1994 US INDUSTRIAL OUTLOOK Chapter 29 Telecommunications Services The U.S. telecommunications services industry will continue to expand in 1994. Revenues should rise about 7.7 percent in current dollars, compared with a 6 percent increase in 1993. In 1994, revenues generated by international services will increase about 20 percent, and local exchange telephone service is expected to rise by 3 percent. Sales of domestic long distance services should grow more than 6 percent in 1994, depending on overall growth in the economy. Value-added network and information services will climb an estimated 15 percent in 1994. Revenues from cellular mobile telephone services will increase 39 percent in 1994; satellite service revenues in 1994 will grow nearly 25 percent. The U.S. telecommunications services industry, which serves more than 90 million households and 25 million businesses nationwide, is expected to have revenues of $193 billion in 1994. The industry (SIC 4812, 4813, and 4822) is broadly divided into providers serving the communications markets for local exchange, long distance (toll), international, cellular and mobile radio, satellite, and data communications, including value-added network services (VANs). The more than 2,000 companies employing about 875,000 persons that serve these markets are both regulated common carriers and unregulated private network providers. Before reading this chapter, please see "Getting the Most Out of Outlook '94" on page 1. It will answer questions you may have concerning data collection procedures, factors affecting trade data, forecasting methodology, the use of constant dollars, the difference between industry and product data, sources and references, and the Standard Industrial Classification (SIC) system. For other topics related to this chapter, see chapters 25 (Information Services), 26 (Computer Equipment), 27 (Computer Software), 28 (Space Commerce), and 30 (Telecommunications and Navigation Equipment). TELEPHONE SERVICES The Federal Communications Commission (FCC) regulates interstate common carrier communications, and individual state public utility commissions (PUCs) regulate communications within their jurisdictions. The FCC also regulates the use of radio frequencies by the U.S. telecommunications (telecom) industry through a system of spectrum allocation and licensing. Since the breakup of AT&T in 1984, the U.S. common carrier network has been divided into 161 local access transport areas (LATAs). Communications among LATAs are handled by long distance carriers, although intra-LATA telecommunications (both local and toll calling) are the responsibility of the local exchange carriers (LECs). Private telecommunications networks, which serve only specific customers rather than offering services to the public at large, are not regulated as common carriers. Since most U.S. long distance carriers are judged not to possess market power, they are not subject to FCC regulation. The largest company, AT&T, is subject to price-cap regulation, and in some business markets, where the FCC has determined that AT&T lacks market power, its services are subject to streamlined regulation under which its tariffs are presumed lawful and need not be justified by cost support materials. The FCC allows unlimited resale of long distance facilities and services, although the degree of intrastate resale competition varies from state to state. Local telephone services are provided by about 1,325 local telephone companies (telcos), including 22 local Bell Operating Companies (BOCs), telcos owned by GTE, Sprint (United Telecom and Centel franchises), and independent local telephone companies. Many of these small, local companies operate as rural telephone cooperatives. Long distance service is provided by AT&T, MCI, Sprint, WilTel, Metromedia Communications, Litel Telecommunications, Allnet, and more than 475 smaller carriers. Telephone service continues to be a valuable and cost-effective service for American consumers and businesses. During the last several years, local service rates have been increasing at a slower rate than overall inflation. During 1992, the consumer price index (CPI) rose 2.9 percent for all goods and services. By contrast, the CPI for local services rose 0.5 percent, while the CPI for intrastate toll services declined 2.4 percent and interstate toll services declined 1.3 percent. As of late 1992, average monthly residential rates for a single party access line were $13.08, an amount only 50 cents higher than the average 6 years earlier. Even adding increases for access charges and taxes, the total average monthly cost of touch tone service increased only $2 between 1986 and 1992. According to a recent survey, average monthly household expenditures for telephone service totalled $55.10 in 1991, of which about one-half was for toll services and nearly 20 percent for discretionary services (such as touch tone calling, call waiting, directory listing charges, etc.), or additional local lines and cellular service. Business customers pay a significantly higher local rate than residential customers, about $42 in total monthly charges for a single telephone line, compared with an average rate for a home telephone line of less than $20. In the United States, 2.1 percent of annual household expenditures nationwide went for telephone service, but research has indicated there is a strong relationship between income and telephone expenditures. Many states have "lifeline" programs that help promote universal telephone service by subsidizing monthly service charges for the poor. Thus, basic local service is available to needy households for an average price of less than $11 per month. Data for 1992 show that 93.9 percent of U.S. households have telephone service. Since 1984, domestic interstate long distance charges have dropped 31 percent while the CPI for the same period rose 35 percent. The nine-year trend of overall declining prices for long distance service was halted in July 1993 when AT&T filed for overall long distance rate increases of 1.2 percent valued at nearly $500 million. MCI and Sprint also raised their prices slightly. Such small increases should not slow down the continuing 5 percent annual growth in residential toll traffic. Declining prices have also characterized international communications. U.S. billed revenue per minute was $1.34 in 1980, but only $1.01 in 1991. However, revenue totals continue to grow impressively, with international billed revenues exceeding $13 billion in 1993. Telephone traffic accounted for more than 90 percent of that amount. Growth in international telecommunications traffic and revenues continues to increase at a faster pace than in the domestic market. Latest available figures show U.S. originated minutes of traffic grew at 13.8 percent and the number of calls increased 20.5 percent in 1992, while incoming minutes grew at 12.9 percent and number of calls at more than 19 percent. Increases of those magnitudes should continue for 1994 international traffic to and from the United States. Usage of the public switched telephone network continues to increase. Business day minutes of use of the local telephone networks topped 10 billion minutes in 1993. Long distance minutes of telephone traffic increased at about 7.8 percent in 1993 over 1992, and the volume of minutes should grow by about 9.5 percent in 1994. Interstate minutes of use now exceed 30 billion a month. Telephone traffic volume generally moves in rhythm with the nation's economic pulse, so that improvement in the U.S. economy in 1994 should help stimulate increases in long distance and international calls. Total U.S. access lines exceeded 147 million in 1993, with yearly growth expected to continue at about 2.2 percent (Table 1). The local exchange carriers spent about $20.4 billion for construction of new plant and equipment upgrades in 1993. The value of their total investment in plants reached $280 billion. During the year, the deployment of fiber optics in the country's telephone networks continued, particularly in the local exchange areas. Long distance networks now are nearly 100 percent fiber, although the carriers utilize satellite and microwave circuits for backup and special facilities applications. Both local and long distance carriers are either investing in or evaluating applications using digital technologies for wireless communications networks, including point-to-point microwave links and wireless access technologies such as cellular (see subsequent sections in this chapter). National Trends In 1993, the local exchange telephone companies confronted increasing competitive pressures in certain local services they had monopolized for decades. In response to these pressures, and to possible future competition from cable TV companies and others for local exchange telephone service itself, the BOCs stepped up their campaign to obtain authority to enter the long distance and telecommunications equipment manufacturing businesses, and to offer video programming services. The major long distance carriers, meanwhile, focused their attention on wireless technologies and made plans to work with or acquire companies in the wireless market. This would enable them to provide long distance services to cellular users and possibly to develop a more economical local access network to reach their own subscribers. Internationally, the large service providers continued to make alliances and seek out partners in efforts to put together global telecommunications networks and offer the international equivalent of the advanced telecommunications services available in the U.S. domestic market. Digital technology is making rapid advances in wired and wireless communications and is lowering