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Telecommunications

@ the Millennium

The Telecom Act Turns Four

##  Office of Plans and Policy[^1]

##  Federal Communications Commission

##  February 8, 2000 William E. Kennard, Chairman

## 

# The Telecommunications Industry is Booming

### ![](media/image2.wmf){width="3.5in" height="2.3930555555555557in"}The telecommunications industry has grown since 1996, creating 230,000 new jobs and generating \$57 billion[^2] more revenues. 

Revenues in communications services, which include all telephone
services, radio, cable and broadcast television, and certain other
services, have grown from \$331 billion in 1996 to \$388 billion in
1998, a growth of 17 percent in real terms (Figure 1). That figure does
not include the rapid growth in sales of communications equipment --
telephone handsets, central office switching equipment, etc. -- where
revenues have grown \$26 billion, 24 percent, between 1997 and 1999.
With the growth in output, employment in the communications equipment
and services industries has grown from 1.6 million in 1996 to 1.8
million in 1999 (Figure 2).

![](media/image3.wmf){width="3.5in" height="2.3930555555555557in"}Growth
and service improvements in the telecommunications industry also have
important secondary impacts on the rest of the economy. While the above
figures present an industry growing at a healthy pace, they understate
the full impact improvements in the telecommunications sector have had
on the economy. This is because communications are end products as well
as inputs to the production of other goods and services.

By providing cheap, efficient underlying infrastructure and services,
the communications industry has played a pivotal role in the development
of a host of data and communications related industries that could not
exist without it. For example, the Internet, and electronic commerce
generally, is built on the communications infrastructure.

**The "digital economy" is changing the way we do business, carry out
our day to day lives, and interact with each other.** New virtual
markets are being created to more efficiently trade goods and services.
Companies like General Motors and Ford are now developing Internet
trading networks to link their thousands of suppliers. These systems
could electronically process upwards of \$300 billion in transactions
every year. We are only beginning to understand the profound positive
effects these changes will have on the economy.

These secondary linkages are, of course, difficult to measure. One
approach is to look at the growth in industries that rely heavily on
communications infrastructure and services. For example, employment in
the data services industry has grown by 666,000 since February 1996
(Figure 2). **In one study, the Department of Commerce estimated that
information technology producing industries (the producers of computer
hardware and software, data services, and communications equipment and
services) directly contributed, on average, over one-third of the real
economic growth between 1995 and 1998.**[^3] That same study found that,
because of the declining prices of their products and services, these
industries reduced overall inflation by 0.7 percentage points in 1996
and 1997.

![](media/image4.wmf){width="3.5in" height="2.3930555555555557in"}**The
benefits of the digital age are being extended to all Americans.** The
FCC has implemented rules pursuant to the Act that require all
telecommunications products and services to be made accessible to people
with disabilities. The Act also provides the FCC with important tools to
update universal service policies to ensure that Americans in remote and
rural areas receive service.

By 2006, it is estimated that half of the U.S. workforce will be
employed in industries closely linked to information technologies. It is
important that all Americans be able to participate in the emerging
digital economy. Therefore, the 1996 Act established the Schools and
Libraries Universal Service program (E-Rate) to provide affordable
telecommunications services for schools and libraries, especially those
in rural and economically disadvantaged areas.

![](media/image6.wmf){width="3.5in" height="2.3930555555555557in"}Nearly
three times as many public schools were connected to the Internet in
1998 (89 percent) as were connected in 1994 (35 percent), while schools
in low income areas went from 19 to 80 percent connected quadrupled
(Figure 3). However, at the end of 1998, only half of all classrooms
were connected to the Internet. Some data suggest that one million
classrooms were connected to modern networks in 1998 and 1999. This
program is on the road to ensuring that all American children will have
the technology tools to thrive in the global information age.

# Prices are Falling as Demand is Increasing

### In general, prices are falling.

![](media/image7.wmf){width="3.501388888888889in"
height="2.395138888888889in"}Prices for wireless and long distance
telephone service have fallen dramatically over the past years. Long
distance prices (international and domestic), as approximated by average
revenue per minute, have fallen by 34 percent since 1993 (Figure 4). For
residential consumers, domestic long distance prices relative to other
goods and services have fallen by 10 percent since 1993 (Figure 5). New
calling plans now offer consumers long distance rates of only 5 cents
per minute. International long distance prices have fallen by more than
half since 1993. Mobile prices have fallen by 35 percent since 1993, and
average monthly local bills have dropped by \$30 -- from \$70 in 1993 to
\$40 in 1999 (Figure 6).

![](media/image8.wmf){width="3.5in" height="2.3930555555555557in"}The
only areas where prices have not fallen significantly since the 1996 Act
is in local telephone and cable television services. Local rates have
declined only 2 percent relative to all other goods since the Act.
Although cable rates have decreased in terms of the price per channel
received, overall cable bills have risen by 1.8 percent between 1998 and
1999 in real terms.

