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1. Introduction
I am pleased to be a resource for the Committee and am honored to have been
asked to participate in today's hearing.
My name is Ned Zachar and I have followed the Media and Communications sector -
either as a fixed income or equity research analyst -- for all of my 16-year
business career. Our team at Thomas Weisel Partners covers approximately 30 US
and International companies with a publicly traded market capitalization of
approximately $525 billion dollars.
The size of the companies we cover varies substantially -- and include $1B
market caps such as United Online as well as some of the largest companies in
the world - including Verizon and AT&T Corp. By sector, our coverage
includes Wireless and Wireline Telecom, Cable, DBS, ISPs, and Tower Management
-- which gives us a wide perspective on today's topic.
2. Telecom Competition is a Major Factor in our Analysis
Today's hearing -- of course -- addresses the state of competition in the
telecommunications marketplace. Several reports we have recently completed,
including our "2004 Outlook - For Some the Recovery Will Continue" and
"Race for the RGUs" -- address this issue head-on. My comments today
are a summary of those reports and I have included them for the record.
The increasingly competitive environment for US Communications companies is a
major factor in our overall investment thesis. It directly impacts which sectors
we are steering investors towards - and which sectors we are steering investors
away from. Generally speaking, we have favored investment in companies that can
maintain current market share (usually because of a product or technology
advantage) while stealing successfully from others. In general, the wireless and
cable industries fit that profile while the RBOCs and especially the long
distance companies do not.
Let me elaborate briefly. Based on our Firm's estimates, the US
Communications Services industry - not including equipment sales - is comprised
of nearly $400 billion of annual end-user spending. As a % of GDP, annual
telecom spending is about 3-1/2% of the U.S. economy and has been growing on
average, roughly in line with the US economy.
Thus, the pie of spending is quite large but not growing all that fast.
Average annual spending has been reasonably consistent overall -- though there
can be some year-to-year variability within each subsector. However, beneath
this veneer of consistency, there are subtle but powerful undercurrents
occurring that we think should be noted.
First, the effects of the 1996 Telecom Act - along with subsequent agency and
judicial interpretation - have applied and continue to apply steady pressure on
the established incumbent companies such as the RBOCs and the interexchange
companies like AT&T Corp. and the reconstituted MCI. Our market share
statistics in Figure 2c illustrate the point.
Second, in or view, technology is accelerating competition between the
various subsectors - and is a phenomenon that is clearly benefiting businesses
and consumers. For example, because of much improved wireless network coverage
and rapidly falling per minute prices, it has been estimated that as many as 5%
of US households have dropped wireline service altogether - choosing instead to
manage their relatively mobile lives via a cell phone. Changing US demographics
will likely accelerate this trend, in our view.
At this point in time, we believe that the US Communications marketplace is
approaching a significant "knee in the curve" whereby the combination
of a) generally pro-competitive policymaking and b) additional technology
advances -- are set to provide US businesses and consumers with new choices in
service providers and/or new services that will set us apart from the rest of
the world competitively.
There are several tables at the end of my written testimony that illustrate
the competitive dynamics I noted above. A few key factoids from our tables are
relevant to mention:
1) We expect the share of residential lines controlled by the traditional
iLECs to fall from 79.2% as of the end of 2003 to 68.6% by 2008. Key market
share gainers will be the wireless, LD and cable television industries.
2) Despite the addition of local UNEP, we expect the share of telecom dollars
controlled by AT&T, MCI, & Sprint (the three major US LD providers) to
fall from 10.9% to 7.7% over the same time frame, from $29.7 billion to $25.8
billion.
3) We expect the number of wireless users to increase from 153.8 million at
the end of 2003 to 196.7 at YE 2008. While we do not estimate how many of those
users will be "wireless only", with roughly 5 million having already
"cut the cord" it's reasonable to believe that number would be 2-3x as
high in 2008.
4) We are estimating that the number of cable television
"telephone" customers will increase from 3.2 million to 13.0 million
between YE 2003 and YE 2008.
5) We estimate that residential high-speed data connections will increase
from 23.4 million at YE 2003 to 46.4 million at YE 2008. We have also estimated
that the cable industry will have about 65.4% market share with the balance held
by the iLECs.
6) In pay television, we estimate that the DBS industry will have about 30.1%
market share by YE 2008, compared to the 23.2% market share they have today.
Overall, we expect total pay television subscribers to increase from 93.1
million at YE 2003 to 103.5 million at YE 2008, representing 90.5% penetration
of U.S. television households.