the cost of transmitting information. Hence, there are new ways to construct local networks and provide services in a local telephone market, a market that no longer appears to be a "natural monopoly." Conditions in the local market today resemble those in the long distance arena 20 years ago when AT&T first began to face limited competition from specialized communications carriers like MCI. In 1993, the long distance or interexchange carriers (IXCs) played a significant role in the local access market by teaming with firms in the wireless and cable TV business. IXCs are exploring alternative arrangements that would lower their cost of using the local network, an expense that exceeded $30 billion in 1993, or even allow them to provide such access themselves through business partnerships or acquisitions. The facilities based IXCs have advanced, nationwide, switched networks that can serve as a backbone for alternative local access networks, and they have the financial and human resources that can help the small, competitive access firms grow. U.S. interexchange carriers regard wireless, radio-based services as future vital parts to the long distance business and are looking for alliances as a means to achieve a nationwide seamless wireless communications network. In March 1993, Sprint, an IXC, acquired Centel, which owned local telephone systems in 7 states and cellular operations in 44 cellular communications markets. This gave Sprint a stake in the local services and cellular markets to complement its long distance operations. In August, AT&T announced its intention to acquire McCaw Cellular Communications for $12.6 billion, a merger that may lead to the establishment of a national cellular communications network. MCI has targeted personal communications services (PCS) and in July 1993 announced a plan to become the manager of a consortium that would provide a national PCS network (see further discussion later in this chapter). INTERNATIONAL PROFILE Traditionally, separate national networks have been connected internationally in accordance with service agreements between national telecommunications carriers. Several developments placed these long-standing arrangements for international telecommunications services under increased pressure in 1993. They include the emergence of new firms and service offerings, some of which provide alternatives to international voice service from foreign points, others which use private networks and bypass public switched network facilities; liberalization of data services in some countries; and the continued disparity between tariff rates for similar services in different countries and between tariff rates and settlement or accounting rates the carriers use to apportion international service revenues. Some large customers are looking for global accessibility and one-stop shopping for telecommunications services and facilities. Hence, there is a move toward integrated global networks through carrier partnerships in an attempt to form a seamless connection of networks and service providers. The degree of network digitalization is a key factor in making advanced telecommunications services available to the consumer market (Table 2). U.S. carriers continued to increase their business activities in international telecommunications markets in 1993. The seven Regional Bell Holding Companies (RBHCs) are pursuing such ventures as building and operating dual cable television and telephone networks (US West in the United Kingdom); providing, often through joint ventures, cellular telephone services (Pacific Telesis in Belgium and BellSouth in Germany, respectively), and making investments in foreign telecommunications carriers that provide voice and data services (Bell Atlantic and Ameritech in New Zealand, and Southwestern Bell in Mexico). AT&T maintains an active portfolio of overseas investments, including a 20 percent interest in Unitel (a Canadian long distance carrier), a 19.5 percent interest in the Ukrainian telephone company, and a minority stake in the GTE-led group investment in the Venezuelan telcom carrier. In order to improve its capabilities in international services, AT&T, together with KDD of Japan and Singapore Telecom, has formed an alliance called WorldSource that has attracted carriers from Australia, Canada, and Korea. The intent behind this partnership is to provide global voice and data services with common features and standards of performance. It will help customers avoid the need to deal with various national carriers for ordering, maintenance, and other customer service requirements. In 1993, Sprint also acquired access to a foreign telecommunications service market by making an alliance with a company based in that market. It agreed to invest $50 million to acquire 25 percent of Canada's largest reseller, Call-Net Enterprises. Call-Net will pay royalties for using Sprint's networking resources and marketing plans to offer the same type of services in Canada that Sprint offers in the United States. In addition, the two companies will jointly provide cross-border services, such as virtual private network services, to large users. MCI's new alliance with British Telecom is discussed below. Policy Developments The new Administration has focused its attention on the national telecommunications infrastructure, or the "information superhighway." Bills have been introduced in both houses of Congress that address this and other key telecommunications policy issues. Proposed Senate legislation, the Telecommunications and Infrastructure Act of 1993, contains provisions regarding competition in local telephone services and cable TV services, universal service, modifying the 1984 AT&T consent decree, and wireless communications and information services. In the House, the Administration is supporting the Telecommunications and Information Infrastructure and Public Broadcasting Facilities Assistance Act of 1993 that contains funding for infrastructure pilot projects. There is broad consensus that the Federal Government should not finance the construction of a national network. Rather, the Government is being urged to help promote competition in network access, advance interconnection and interoperability standards, see that customers will have access to new services provided over the digital infrastructure at reasonable rates, and support pilot projects for applications in education and health care. Under proposed legislation, the digital infrastructure would be extended to tap information resources at libraries, research centers, and government facilities. Congress will consider major telecommunications legislation in 1994 and face the task then of how it will resolve the contentious issues involved that concern so many large and powerful interests. There were signs in 1993 that some states will open up their local exchange and intra-LATA service markets to competition. California is considering a proposal to allow long distance carriers to compete with the local telephone company for intra-LATA traffic beyond the local (up to 16-mile) calling area. In return, the LECs could increase their rates for basic telephone service and lower their intra-LATA toll rates. Oregon recently passed a law permitting the state's public utility commission to allow competition within a local exchange that would be designated a "competitive zone." The law sets out a public interest standard under which the commission is to evaluate proposals from competitive access providers (CAPs) and others that wish to enter the market. Some local telephone companies are taking the initiative themselves and proposing restructuring and service plans designed to open up the local services market and free them from some existing regulatory constraints. Rochester Telephone Corp. has proposed an Open Market Plan under which it would divide its local exchange operations in New York into a regulated subsidiary that would offer basic network services available to all carriers on an unbundled and nondiscriminatory tariffed basis, and a retail unit that would resell the regulated subsidiary's services to end users. New York regulators are planning to review and rule on that proposal. Pacific Telesis has already adopted a divestiture strategy and is spinning off its nonregulated wireless subsidiaries into a separate company to try to escape the restrictions of the Consent Decree under which AT&T was separated from its Bell operating companies in 1984. Ameritech Corp. announced an ambitious restructuring plan in March 1993 under which it would give up its local service monopoly franchise in exchange for the right to enter the long distance and cable TV markets. This plan must be reviewed by U.S. District Judge Harold Greene, who rules on requests to lift the AT&T Consent Decree restriction on BOC participation in the inter-LATA services market, as well as by the FCC. Ameritech's restructuring of its business units will proceed whether or not it is allowed into the long distance market. Regulators are beginning to allow market forces to determine prices and services in what has been a highly regulated local services business. The FCC took further steps during 1993 to help introduce competition in the local exchange market. It required that the larger LECs offer expanded interconnection to any interested party by providing space in their central offices for competitors to collocate facilities for providing interstate special access and switched transport services. Although these services represent only a small part of the total local exchange market, that limited area of competition in the local services market should expand significantly in the next few years unless blocked by legal action or judicial review. In 1993, the