Instability in the Telecommunications Industry

Instability in the Telecommunications Industry

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Instability in the Telecommunications Industry

Currently the Telecommunications industry is in a state of flux. The industry is reporting record growth rates but at the same time is seeing diminishing returns. Subsequently stock prices and the value of these companies are falling. Focusing on two industry leaders in the US are AT&T Wireless (AWE) and Verizon (VZ). The number of cellular subscribers in 1997 was 42.8 Million and in 2000 that number went to 66.4 Million. That works out to a 55% growth in usage. Over time it took 15 years to get to 42.8 Million subscribers, but it took only 3 years to gain 23.6 Million subscribers for a total of 66.4 Million. The industry has seen major growth over the past 4 years. Some reasons for this change are the changes in cellular technology for the past 20 years Analog signals have been in use but in the past 5 years Digital technology has been introduced. Currently both cellular systems are in use but new subscribers are leaning towards the Digital signal systems and phones, due to the clarity in connection, advanced features, and expanded service. As well as older customers are switching over to the new digital system and phones.

Some of the issues that exist within the industry. With the change in cellular systems and the proliferation of new cellular providers the customer is receiving many benefits such as falling prices from the diverse competitive market. The cost for cellular plans are constantly falling but at the same time the amount of Minutes offered by the plan is increasing. Recently an advertisement offered 3000 minutes for $35.00 per month, no long distance, and the cellular phone handset was free. The cost of such a plan works out to about $0.01 per minute. So as technology advances and prices continue to fall the consumer uses the cellular phone to make all calls both local and long distance, subsequently the long distance carriers are losing market share as consumers change their usage habits. At the same time the manufacturers of cellular handsets such as Ericsson and Motorola are forced to produce more products, and new products for less money. As an example the Motorola StarTac sold for $250 6 months ago, now that same product sells for $70, that is a 72% reduction in price over 6 months.

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In a Market that has a growth rate of 15% annually it is difficult for a manufacturer to produce 15% more product for 72% less profit on a per unit basis. As cellular companies offer the cellular handsets for free it is difficult to think that they are doing this and losing money which means they have negotiated very inexpensive prices from the manufacturers.

Over the next four years the cellular market is expected to sustain a growth rate of about 15% per year. At the same time newer cellular technologies are evolving such as the new 3G technology which is expected to rollout in 2004. This technology will offer a more wide spread access to the internet through a broadband connection over your cellular handset. Much like the turning point in the cellular industry when the digital technology was released this new technology 3G is expected to have the same reaction. Looking at the past from 1982 to 1997 the industry had steady slow growth. From 1997 to 2000 the industry had explosive growth with the addition of Digital and PCS technology. 2000 through 2004 the industry is expected to continue to have growth at a steady similar to what was seen in the early phases of cellular phones. As these companies have fallen off of the growth reported in 1997-2000 investors have been very harsh as stock prices and profits have fallen. It took 15 years to obtain 40 million subscribers and then 5 more years to climb to 80 Million, so in 1/3 the time the industry doubled. It is reasonable to think that the industry is not going to double again to 160 Million subscribers in 2 years or even 5 years for that matter. The telecommunication industry has fallen off of the pace that it once had and the possibility exists that the telecommunications market my never see the type of growth that existed in the market.


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