### Usage is increasing. 

With the drop in prices, Americans are making more long distance calls
and mobile phones are becoming commonplace. Wireless subscriptions in
the U.S. grew from 13 million in 1993 to over 76 million in 1999 (Figure
6), and are projected to increase to 149 million by 2003. In other
words, the penetration rate of mobile service is expected to go from one
in ten Americans in 1993 to six in ten in 2003. Similarly, since 1993,
long distance traffic has increased 42 percent (Figure 4).

### The Internet is driving growth in data traffic. 

![](media/image10.wmf){width="3.5in" height="2.3930555555555557in"}The
Internet was in its infancy in 1996 when there were only 14.3 million
host computers (computers with an IP address through which users can
"log-in") connected to it in the world and only 27 million Americans
using it (Figure 7). Today, there are more than 44 million Internet
hosts (Figure 8), and nearly 80 million users in the U.S. Every day more
people use the Internet in their business and personal lives. Families
communicate through electronic mail and businesses are using the
Internet to link their ordering systems to manage their inventories more
efficiently. Electronic commerce has grown from next to nothing in the
early 1990's to around \$70 billion in 1999, and is projected to exceed
\$1 trillion in the next few years. This growth is one of the drivers
causing data traffic to double every 100 days.

# ![](media/image11.wmf){width="5.99375in" height="4.105555555555555in"}  {#section-1 .unnumbered}

# Industry is Investing and Innovating

### Companies are responding to demand, competitive pressures and new opportunities by investing heavily in their networks.

![](media/image12.wmf){width="3.5in"
height="2.3930555555555557in"}Competitors and incumbents invested
roughly \$25 billion more in 1999 than they did in 1995 (Figure 10).
[^4] These investments are driven by increasing demands on the nation's
networks for voice and data traffic, to build new networks to compete
with incumbents, and to offer better services to consumers in response
to competitive pressure. In order to accommodate the rising traffic,
companies have been investing heavily to expand their high-speed
networks, and have nearly doubled the extent of the nation's fiber
system (Figure 11). As demand for global communications has increased,
the industry has responded by dramatically expanding capacity. By 2001
there is expected to be roughly 140 times as much trans-oceanic capacity
as was available in 1996.

### New entrants are building new networks.

![](media/image13.wmf){width="3.5in" height="2.3930555555555557in"}Since
the 1996 Act opened markets to competition, new entrants have invested
ever larger amounts in building out their facilities and developing new
services to compete with incumbents. They are laying fiber across the
country, and installing switching equipment to link customers on their
networks. Competitive Local Exchange Carriers (CLECs) have installed
over 800 voice and 1,400 data switches, and laid 162,000 route miles of
fiber through the end of 1999.

Similarly, wireless providers have, in the matter of a few years, built
out entirely new networks across the country, and have been able to keep
pace with increasing demand as more and more people discover the
advantages of going mobile.

Not only have these new wireless operators brought competition to
virtually every major market in the U.S. (Figure 12), but they have also
facilitated the creation of truly nationwide wireless networks. For
example, a business person could take a trip visiting clients in Boston,
St. Louis, and Los Angeles and never leave the national networks of
operators like AT&T and Sprint PCS.

### ![](media/image14.wmf){width="8.750694444444445in" height="6.722916666666666in"}

### ... and incumbents must upgrade to compete and grow.

![](media/image15.wmf){width="3.5in" height="2.3930555555555557in"}Faced
with competition in their traditional markets, incumbents have renewed
their investments. Cable companies invested nearly twice as much in 1999
as they did in 1995. They are upgrading their cable systems to advanced
two-way systems that can deliver not only more video channels, but
high-speed Internet access and telephone service as well. Similarly,
investment by incumbent local exchange carriers (ILECs), while flat in
the early 1990's, grew by 19% between 1995 and 1998.

In the wireless industry, incumbent cellular operators have converted
large sections of their networks from analog to digital technology in
order to compete with the fully digital networks of broadband PCS
operators.

### The industry is becoming more innovative.

With competition, firms have been under increasing pressure to cut
costs, introduce new products, and improve service. As one measure of
this increased innovation, the number of telecommunications patents
granted annually by the U.S. Patent Office grew from 3,744 in 1994 to
7,674 in 1998. These patents cover a wide range of innovations such as
the digital coding and decoding of conversations on wireless networks
that have improved the sound quality of mobile telephones and allowed
many more conversations to be carried over the same amount of spectrum.
Overall patenting activity has been growing throughout the U.S. economy,
but the telecommunications sector has grown more than three times as
fast as the overall rate from 1994 to 1998. Telecom's share of all
patents has grown from less than 1.5 percent in the early 1990's to 3
percent during the first half of 1999 (Figure 13).