Commerce Department's National Telecommunications and Information Administration (NTIA) initiated a comprehensive study to examine the technological, regulatory, and policy factors affecting U.S. international telecommunications services. NTIA sought public comment on a number of telecommunications issues, such as the present regulatory approach of the FCC; the interaction between U.S. regulation and U.S. trade and competitiveness goals; the need for greater coordination among U.S. agencies handling regulatory and trade policy matters; and the competitive implications for U.S. telecommunications carriers in a situation where the U.S. market is generally open to foreign firms, but most foreign markets do not offer fair and comparable access to U.S. suppliers. NTIA's final report will present recommendations that should indicate the directions of the new Administration's policy on important international telecommunications questions. Local Exchange Service Since the divestiture of AT&T in 1984 from its 22 local BOCs, these local telephone companies have emerged as financially strong competitors (Table 3). The BOCs have won a number of important regulatory freedoms in the past few years that will enable them to enter new markets as aggressive competitors to AT&T, bringing with them inherent cost efficiencies due to their ownership of underlying local transmission and switching facilities. Present law prohibits telcos from providing video programming services to subscribers within their local service areas except in certain rural areas. The FCC has allowed LECs to carry programs over their networks, and they can offer video dial tone service to broadcasters and cable programmers. However, they cannot create or own the programs they carry. Video dial tone allows customers access to entertainment and information services on demand. Under a dial up arrangement, LECs would make all program services available on a non-discriminatory basis, and programmers would pay fees to LECs to carry the programs. Customers would pay service charges to receive all TV programming, including the major broadcast and cable networks and independent and public broadcasting services. Premium and data channels would be priced separately. Up to 400 channels could be available through a broadband video dial tone service. In most states, local exchange competition is barred by statute; even if there is no legal prohibition, state commissions have regarded local telephone franchises as de facto monopolies. However, there are signs that competition is making its way into this last bastion of monopoly in the telephone network. The development and implementation of radio-based technologies (wireless services) may enable new companies to offer competitive services in the local exchange market. Cellular and PCS service providers may soon be in a position to capture a significant share of the local access market for traditional voice and low-rate data transmission. In a number of states, alternative access carriers (AACs) or competitive access providers have built local (usually fiber) networks that link high-volume business users directly with the IXC switch, bypassing the LEC's network. The FCC has ruled that CAPs can interconnect with the facilities of the franchised local exchange carrier and transport calls from the LEC's local switch to the IXC switch, about a $4 billion market nationwide. The CAPs have been providing intrastate special access services, and in a few states have been allowed to offer switched access and local exchange services too. At present the CAPs have a noticeable market presence in the cities of Boston, Chicago, Los Angeles, New York, and San Francisco, and collectively account for about $200 million in revenues. One of the leading CAPs, Metropolitan Fiber Systems, has installed local networks totaling more than 1,000 route miles and can serve business customers in about 1,350 buildings in the 14 metro areas it serves. Allowing competition in the local exchange market could benefit consumers, although there is concern about whether potential LEC revenue loss from existing services would force up rates for local telephone service. Competition in the intra-LATA toll market, worth about $14 billion in 1993, could lead to a decrease in prices. Alternative means of access to the local customer could reduce long distance carrier costs. Finally, prices to the consumer could fall if the BOCs are allowed to enter the cable TV business. Cable TV companies are likely to become another group of competitors the local telephone companies will face in the near future. Cable companies already have connections with 60 percent of U.S. households, and cable facilities extend into areas where another 30 percent of the households are located. New digital and fiber optic technologies will allow them to provide telephone services over their networks, something cable companies already are doing in Britain. State or local governments issue franchises to cable operators, and in most areas of the country, cable TV services are offered under a legal or de facto monopoly. Cable companies are not legally prohibited from offering telecommunications services, although they would probably need to receive approval from the state public utility commissions to provide any intrastate telecommunications services. Deployment of broadband technology has become a critical issue for the BOCs. With such a platform in place, the telephone companies would be in a position to offer video services and add new revenue sources. Although high quality digital telecommunications networks already criss-cross the United States, it often is the "last mile", the connection from a local switching office to a customer's residence, that forms the barrier to providing end-to-end digital connectivity. Where Integrated Services Digital Network (ISDN) facilities have been implemented (Table 4), software defined digital circuits that utilize existing analog copper local loops are available to provide new digital services. However, there are bandwidth constraints that would preclude some future services from being offered over the ISDN network under current implementation. Fiber optic cable provides ample bandwidth to carry video and interactive services, but running fiber optic cable to the home is an expensive proposition. The local exchange companies argue that the only way installing fiber to the home would be economically feasible for them is if they could enter new lines of business that would allow them to provide new video and information services over that fiber link, for example, cable television. However, a telephone company can purchase and operate cable systems outside its franchise area, and a telco that does this eventually might offer local phone service over its cable system in competition with the established telco of that area. As a result of new and potentially dramatic changes in the local exchange market, the RBHCs collectively are calling for an end to the restrictions that prohibit them from manufacturing equipment and from providing long distance and cable TV services. Their opponents, however, claim it is premature to lift the restrictions and say this should be done only after the local service markets are truly competitive and the BOC local "bottleneck" no longer exists. Five RBHCs have asked for an FCC rule making proceeding that would identify safeguards under which they could compete in the inter-LATA services market. At the conclusion of such a rule making, the RBHCs would ask that the AT&T consent decree restriction keeping them out of the long distance market be lifted. It is doubtful that the RBHCs will be allowed to compete in the inter-LATA telecommunications markets any time soon, although the odds that they could do so by 1998 are more favorable. Each year, the RBHCs will continue to face increasing competitive pressures in the local exchange. Wireless service firms will offer a practical alternative to the telco local copper wire for reaching the residential and small business customer. In the larger metropolitan areas, CAPs will continue to attract large businesses that seek a more economical way to connect to their long distance carrier. These developments threaten a portion of the $30 billion access charge revenue stream that the LECs have depended upon as a predictable source of income since the 1984 Divestiture. And cable companies will begin to offer interactive home services and in some cases residential phone service to compete with the local telco. The RBHCs will continue to pursue international opportunities that will strengthen their capabilities in the domestic market and will pursue business opportunities outside the boundaries of their local service area. They will attempt to develop a full range of video and information services. Efforts to resolve long-standing telecommunications policy debates and define a national policy in light of relentless structural and technological change in the industry will continue within the Administration, on Capitol Hill, and, inevitably, in the courts as well. Long Distance Service In 1993, U.S. long distance carriers generated domestic toll revenues of nearly $55 billion, an amount that should grow by 6.5 percent in 1994 to almost $58 billion (Table 5). Ten years ago, when divestiture took place, AT&T's toll revenues of $35 billion accounted for about 90 percent of all long distance revenues even though the FCC had introduced limited competition years earlier. In 1993, AT&T's share of total inter-LATA toll revenues had fallen to nearly 60 percent, according to the FCC. About 480 companies, plus a number of others that provide operator services, compete in the U.S. long distance market. The top three