitating mergers such as the AT&T-TCI deal. Despite numerous chinks in the landmark legislation, lawmakers intended the regulations to be a sequel to the break-up of the AT&T monopoly on telephone service that took place more than a decade ago.

    But legislation created to promote a new era of competition has, in one sense, had the opposite effect. The Big Three telco players and the regional Bells have tried to build up their stable of technology and services through acquisitions. The Baby Bells, in particular, seem bent on reestablishing themselves as the primary drivers in the telco industry--starting to put Ma Bell back together again.

    At the same time, various new players, often called "Green Field" companies, are taking their cues from the legislation and See special coverage:
Telecom empires emerge building new-age high-bandwidth networks to compete with the Big Three in the one-stop-shop game. They are following various strategies, often a combination of partnerships with regional carriers, wholesale supply of bandwidth to third parties, and home-grown services.

    The underpinnings of these network shifts involve a technological revolution centered around the Net and the use of its transmissions medium--IP, or the Internet protocol--to deliver voice, video, and data-based packet services. That revolution will likely lead to dramatic changes in the cost of delivering voice services and will free up congested voice switches not intended for Net use.

    "It may take a decade, it may take two decades...but I think the outcome in the end is already predetermined," noted Gordon Vanderbrug, executive vice president at embryonic IP voice company VIP Calling.

    "Today it is central to our business, our mission, and our vision. We are making a multibillion-dollar bet on Internet technology," said C. Michael Armstrong, chairman of AT&T.

    The numbers tell the story in real terms: domestic long distance growth rates, as far as number of minutes, grew 8 percent per year between 1991 and 1997, while Net traffic grew 170 percent annually over the same period, according to a study by Atlantic-ACM, a telecom-focused consulting firm.

    This transition in network usage, combined with infrastructure overhauls among the Big Three carriers and various new players, is sure to shake up the telecommunications market--rendering the words "local" and "long distance" as "regulatory artifacts," according to Mark Bruneau, president of the business strategy group at Renaissance Worldwide.

    What the market will look like once remaining regulatory hurdles are firmly ensconced in the dustbin of communications history is anybody's guess, though most believe that the transition to a fully converged marketplace is likely to be a bloody one.

    "We really have a battle between pricing schemes. Data has always been priced lower than voice," said John Roth, chief executive at Nortel Networks, a provider of telecommunications and data equipment to carriers.

    Despite all the new initiatives, executives still are cuddling Today it is central to our business, our mission, and our vision. We are making a multibillion-dollar bet on Internet technology. up to the same tools that may eventually make a carrier's current bread and butter--long distance phone service--a commodity priced so low it will have a negligible effect on the bottom line.

    It used to be so simple: You wanted phone service, you called on Ma Bell. Now the profound changes sweeping the telecommunications industry signal a new age driven by digital services, the Net, and a belief that the competitive playing field has been leveled.

    Who would have thought this would be heard from AT&T: "We have a very strong belief in the power of the Internet and the power of IP-based services," said Sanford Brown, director of business strategy for the telco's Internet Services. "It's a very natural extension of what we do."

    AT&T, for one, believes that opportunities will make up for changes in the traditional cost structure for voice communications, sure to be cannibalized by cheaper data-based transmission means based on IP.

    Everyone is making moves for what is likely to be a cutthroat price war between the traditional carriers and upstarts that are either providing bandwidth for third parties to market or entering the long distance business themselves.

    This environment is likely to lead to more mergers in the telecom sector; Sprint has been mentioned as a likely player, despite nearly $15 billion in revenue this past year. However, the Federal Communications Commission has warned the industry that more consolidation could hurt competition.

    Waiting in the wings is a new breed of network service providers free from the legacy of older voice-based circuit networks. Qwest Communications and Level 3 Communications, among others, are readying high-speed fiber layouts based largely on IP to battle the likes of MCI WorldCom and AT&T.

    "The power of a Qwest or a Level 3--those muscles have not been flexed yet in terms of the disruptive pricing they are capable of," Renaissance Worldwide's Bruneau noted.

    From one standpoint, the one-stop-shop is a good idea for the Big Three because it will shield large firms from financial liability if one market goes south. But an unintended consequence of their recent flurry of mergers is a rapidly dropping price structure for long distance because of increased competition.

    As a result, what was formerly counted on as a cash cow is now highly dependent on volume and so-called customer churn so that rates of 7 or 8 cents per minute can reap a profit.

    On the technology side, some industry analysts believe that the accelerated construction of high-capacity pipelines may speed the digital transition from voice to video. "In the next century, we'll be moving from telephony to imagery," Joseph Nacchio, chief executive at Qwest, predicted recently. "We're facing a bandwidth future unfettered by historical scarcity."

    That bandwidth also will likely precipitate a boom in alternative forms of commerce, such as those wrought by the Web. "We're on the cusp of transitioning from how to why," Bruneau noted.

    The players in the chameleon-like telecommunications industry can only hope the answer to that question will continue to fill their pipes.  

    News.com's Jeff Pelline contributed to this report.

    Go to: Networks find voice