# ![](media/image16.wmf){width="3.5in" height="2.3930555555555557in"}Competition is the Driving Force

The 1996 Act provided a blueprint for competition among a variety of
suppliers using different technologies to compete on a level playing
field to deliver services to consumers. The Act mandated the elimination
of barriers preventing companies from competing against each other --
letting cable, wireless, long distance and other companies into local
telephony and establishing the conditions by which the Bell companies
could enter the long distance market. On the fourth anniversary of the
Act, we see competition in the local market beginning to take hold and
are beginning to see competition across multiple platforms to deliver
services to consumers.

![](media/image17.wmf){width="3.5in"
height="2.3930555555555557in"}Competitors in the local telephone market
have invested billions of dollars to build networks, and are
successfully competing with incumbent carriers. According to some
estimates, new competitors in local markets (both independent CLECs and
the local arms of large long distance companies) have been adding over 1
million lines per quarter. Their share of the local market has increased
to 4 percent of lines served and over 6 percent of local service revenue
(Figure 14).

Local competitors have been particularly successful in the business
market, where competitors have added 65 percent of all new lines
deployed in the third quarter of 1999 (Figure 15).

### ![](media/image18.wmf){width="3.5in" height="2.3930555555555557in"}Local competition is developing at a rate comparable to the development of competition in the long distance market.

In the long distance market, competitors that didn't exist before the
1970's now have over half of the long distance market as measured by
revenue. However, in 1979, long distance competitors only had a one
percent share of the long distance market. It took those competitors
more than four years to take six percent of the market from incumbents.
Similarly, in 1996, when the Act was passed, competitors had a one
percent share of the local market. But it has taken them only two and
one half years (through the second quarter of 1999) to reach the six
percent mark (Figure 16).

### 

### ![](media/image19.wmf){width="3.5in" height="2.3930555555555557in"}Competition from satellite companies has eroded cable television's market share, forcing them to upgrade their cable systems.

![](media/image20.wmf){width="3.5in" height="2.3930555555555557in"}Cable
television companies have seen their market share fall by over ten
percentage points in the 1990's (Figure 17). Between 1998 and 1999,
competitors (mainly DBS operators such as DirecTV and Echostar) took 2
out of every 3 new multi-channel video subscribers (Figure 18). This
competitive pressure has forced cable companies to upgrade their cable
systems. Upgraded cable systems offer consumers more video choices, but
also allow them to offer broadband Internet access and even telephone
service. As Figure 17 shows, more people have more channels to choose
from. Over 30 percent of the homes passed by cable TV can receive
broadband Internet access today. About 130,000 customers already get
telephone service from their cable company, and nearly 50 percent of all
households are projected to be able to do so by 2005.

### The wireless explosion.

Since the FCC first auctioned spectrum licenses in 1994, over 8,000
licenses have been awarded and new entrants have quickly developed
wireless networks throughout the country. The 1996 Act further
facilitated the development of competition in wireless markets by

![](media/image21.wmf){width="3.225in" height="2.4166666666666665in"}

requiring local telephone companies to interconnect with new entrants
and by establishing the ground rules for those interconnection
agreements. These have made more competition possible in both mobile and
fixed wireless networks.

![](media/image22.wmf){width="3.5in" height="2.3930555555555557in"}In
1994, most Americans could choose between, at most, two competitors for
their wireless service. Today, 94 percent of Americans have three or
more providers in their home market, and over 75 percent have at least
five operators competing for their business (Figure 20). With dramatic
price decreases and quality improvements in mobile telephone services,
more people are beginning to see wireless telephones as substitutes for
their wireline services. Along with the growth in the number of mobile
telephone users, the average number of minutes each customer talks has
more than doubled from approximately 100 minutes per month to between
200 and 300 minutes per month. This usage growth has helped increase the
wireless industry's share of the overall voice market. In 1995, wireless
voice minutes represented less than two percent of all voice traffic. By
1999, this had increased to more than seven percent, with the
expectation that wireless will account for over 10 percent of all voice
traffic during 2000.

### The Act has changed the way people look at spectrum.

The Act, by opening the local market to competition, has turned spectrum
into a third way to get into homes and businesses for video, voice, and
data. Two CLECs, WinStar and Teligent, are already providing a full
range of voice and data service to small and medium sized businesses
using their spectrum in most of the largest markets. A third CLEC,
Nextlink, is in the process of launching similar technologies and
services in 25 markets during 2000. Others operators (such as Sprint,
and MCI/Worldcomm) are converting wireless one-way video systems to
two-way networks to provide voice and high speed Internet access
services to the residential market

[^1]: ^\*^ This staff report does not necessarily reflect the views of
    the Federal Communications Commission or any of its Commissioners.

[^2]: All figures are 1998 dollars unless otherwise noted.

[^3]: U.S. Department of Commerce (1999). *The Emerging Digital Economy
    II.*

[^4]: Since comprehensive estimates of investment in different sectors
    based on similar methodologies and sources are not available, the
    amounts in Figure 10 should not be directly compared. For example,
    some investments by cable and wireless companies appear in both
    those categories and the CLEC category.