firms--AT&T, MCI and Sprint--have about an 86 percent combined share of the market; the other 14 percent is shared by medium and small sized carriers. MCI's 1993 revenues were about $11.8 billion, a 17 percent market share, and Sprint's long distance revenues were about $6.1 billion, a 9 percent market share. Some of the larger second tier companies are LDDS Communications, Cable & Wireless Communications (a wholly owned subsidiary of its British parent), Williams Telecommunications Group (WilTel), and Allnet, each with revenues of $800 million of less. Industry revenue growth has not kept up with traffic growth, but revenues still rose an average of about 5 percent in 1993, up 1 percent from the previous year. Prospects for 1994 suggest a 7 to 8 percent rate of revenue growth, helped in part by $200 million worth of reductions in access charge payments. The revenues of the long distance resellers grew about 20 percent in 1993 to reach almost $6 billion. Within the reseller market, special niches recently have been created by the aggregators and switchless resellers. Aggregators sign customers and pool them under a volume discount price plan offered by a large facilities-based carrier. This allows the customers (usually small business users) higher discounts than they could obtain on their own. However, the aggregator does not maintain a supplier-customer relationship with the end user. Customers receive their bill from the major carrier and pay the aggregator a monthly fee equal to a percentage of the discount. Switchless resellers are full-service companies that provide network services and support functions. Switchless resellers buy long distance services from major carriers and offer them to their customers at discounted rates. There are more than 300 switchless resellers that accounted for more than $1 billion in revenues in 1993, and provided services to 100,000 customers. The fierce competitive wars that have characterized the long distance industry reached the $7 billion toll-free 800 service market on May 1, 1993. That date heralded the arrival of 800-number portability, which meant that holders of 800 numbers could switch service providers without changing their toll-free numbers. A nationwide 800-service data based access system was implemented that allowed users to select any available 800 number and use it with any carrier. Users also now have access to that 800-service database, so they can specify how their 800-number calls are to be routed, for example, by carrier, time of day, day of the week, originating location, or on a percentage of allocation of 800 calls. Competition heated up in the 800-calling market as thousands of customers reportedly decided to switch carriers and sign service contracts with a different IXC. New technology has provided advanced switching and call-processing capabilities so that one 800-service carrier now offers its subscribers access to special calling features, such as caller recognition routing and next available agent routing. During the next few years, long distance carriers will become increasingly involved in the local loop through wireless technology. Sprint already has cellular operations. MCI is hoping to obtain a national personal communications services license so that it can tie in with local PCS firms. AT&T has its acquisition of McCaw. As CAPs expand, they also should attract more business from the IXCs. AT&T is their biggest potential customer. AT&T could reduce its access costs substantially by moving its traffic away from the LECs to the unregulated CAPs. The other IXCs also would save money by finding alternative means for originating and terminating their calls in the local network. The major long distance carriers will continue to focus on the global marketplace, in part because of prospects for rapid growth in telecommunications in many foreign markets. Alliances and partnerships among firms of different nations will enable telecommunications companies to enter new markets as well as protect their position in home markets. The industry will experience increasing competition in all aspects of the business. Development of new technologies will translate into new service features and applications. International resale will continue as a growth area, although dependent on the degree to which liberalization spreads among the world's major telecommunications markets. Value-Added Network and Information Services Value-added services include a variety of specialized offerings that can be accessed over the regular telephone network or via special carrier networks. Although there is no industry agreement on definitions for value-added network services (VANS), several service categories are generally recognized. Traditional value-added network services include packet transmission and protocol conversion. Information services include on-line databases and electronic yellow pages. There are messaging and conferencing services such as voice messaging, electronic mail, specialized fax services, and audioconferencing. Finally, there are specialized data services such as frame relay, new services being introduced over ISDN, and transaction processing services such as electronic data interchange (EDI). Some VAN providers specialize in a particular service, although large providers find it profitable to offer VANS as add-ons to existing networks. Consistent, verifiable figures for the value-added services market are difficult to compile because VANS are unregulated, and companies generally do not report their revenues for individual VANS offered. AT&T estimates that the value of the 1992 enhanced services U.S. market was about $3 billion, comprising one-fourth of the total $12 billion worldwide market. This is comparable with the Northern Business Information estimate that puts 1993 U.S. VAN service revenues at $3.4 billion. The top six firms, including BT Tymnet, SprintNet, INFONET, GE Information Services, IBM Information Network, and CompuServe, accounted for nearly one-half the revenues in the U.S. market. The growth rate of data services continues to exceed that of voice services, and aggregate revenues for VAN services should increase from 13 to 15 percent yearly through 1998, a somewhat slower rate than the nearly 20 percent annual growth of the past few years. U.S. firms have led in developing VAN services, but the financial and commercial success of those services will continue to present a mixed picture. For example, despite highly-touted pilot projects, videotext services generally have not yet been a financial success in the U.S. market. Since the RBHCs are now allowed to offer information services, the U.S. public can anticipate telephone companies introducing a number of new information services during the next five years. Electronic mail services continue to prosper. The number of public electronic mailboxes reached nearly 4.8 million at the beginning of 1993, while local area network (LAN) electronic mailboxes exceeded 8.5 million. Switched data services, such as frame relay, switched multimegabit data service, and integrated ISDN services, that are still relatively new to market, will demonstrate impressive revenue growth rates. Enhanced fax services, transactional-related services such as EDI (whose usage internationally will markedly increase) and public data services should also exceed the 15 percent average annual growth rate for VAN services. There is no reliable number for facsimile (fax) transmission revenues because faxes appear on the network as regular telephone calls. The impressive size of this market, however, is suggested by the Japanese estimate that more than 40 percent of all international calls between the United States and Japan are fax messages. Although the domestic on-line database market is a more mature market, increased access to U.S.-based databases by overseas customers will contribute to modest revenue growth. During the next few years, services that provide interfaces between LANS and computer systems to enable them to communicate should become a significant sector of the VANS market. With the Administration's active support for developing the nation's information superhighway, companies have developed an intense interest in the technology and applications that ultimately could deliver telecommunications and computer services (including voice, data and video services) as well as pay-per-view movies, interactive shopping, and an enormous number of TV channels into the American home. The multimedia industry is being created from the convergence of communications technology, computers, consumer electronics, and entertainment. In 1993, telecommunications companies began to explore business opportunities that this potentially lucrative multimedia industry could generate. AT&T has tested interactive multimedia devices and services and plans to conduct field trials of interactive services in 1994 with Viacom, a programming and cable firm. AT&T also has acquired a 20 percent stake in the Sierra Network, an on-line computer service that offers interactive games and entertainment. Bell Laboratories has been conducting research on interactive multimedia systems. Companies, including cable and telephone firms, are forming multinational alliances to explore this market. Initial trials indicate that for interactive services to gain customer acceptance, they must be simple to operate and presented as a form of TV entertainment and not be offered via personal computers. The interactive TV would be accessed via telephone lines. It is not yet clear what types of products or programming will sell, but current best prospects include game shows in which subscribers compete with each other, E-mail, educational programs for youngsters, and