Cable and Wireless Growth Hurting Integrated Telecom Providers

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Amidst a drastically changing competitive landscape, the wireline segments of all integrated telecom carriers are under siege from wireless and cable providers and will remain so through the end of 2005, said Standard & Poor’s in its semi-annual survey on the integrated telecommunications industry.

In 2004 and 2005, wireless growth continued to be strong to the point where it has now overtaken traditional wireline voice services as the preferred means of communication. According to the FCC, the number of U.S. customers receiving wireless service totaled 181 million at the end of 2004, exceeding the number of wireline phone lines by more than three million. Standard & Poor’s expects continued wireless growth throughout 2005, as evidenced by the 1.9 million and 1.1 million net additions, respectively, that Verizon Wireless and Cingular reported for the second quarter of 2005.

Standard & Poor’s believes that the operational arena will remain uneasy for wireline telecom companies for the remainder of 2005. Access lines for the four Baby Bells were all down at least 4% in the 12 months ended June 2005, and the smaller regional and rural carriers were losing an increasing number of lines. S&P forecasts that the Regional Bell Operating Companies (VZ, SBC, BLS, Q) will continue to see additional access line declines of at least 4% through the end of the year, as wireless, cable, and Internet telephony offerings further penetrate U.S. households.

As well, a pair of significant potential mergers is changing the landscape of the telecom industry, as consolidation reduces the number of top-tier wireless carriers and eliminates the presence of the pure long distance carriers. Assuming the proposed Verizon-MCI and SBC-AT&T transactions are completed, Standard & Poor’s expects the new companies will have the capability to compete nationally. For both, S&P sees continued focus on customer growth in their wireless, DSL, and long-distance customer bases due to bundling efforts, in the face of weak traditional voice services.

Having lost significant market share to wireless carriers, traditional wireline telecom service providers have begun to fight back by aggressively bundling their service offerings, with discounts from DSL, satellite, video and wireless bundled into traditional service packages.

“The integrated telecom services landscape is in the midst of rapid and drastic change, with competition from cable, wireless and, to a lesser extent, wholesale local services, putting pressure on the traditional local voice businesses of the nation’s four RBOCs,” said Todd Rosenbluth, analyst with Standard & Poor’s Equity Research Services. “As it sorts itself out, we continue to have a negative outlook on the industry.”

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