Based on our work, the wireless and cable industries - and our data supports
this - are gaining market share, and thus deserve more investment attention -
than the RBOCs and the LD companies, which are treading water at best.
3. Future Competitive Catalysts
At this point, let me shift the discussion toward predicting the future,
which is usually a difficult endeavor -- but one that our customers clearly
think is "part of the job".
We see three major "Telecom Tailwinds" impacting the competitive
landscape within the communications marketplace -- each with their own distinct
timeframe. We would define Telecom Tailwinds as technology or regulatory trends
that are likely to be major catalysts for changes in behavior - either by the
service providers or their customers.
1) The first Telecom Tailwind, Wireless, is not a new trend but it remains a
powerful change agent in the communications marketplace. In our view, it really
gained momentum in 1996 with the auction of 1900 MHz PCS spectrum. We expect
this tailwind to last for at least several more years as US penetration drives
toward 70% of the US population. The increasing popularity of wireless is being
driven primarily by ongoing improvement in network quality and changing US
demographics. Since 1996, the number of wireless customers in the US has grown
at a compound rate of 20.9% and the number of minutes of use has grown at an
astounding compound rate of 46.5% annually through 2003. At present, we believe
the share of minutes on wireless networks is approximately 13.1% of total
reported dial minutes, up from 1.6% in 1996.
2) The second Telecom Tailwind is Voice over Internet Protocol which is
really a breakthrough technology that enables voice traffic to make use of
highly efficient packet-switched networks. VoIP has been talked about
extensively for several years but is now coming into its own - literally as we
speak. We are enthusiastic regarding the prospects for VoIP technology and its
ability to change the economics of telecom. It reduces the necessary capital
outlay for new competitors and enables - for example - the cable industry to
generate attractive returns on capital with modest penetration assumptions. With
regard to the incumbents, we do not see VoIP as a significant new tool (other
than as a mechanism to potentially avoid established regulatory constructs)
given that their embedded investment in circuit switching remains viable and has
already been paid for.
3) And the third Telecom Tailwind we see is Wireless Broadband which is a
more obtuse concept that we would define as a mix of established wireless
standards - that is 3g -- and emerging technologies that will likely eventually
enable high speed access - that will allow business and consumers to truly
"cut the cord" for data service. Substantive wireless data projects
should begin in 2005 and could provide added competition for wired data service
to homes and businesses. While one usually thinks of established European and
U.S. 3G standards for wireless broadband, other new technologies such as those
developed by Flarion Technologies, Navini Networks and IP Wireless represent new
opportunities for consumers as well. Additionally, the IEEE wireless standard
802.11 (commonly known as WiFi) is literally spreading like wildfire despite
several inherent technology disadvantages - especially the limited range of
signal. In our view, the best hope for affordable, ubiquitous broadband access
will likely be developed within the wireless sector -- rather than by the
established cable/telecom high-speed duopoly.
4. Conclusion
I finish my statement with a handful of observations recapping the current
state of competition in telecom.
a) In our view, competition in the US Telecom marketplace is robust relative to
the ROW and is likely to increase in intensity in the next several years because
of current legislative/agency policies and technology.
b) The increasingly competitive environment is clearly a key factor in
driving our investment recommendations within our research franchise.
c) There are several new technologies that are likely to intensify the
competitive environment moving forward.
d) While I was not asked to opine on policy directly, we think there are
several items that Congress and the FCC could prioritize which would help the
industry overall AND consumers including: a) spectrum management issues, b)
haphazard local zoning restrictions c) E-911 capability d) UNEP reform e) more
refined definitions for telecom versus "information services" and f)
access charge reform.
On behalf of myself and my Firm, I would like to thank the House and
specifically the members of the Energy and Commerce Committee for listening to
my presentation and I would be happy to answer questions at the appropriate
time.
Respectfully submitted,
Ned P. Zachar, CFA
Thomas Weisel Partners
Cc: Howard Waltzman
Attachments: (Website note: Available attachments are Adobe PDF
documents)
Biography
U.S. Communications Services - Residential and Business
Revenue Breakout (Figure 1)
Selected Residential Market Share Analysis (Figure 2a,
Figure 2b. Figure 2c, Figure
2d)
U.S. Communications Services - Residential Revenue
Breakout (Figure 3)
U.S. Wireless Data Statistics (Figure 4)
TWP Telecom Coverage List (Figure 5)
Comparable Table (Figure 6)
"2004 Outlook -- For Some, the Recovery Continues"
"Race for the RGUs"
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