sports games. Local telephone companies are looking to invest in or work with cable TV companies in an effort to develop advanced interactive services. Southwestern Bell has bought two cable systems in the Washington, DC metropolitan area; this gives the company a platform outside its local operating territory to develop communications and video services that may one day compete with those offered by the local telephone company. Time Warner and US West have agreed to collaborate on a project to extend the information superhighway into the homes of Time Warner's 7 million cable TV subscribers, a project that will take 5 years and cost $5 billion to complete; it will be able to support a range of new data and video services. When completed, the digital superhighway could carry phone calls, pay-per-view movies, home shopping and financial services, educational offerings, and other electronic services, a total market estimated currently at $400 billion. Potential service suppliers have spurred a demand for production of programming. Still, with little hard data available on what services customers really want and how much they will pay for them, the commercial viability of services now in the planning and testing stages is uncertain. However, pilot projects and field trials will continue during the next few years, because the financial rewards will be great for those companies that successfully package and market information services to the consumer market. INTERNATIONAL COMPETITIVENESS The strengths of the U.S. telecommunications services industry place it in an excellent position to compete successfully in overseas markets. On one rough measure of efficiency--that of company revenue per employee--U.S. carriers compare very favorably to their foreign counterparts (Table 6). The knowledge, skills, and advanced services possessed by U.S. telecommunications firms are assets that can help boost U.S. exports to overseas markets as those telecommunications sectors open up to foreign investment and participation. There now is wide recognition in the developing world that a modern telecommunications infrastructure and the availability of high quality voice and data services are essential ingredients for economic growth and social well-being. In the last few years, a global telecommunications market has developed, in part due to the increased importance of international trade and investment in the world economy, and spurred by the liberalization of telecommunications sectors in many countries. This market is served by large national firms like AT&T, British Telecom (BT), and KDD (Japan) that offer global services through agreements, consortia and alliances with other telecommunications firms. The formation of a "multilateral initiative group" by 32 telecommunications carriers in Europe, Asia/Pacific and South America, to take advantage of the growing market for transcontinental circuit connections, is an example of how international carriers now cooperate in order to operate in an increasingly competitive international market. A decade ago, international services were provided by a cartel of foreign Posts, Telegraph and Telephone administration (PTT) monopolies. Now, multiple carriers are utilizing a variety of facilities (transoceanic fiber cables, satellite circuits, private lines, resold switched services, ingenious software programs, etc.) to compete in a more market-oriented environment. International telecommunications is in a state of flux, characterized by the development of new technologies and new services, new business alliances, and legal and regulatory changes affecting the structure of, and rules for, participation in telecommunications markets. Telecommunications service carriers have responded by creating global switched voice networks that may resell the switched services and international private lines of other telecommunications firms. This allows the carrier to gain virtual end-to-end control over switched services for its multinational customers. This was British Telecom's strategy until its recent deal with MCI. Some of the largest corporations ask telecommunications carriers to manage their global telecommunications networks. Such one-stop shopping or outsourcing services are provided through AT&T's Accumaster Management Services, MCI's Global Communications Service, and BT Syncordia's Managed Private Network Service. Through outsourcing, large users may obtain a number of services: a single point of contact for service ordering; installation support and maintenance for circuits and equipment; integrated billing; and management of a data communications network. Outsourcing industry revenues are estimated at $2 billion a year with a growth rate of 20 percent annually. High prices for calling the United States from abroad have provided opportunities for U.S. telecommunications firms to offer international discounted telephone services. The firms resell U.S. carriers' international 800 services or international switched voice or private line services and operate only from foreign soil. In some cases, users also can access enhanced services such as voice mail and fax broadcasting on a global basis and receive multi-currency billing and worldwide system access through a calling card. A "call back" arrangement allows a subscriber abroad to dial a particular U.S. telephone number, let it ring, and then hang up. A computer attached to the line calls the subscriber back at his number abroad and provides a dial tone. The subscriber then can dial any number in the United States or worldwide and be billed at U.S. rates (plus whatever service charge the provider assesses). These arrangements allow the caller to bypass the foreign carrier's international service and reportedly realize savings of 50 to 75 percent. Although discount calling providers so far have captured only a tiny share of the U.S. inward bound traffic, they have introduced a competitive alternative to the foreign monopoly carrier for making international calls. According to a study by TeleChoice, about 20 U.S. firms providing discounted international services expect to earn about $120 million in 1993, all of it for calls and services originating outside the United States. Revenues for these firms are expected to more than double to $280 million by 1996. TeleChoice anticipates the firms' minutes of traffic will increase even more dramatically, from about 58 million minutes in 1993 to 372 million minutes in 1996. In some cases, foreign administrations have tried to deny or block discount calling services and have threatened legal action. AT&T has opposed the filings of three call-back service providers that sought to resell switched services to multiple foreign points on the grounds that call-back services involved a deliberate misuse of the carrier's facilities with the intention to avoid payment for the incoming, unanswered call. The FCC has yet to rule on the filings. Some foreign telecommunications service markets have been opened to competition, but where new firms have been allowed to compete, they generally have been confined to enhanced data and mobile communications services. Even in countries where legal or regulatory changes have been made to permit some competition in telecommunications services, such as in the U.K., the former monopoly provider has retained its dominant market position. Regulations regarding charges for, and terms of access to, the monopoly carrier's network either have not been implemented or have not been sufficient to promote effective competition. Even where foreign resellers are allowed to provide switched voice services abroad, there usually are legal or market restrictions on the ability of the resellers to acquire domestic facilities or offer their services internationally. About 183 carriers offer international switched or private line services from the United States. Nineteen are facilities-based carriers, 164 are resellers, including 5 foreign-owned carriers and resellers. They can serve all countries through reselling the facilities-based services of AT&T and other carriers, and need no service agreements with foreign carriers. Presently, the U.S. international telephone market is dominated by three firms: AT&T, accounting for about 70 percent of revenues, MCI with about 20 percent, and Sprint at 8 percent. The continuing growth of U.S. billed minutes for international telephone traffic demonstrates the popularity and affordability of the service in both the residential and business markets. The average annual growth rate of two-way U.S. international traffic during the past 9 years has been about 18 percent, and a 20 percent increase for U.S. outbound calls is expected in 1994. On traffic to and from the United States, U.S. carriers received net revenues of about $.41 per minute on international calls in 1991. There is no shortage of facilities to handle growing international traffic; currently installed or planned international submarine cable facilities can accommodate a tenfold increase in traffic demand. An increasingly popular means of international calling makes use of carrier-issued travel cards. When abroad, the customer uses it to call an international 800 number and access a U.S. carrier. In the "home beyond" service, the foreign originated call is first transmitted to this country by the U.S. carrier, then routed through the U.S. to its destination in a third country. In effect, the U.S. service provider offers its customers a worldwide calling capability from virtually any location outside the U.S. U.S. carrier country direct calls (including reverse-billed calling services and 1-800 international service) accounted for 7.1 percent of total U.S. international billed minutes in 1991. Such a