Chapter 7
Legislative and Industry Trends
Introduction
• The computer and telecommunications
industries employ millions of people
worldwide
• Changes in technology are rapidly
changing the faces of these industries
and effecting managers, employees,
and customers
The Semiconductor Industry
• Worldwide demand tops $200 billion
• The top 10 suppliers account for nearly
half the total market
• Greater than 80% of the market is
controlled by firms based in the U.S.
and Japan
The World’s Largest
Semiconductor Suppliers
The Computer Industry
• A dynamic industry with continual
changes
Hardware Suppliers
• A diverse group of products ranging
from notebooks to supercomputers,
storage, and printers
• Server sales amounted to $60 billion in
2000
• Supercomputer sales are accelerating
as corporations need higher levels of
computing power to deliver services
The Software Business
• Continues to grow with 2001 sales of
$195 billion
• Employment in the U.S. in the packaged
software business is 336,000
• The industry leader is Microsoft with
domination of the desktop operating
system and application package
markets
Industry Dynamics
• The industry is characterized by
multinational corporations in multiple
overlapping strategic alliances and
partnerships
• Regulation of the industry by
government, intense competition, and
consumer demand are continually
impacting these industries
Information Infrastructure
• The US telecommunications market for
equipment and services in 2003 is
projected to exceed $700 billion
• Two factors drive this demand:
– Transmission bandwidth
– Switching capacity
Telecommunications
Regulation
• In the US, telecom firms are regulated
by local, state, and national government
• Major national legislation has included:
– Communications Act of 1934
– Cable Communications Policy Act of 1984
– Communications Satellite Act of 1962
– The 1956 Consent Decree with AT&T
– Modified Final Judgment of 1982
– The Telecommunications Act of 1996
The Divestiture of AT&T
• AT&T was a monopoly provider of
telephone service in the US
• Over time, the government required a
progressive opening of infrastructure to
competitors
• In 1982, AT&T was split into seven
independent Regional Bell Operating
Companies (RBOCs)
The Breakup of AT&T
• Many startup firms entered the market
• Cable companies began to offer voice
service
• Phone companies attempted to offer
video
• RBOCs began to join with cable
companies in a regional focus to
reestablish monopolies on
communications
1996 Telecommunications Act
• A wide reaching act aimed at fostering
an open market in communications
based on aggressive competition
• It covered cable, broadcast, and
telephone providers
• It fostered competition between RBOCs
and Incumbent Local Exchange Carriers
(ILECs)
1996 Telecommunications Act
• The Act increased the oversight of the
FCC with numerous ruling and
judgments
• The FCC set rates and formulae for
reimbursement in order to “level the
playing field”
• Unfortunately, this meddling created
disincentives for investment and a
confusing landscape for investors
FCC Actions
• The Act granted the FCC broad new
powers
• They created 80 major regulations in
the first 4 years
• The FCC has put in place rules that
subsidize some users at the expense of
others
• These rule have created a confusing
environment resulting in massive
litigation
Implementation Realities
• Local wireline competition is minimal
• Long distance competition is robust, but
startups are unable to compete against
established players
• Established long distance companies
are under extreme financial stress with
WorldCom, Sprint, and MCI all in or
near bankruptcy
Privatization Around the Globe
• 69 members of the WTO opened their
markets to competition
• Governments sold off telephone assets
to investors
• Competition brought new capital flows
from around the world, modernizing and
expanding the telecommunications
infrastructure
Industry Transformations
• With changes in the regulatory
landscape, the industry underwent
dramatic transformations, consolidation,
mergers, joint partnerships, bust and
bankruptcy, divestitures, and a sector
depression
Local Service Providers
Industry Consolidation
• Bell Atlantic, NYNEX, Verizon, and GTE
– 1997 - Bell Atlantic and NYNEX merged to
control 30% of the US local lines – Entity
renamed Verizon
– 1998 – Verizon and GTE merged to form
the largest phone company in the US
• 100 million lines throughout the US
Industry Consolidation
• SBC, Pacific Telesis, SNET, Ameritech
– 1997 – SBC merged with Pacific Telesis
– 1998 – SBC bought SNET
– 1999 – Merged with Ameritech
• 59.5 million lines in 13 states
Industry Consolidation
• BellSouth
– Focused on international expansion
controlling 6.2 million customers in 10 Latin
American countries in 2000
Industry Consolidation
• US West, Qwest, Time Warner, Frontier
– US West pursued a cable strategy buying
Wometco Cable, Georgia Cable Holdings,
and 25% of Time Warner Cable
– In 1997 it bought Continental Cablevision
– Qwest bought US West and divested parts
to Global Crossing
– Global Crossing filed for bankruptcy, and
Qwest is in shaky financial shape
Local and Long Distance
• The MFJ created local and long
distance areas of service; these areas
were called LATAs
• RBOCs could provide inter-LATA
service if they could prove (with the
FCC’s 14-point checklist) that effective
competition existed in the local market
Traditional Long Distance
Providers
• With increased competition, profits
decreased as pricing power eroded
• Providers attempted to differentiate
themselves by entering other markets
such as data (WorldCom) or wireless
(Sprint)
• These moves required enormous
amounts of capital expenses and huge
debt burdens
Long Distance Competition
• AT&T started in a dominant position, but
pursued a cable strategy wasting capital
• WorldCom acquired MCI, but in the
succeeding years began to
misrepresent its finances, and filed for
bankruptcy
• Sprint created a wireless network, but is
currently in financial difficulty due to its
highly leveraged balance sheet
Cellular and Wireless
• Consolidation of the parent wireline
companies is producing needed consolidation
in wireless companies
• Consolidation is more difficult in the wireless
sector because not only do the geographic
service areas need to work, but the cellular
technologies of the two companies need to
be similar (TDMA, GSM, or CDMA)
Major U.S. Wireless Operators
International Wireless
• People in many countries worldwide are
exchanging wireline phones for wireless
• In 2002, there were more than 1 billion
wireless subscribers
• Ericsson predicts 1.6 billion global
subscribers by 2005 as China and other
third world countries begin to build out a
cellular infrastructure
Leading Global Wireless
Operators
Satellite Cellular
• At one time this was thought to be the
next frontier with cell sites in orbit
• Eight companies attempted to build an
orbital system
• To date none of these have been
successful, and investor capital has
dried up, closing this cellular mode for
the foreseeable future
Global Telecom
• Privatization in the 1990s has begun to
radically reshape the global
marketplace
• As emerging economies grow, the
demand for voice and data services will
continue to expand
• These markets are immature, and will
require huge capital outlays to develop
The World’s Largest Phone
Companies
The Fall of the Monopoly
System
• The current phone system in the US
has its roots in the Bell System
• Over the past two decades, enormous
changes have reshaped the industry
• Stresses from regulators, customers,
competitors, technology and financial
markets have radically transformed the
face of the playing field
Implications
• The IT industry is undergoing rapid
changes that are profoundly affecting
managers at all levels and in all
segments of business
• The dynamic nature of the
telecommunications landscape will offer
bold and innovative management the
tools and technology to deliver
competitive products and service; it will
also punish those unable or unwilling to
adapt