Subject: [NEXTEL-1] Weisel Partners On- The Current State of Competition in the Communications Marketplace

From: "marcel_rf1" <[email-masked]>
Date: Fri, 27 Feb 2004 16:04:10 -0000

The Current State of Competition in the Communications Marketplace
Subcommittee on Telecommunications and the Internet
February 4, 2004
1:15 PM
2322 Rayburn House Office Building  

==================================================================

Mr. Ned P. Zachar CFA 
Founding Partner, Weisel Partners Director of Telecom Services 
Research
Lever House
390 Park Avenue, 17th Floor
New York, NY, 10022 

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

http://energycommerce.house.gov/108/Hearings/02042004hearing1164/Zacha
r1853.htm

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