service provides several benefits to the international traveler: connection to U.S. operators, uniform dialing procedure, billing to a credit card or home phone number, and no need for local coins. U.S. carriers now market their travel cards to residents in foreign countries, and many foreign carriers now offer similar travel cards for international calling. Forty foreign carriers now offer their country direct services from the United States. Payments for jointly-handled international traffic are based on a negotiated settlement rate agreed to by the international carriers. These accounting or settlement rates vary by country and may also vary by type of service, time of day, or even city of origin. Settlement rates traditionally were set far in excess of actual costs. U.S. firms and the FCC, with some success, have pressed foreign telecommunications carriers to reduce the settlement rates, but many PTTs are reluctant to do so, because their earnings from international traffic subsidize domestic rates or provide the government money for telecommunications infrastructure development. Although the average accounting rates between U.S. and foreign carriers have been reduced by an average of 3.4 percent annually during the last few years, they still remain well above costs. Since settlements represent about two thirds of the charge for an international call, reducing accounting rates could result in lower calling rates for the consumer, here and abroad. Above-cost accounting rates also reduce the net revenues of U.S. carriers, and in effect provide subsidies to foreign carriers. But lack of competition abroad allows foreign carriers to maintain both high settlement rates and high tariff rates, the latter serving to depress the demand for international calling. Since there are more outgoing calls from the U.S. to most countries than incoming calls, U.S. carriers make net settlement payments to most foreign carriers, an amount that reached $3.3 billion in 1991 and is expected to exceed $4 billion in 1993. More than half the net settlement payments are made to 10 countries, with Mexico, Germany, and the Philippines topping the list in 1991. About 70 percent of the settlement outpayments are made to carriers in developing countries, and U.S. traffic imbalances tend to be greater with those nations. Telecom service providers are following several strategies as they seek to strengthen their position in the increasingly competitive international services market. However, legal prohibitions, regulatory delay and policy uncertainty in many countries continue to complicate the business environment. The stakes are particularly high for U.S. and British carriers, whose markets have become among the most open and competitive in the world. The size of the U.S. telecommunications market--U.S. long distance and international traffic accounts for about 20 percent of the world's total--the pro-competitive policies that have been adopted the past 10 years, and the presence of more than 40 percent of the world's multinational companies in the United States, make this country a particularly attractive target for foreign service providers. Meanwhile, debate continues in the United States over the issue of whether the degree of market access in a foreign firm's home market should be considered in allowing that firm access to the U.S. telecommunications services market. Applications by BT to enter the U.S. market and by AT&T to provide services in the United Kingdom in 1993 brought such issues to the forefront of the telecommunications regulatory and trade policy debate. It began in early 1992, when Sprint applied for licenses to build its own fiber optic network in the United Kingdom, with the intention of using that network to offer domestic and international services. Cable & Wireless applied in the United States to acquire facilities for direct switched voice services to the United Kingdom and Hong Kong, markets where the company already provides services. Neither application has yet been decided. In March 1993, BT sought direct access to the U.S. telecommunications services market in an effort to provide global end-to-end private network services for its multinational customers. BT asked the FCC for authorization to resell private line and switched services of U.S. carriers to international points. Shortly thereafter, AT&T applied to British authorities for a license to provide communications services in the United Kingdom and between the U.K. and the United States, in effect asking for the same access to the U.K. market that BT seeks in the U.S. market. In late May, BT unexpectedly announced plans to buy a 20 percent stake in MCI Communications and establish a joint venture with MCI to market products and services around the world. Under the plan, MCI would have marketing responsibility for North America, Latin America, and the Caribbean, while BT would cover the rest of the world. For BT, teaming with MCI offers instant access to the U.S. market and may render moot its application before the FCC. Besides joining forces with the world's third largest telecommunications company, MCI will receive $4.3 billion from the BT purchase. It is likely that MCI will use much of the money to secure a presence in the U.S. local exchange market by investing in cable TV companies, multimedia projects, and personal communications services and firms. The growing market for international value-added network services (IVANS) has attracted a number of players besides the national telecommunications carriers. Other IVANS providers include system integrators, computer system vendors, and multinational firms with their own global networks that utilize excess capacity on their networks to offer value-added services on a commercial basis to others outside the company. Markets for IVANS are attracting increasing attention for several reasons. Unlike basic voice and data telecommunications services that are still reserved for the dominant telecommunications operator in most countries, foreign firms are allowed to offer IVANS, albeit often under less than ideal conditions, in most of the major world telecommunications markets. In an effort to clarify regulatory treatment of, and to encourage trade in, value-added services, the U.S. Government continues to seek IVANS agreements with countries that have liberalized arrangements under which value-added services may be offered. In September 1992, an IVANS agreement was signed with Germany. During 1993, the U.S. Government sought answers to and exchanged information on national telecommunications regulatory practices with several other countries in evaluating the feasibility of concluding additional IVANS agreements. Although a European Community (EC) directive authorized competition in data services in 1993, U.S. companies continued to monitor the extent to which EC member states actually are opening up their markets to foreign firms, a process that requires enacting national laws to implement the EC directives on telecommunications services, open network provision, and telecommunications terminal equipment. The EC Commission decided in 1993 to defer the start of full liberalization of domestic and international telephone service until 1998; it is possible that in several member states it will be even later. Delaying the introduction of competition will also delay the reduction of prices and the availability of new services that would benefit U.S. IVANS providers. The Asian market holds promise of major growth in value-added services, with one estimate placing regional VAN revenues at $11 billion by 1996. Liberalization of IVANS regulations and market access is taking hold in some Asia/Pacific countries. The efforts of the Asian Pacific Economic Committee (APEC), of which the United States is a member, may contribute to liberalizing access to IVANS markets, especially if the APEC countries are able to reach agreement on common principles to create a regional framework for facilitating trade in IVANS. There still are significant barriers in other countries that must be removed before a competitive telecommunications services and IVANS market can emerge. Examples include restrictions on the resale of leased circuit capacity, the connection of leased lines to the public network, and on the provision of data services. Restrictions on foreign investment and licensing provisions also can discourage entry by U.S. firms. Nor have all countries yet adopted competitive safeguards to govern the dominant telecommunications operator's participation in the information services market. Until progress is made on these issues, U.S. telecommunications service firms will continue to confront obstacles in entering or competing effectively in many international telecommunications service markets. Significant developments in the international telecommunications service markets can be expected during the next five years. There will be wider acceptance of international simple resale (ISR), under which private line circuits are connected to the public switched network at both ends. This shift away from the resale of private lines to ISR will affect how a major portion of international services are provided. Beyond this, facilities-based competition, permitting domestic and foreign companies to build networks to compete with the established (monopoly) supplier, will become a reality in several countries. Finally, 1-800 international and detailed billing services, made possible by advances in software and intelligent switching, will spread to new markets. Negotiations on trade in telecommunications services have been under way in two areas--the proposed North American Free Trade Agreement (NAFTA), and the General Agreement on Tariffs and Trade (GATT). Under NAFTA, the provision of enhanced telecommunications services in Mexico will be liberalized. As the Mexican economy expands and the modernization of the country's telecommunications network continues, a growing market for value-added services in Mexico will emerge. Since U.S. service providers have expertise in software development and customer support services, they will be able to take advantage of emerging opportunities in Mexico's information services market. NAFTA will have less of an effect on U.S.-Canadian enhanced services trade, primarily because the U.S.-Canada Free Trade Agreement already has liberalized that sector. NAFTA will guarantee U.S. telecommunications companies access to and use of the Mexican public telecommunications network for their own international communications networks. U.S. companies will be able to operate their corporate communications networks across the border without a local partner, an improvement over previous requirements. Other NAFTA provisions require that telecommunications service tariffs reflect the economic cost of providing the service and establish safeguards that constrain anti-competitive behavior by monopoly telephone companies. Although NAFTA does not address the provision of basic telephone service, increased U.S. investment and participation in Mexico's and Canada's economies are certain to stimulate international communications to both countries. U.S. customers already make more telephone calls to Canada per year than to any other country, and Mexico ranks second. Telecom services also have been addressed in the Uruguay Round of the GATT. Efforts toward global regulatory liberalization in teleom through GATT negotiations have yet to produce consensus for liberalization of telecommunications service markets according to a set schedule. But agreement has been reached on a telecommunications annex that would form an intrinsic part of a Services Framework Agreement. The annex, however, covers only value-added services, and for liberalization to occur, member states must make specific commitments in their market access schedules. The U.S. Government hopes to conclude the GATT talks by the end of 1993. In July of 1993, a group of GATT countries met to consider negotiating market access for basic telecommunications services. In most countries, basic telecommunications services are still provided by a government-owned monopoly. Although the United States and a few other countries allow competition in at least some basic telecommunications services, U.S. firms generally are not permitted to compete in offering basic services abroad. Thus, the United States has supported a proposal to begin talks on liberalizing basic telecommunications services during the balance of the Uruguay Round and to continue, for a period of not more than two years, after the Round concludes. While the talks are open to all GATT members, those nations representing the major telecommunications markets, where some telecommunications liberalization already has occurred, are most likely to participate. If the GATT is successfully concluded--and initial discussions on basic telecommunications services show promise--1994 should see a multilateral effort to liberalize basic telecommunications services. Outlook for 1994 Revenues of the domestic telecommunications services industry are expected to increase about 7 percent in 1994. Long distance revenue will grow about 6.5 percent, and international service revenues should rise nearly 20 percent higher than 1993 levels. Individual market segments such as international services can expand much faster than the industry as a whole. Revenues for value-added network and information services should increase by 15 percent, spurred by growth of newer data service offerings for businesses and continued strength in the voice messaging and electronic mail markets. Long-Term Prospects Total revenues from local exchange service will reach $85 billion in 1994, and are forecast to grow to $95.5 billion by 1998. The market for local telephone service will grow steadily at a rate of about 3 percent annually for the next several years, but market structure will change as competition increases. The Local Exchange Carriers (LECs) obtained nearly 90 percent of their total $96 billion revenues from regulated telephone services, including access charge payments. The LECs received almost $43 billion for providing local telephone service in 1993 and $14 billion for toll services. Network access charges brought in an additional $30 billion. Since conventional telephone service promises only limited future growth, the Regional Bell Holding Companies and other large LECs are looking for strategic opportunities in such areas as the cellular telephone, paging, electronic publishing, and cable TV businesses. U.S. long distance carriers are expected to generate toll revenues of about $73 billion by 1998 compared with about $58 billion in 1994. The number of E-mail users should increase by 40 percent over the next five years. CELLULAR AND RADIO SERVICES The 1990's have been characterized by record-breaking growth in most wireless service segments, including cellular, paging and specialized mobile radio. U.S. subscribers for all three services are estimated at more than 28 million in 1992, generating more than $10 billion in revenue. This thriving market, which is considered to have enormous growth potential through the year 2000 and beyond, was given momentum in 1993 by a series of legislative and regulatory developments encouraging emerging wireless technologies. Cellular and paging are the two largest segments of the present day wireless services market. In 1993, the U.S. cellular industry maintained its impressive growth record, reporting 13 million U.S. cellular subscribers at the end of June and $5 billion in revenue during the first six months of the year. By yearend, nearly 15 million subscribers with annual service revenues of more than $11 billion were expected, representing increases of 36 and 39 percent, respectively, compared with yearend 1992. Cellular Largely driven by declining equipment costs, the cellular industry has begun to attract users from the consumer market at a higher rate than business users. Although this trend is bringing down average revenues per subscriber (about $65 per month in 1992), industry revenues should continue to increase as higher capacity digital networks are implemented and new service offerings such as messaging become available during the next few years. GTE President Clinton addresses group at wireless communications demonstration on White House lawn, saying the industry will be important to nation's economic growth in coming years. Solar-powered cellular telephone call box is in background. Cellular subscriber growth is expected to climb steeply to nearly 20 million users in 1994. A consortium of cellular operators, in conjunction with IBM, has developed an open protocol for wireless data communications, dubbed Cellular Digital Packet Data (CDPD). CDPD allows data to be sent over cellular voice channels by dividing the data into packets that are transmitted when a voice channel is vacant between conversations or during silent periods. The CDPD standard establishes the technical parameters for building the network, such as external interfaces and internal protocols; Version 1.0 was released in August 1993. This represents the first time a specification has been jointly developed by industry before actual deployment of the technology. Potential uses of the technology include: transaction-oriented services, such as credit card verification, fleet management, inventory control, and emergency messaging; interactive services such as dial-up data and remote LANs; and multicast services providing access to on-line and subscription information sources and private bulletin boards. Cellular operators, including McCaw Cellular Communications, were beginning to implement CDPD in the second half of 1993, with broad coverage expected by late 1994. CDPD, which has only a small incremental cost for installation, holds substantial revenue potential for cellular carriers. In July 1993, the Cellular Telecommunications Industry Association (CTIA) announced the selection of Independent Telecommunications Network, Inc. (ITN) of Missouri to create a national backbone signalling network by the end of the year. ITN is using its existing Signalling System 7 (SS7) network to provide a national network to cellular operators. This development will put the industry much closer to its goal of offering seamless national roaming, eliminating the need for roaming agreements between operators and special access codes, as well as additional charges for subscribers. In the largest merger in telecommunications history, AT&T agreed to pay $12.6 billion in an all-stock transaction to acquire McCaw Cellular Communications in August 1993. This was a dramatic change from the November 1992 plan to buy only one-third of McCaw, the nation's largest cellular carrier. Pending approval by the Department of Justice, the FCC and certain state regulators, the merger is due to be completed by mid-1994. Under the plan, McCaw can market its services under the AT&T brand name, and the two companies are expected to roll out an array of new service offerings, also under the AT&T name. Not surprisingly, the proposed merger has alarmed competitors, particularly the regional Bell companies, who anticipate that AT&T will use its new wireless offerings to break into their local market. In the worst case scenario for the Bell companies, AT&T could reach its customers without paying the local access charges that have been so important to the Bell companies. Moreover, a new, unified rival with deep pockets and broad geographic coverage like the AT&T/McCaw combine is in a virtually unmatched position to introduce advanced wireless services. For example, although six of the seven regional Bell companies joined with GTE and eight other companies to form MobiLink, a cellular consortium covering 80 percent of the U.S. population and marketing under a common brand name, MobiLink is at a serious disadvantage in comparison with a merged AT&T/McCaw. Continuing legal restrictions on Bell company provision of long distance services will make it more difficult and costly for MobiLink to roll out the types of new services AT&T/McCaw are expected to introduce. In addition, MobiLink members remain divided over which digital cellular standard to adopt. In March 1993, Sprint's $4.6 billion merger with Centel Cellular was officially complete when regulatory commissions in three states and the FCC gave their approval. Now known as Sprint Cellular, the merger gives long distance carrier Sprint entry into the cellular arena and adds a new dimension to Sprint's telecommunications service offerings. The combined company is the only company engaged in local, long distance and cellular telephony. The trend toward consolidation, especially among large industry players, is expected to continue, reflecting demonstrated economies of scale and demand for wide area systems. But not in all cases. In an effort to eliminate legal and regulatory constraints, Pacific Telesis planned to place its wireless operations under an independent company, pending regulatory approval. If the spinoff is completed, Pacific Telesis companies would be freer to bid on PCS licenses. Paging The paging industry has also seen remarkable growth during the last few years. Despite being one of the oldest wireless telecommunications technologies, paging continues to see record growth in both subscribers and revenues, driven by lower costs of both service and subscriber equipment, as well as the increasing availability of advanced services. At the end of 1992, there were 14 million paging subscribers in the United States; that number was expected to reach 17 million at the end of 1993. Revenues were $2.3 billion in 1992, up 21 percent over 1991. A number of developments since 1992 have interesting implications for the future structure and growth of the industry. The most significant trend for the future of the industry is the increasing number of non-business users. The mass consumer market is a new one for paging, and carriers will pursue it aggressively through retail marketing and special promotions. Another recent phenomenon is the use of paging by cellular subscribers as a means of screening calls. Because it is much less expensive to receive a page than an incoming cellular call, cellular users find it more economical to give out their pager number and return only the most urgent cellular calls. The market research firm EMCI estimates that 20 percent of all cellular subscribers employ paging in this manner. Two other important trends have been consolidation as smaller companies are bought by larger carriers, and increased competition as new carriers enter the markets. Despite lower monthly revenues per pager, reflecting cost declines and more heated price competition, predictions are that industry revenues will continue their upward trend of about 20 percent annual growth, with 1993 revenues reaching nearly $3 billion. This will be due to increased capacity and the introduction of new services, the latter including national and international paging, two-way messaging and data services. Because carriers will charge extra for these future services, revenues per pager should turn upwards. Presently, 98 percent of paging subscribers have local or regional service only, and 95 percent use numeric receivers. Paging is well positioned to capture part of the potentially huge wireless data market, especially with the increased use of alphanumeric pagers. Telocator, the paging industry's trade association, developed the Telocator Data Protocol (TDP) in 1993. In addition to voice mail and subscriber services (such as news and weather updates), TDP will allow pagers to interact with personal computers to send data quickly and at low cost. This will make it attractive to small and medium-sized companies who cannot afford the higher-priced two-way wireless data services, such as those provided by the RAM Mobile Data and ARDIS networks. INTERNATIONAL COMPETITIVENESS A June 1993 study by the U.S. International Trade Commission (ITC) found that U.S. companies are highly competitive in cellular licenses awarded to foreign operators. The ITC attributes this success to the companies' experience with duopoly competition in U.S. markets. At the end of 1993, U.S. companies either were bidding or preparing to bid on cellular licenses in Argentina, Colombia, Cyprus, Ecuador, Egypt, Honduras, Israel, Italy, Korea, Panama, Russia, and South Africa. Overall, U.S. firms have dominated foreign license competitions for both analog and digital cellular systems, winning about 70 percent of the total awards (Table 7). Although U.S. cellular systems do not use the GSM digital standard, U.S. companies nevertheless will help operate GSM systems in at least 14 countries by 1994, including Germany, Portugal, Australia, and Hong Kong. In 1993, U S West won GSM licenses in Russia and Hungary, and Pacific Telesis was chosen as a partner to develop the Belgian GSM system. Europe is expected to experience high cellular growth during the next several years. By 1996, the number of European cellular subscribers will more than double, reaching 13 million, about half of these using digital GSM systems. Worldwide, industry forecasts are for more than 50 million cellular subscribers by 1996. Other areas of high growth include Asia and Latin America. Outlook for 1994 U.S. cellular subscriber growth will continue to climb steeply in 1994, reaching nearly 20 million. Forces behind this increase include increased capacity, seamless national call delivery, and other advanced services. Cellular service revenues should approach $15 billion in 1994. For the paging industry, the availability of national and international service, combined with increased consumer acceptance, will ensure continued growth. Subscribers will exceed 20 million in 1994, and revenues will be nearly $3.3 billion. Long-Term Prospects The U.S. cellular market will reach an estimated 35 million subscribers by 2000. Paging subscribers and revenues are forecast to continue near the 20 percent growth rate seen over the last two years, aided by the wide availability of alphanumeric paging and subscriber information services, as well as by the possible introduction within this forecast period of two-way messaging. Personal Communications Services After three years, legislative efforts to reallocate 200 MHz of the Government's radio spectrum to the private sector ultimately passed Congress in August 1993 as part of the Omnibus Budget Reconciliation Act of 1993. Title VI of the Act, Communications Licensing and Spectrum Reallocation Improvement (formerly the Emerging Telecommunications Technologies Act), incorporates competitive bidding procedures, and mandates the FCC to conclude the spectrum reallocation and rulemaking for Personal Communications Services (PCS) within 180 days of enactment and begin issuing PCS licenses within 270 days. The legislation also calls for regulatory parity of like wireless services, thereby limiting a wide array of state rate and entry regulations, and applying uniform Federal regulations. The NTIA is moving to identify spectrum that eventually will be transferred. In the last few years, the FCC has authorized 224 experimental licenses to conduct PCS trials involving companies with diverse communications backgrounds. Bell Atlantic's Personal Phone Service (PPS-800) trial in Pittsburgh using internetworking to offer transparent, customized services is just one of many innovative offerings tested in 1993. Using a combination of an intelligent network (SS7), distributed antennas, macrocells, microcells and digital radio, customers were afforded single number accessibility. Many of the trials examine cable-based deployment of PCS, with some cable companies claiming that their PCS architectures can dramatically reduce PCS construction costs. Positive demonstrations through cable PCS trials have led to several formal linkages involving cellular and cable companies, such as U S West and Time Warner's cable television division. Other hybrid technology proposals envision synergies between satellites and PCS. In July 1993, Celsat asked the FCC to authorize 40 MHz within the PCS band for a hybrid satellite and ground-based PCS. Celsat believes that an exclusively ground-based PCS system with coverage comparable to cellular would be very expensive, and that these costs can be brought down utilizing the ubiquitous coverage of satellites. At the same time, NASA plans to conduct experiments on satellite-terrestrial PCS beginning in June 1994 using the Advanced Communications Technology Satellite (ACTS). The tests, which are being performed with Bellcore, will evaluate the capability of satellites to complement and extend PCS, including the issue of interoperability and connectivity between satellites and ground-based service providers. The FCC issued its much anticipated rulemaking on PCS licensing on September 23, 1993. It authorized 160 MHz of spectrum in the 2 GHz band for PCS (120 MHz for licensed PCS and 40 MHz for unlicensed), and established the licensing structure for PCS. The Commission endorsed a scheme of 51 major trading areas (MTAs) and 492 basic trading areas (BTAs) for the PCS service areas. Theoretically, up to seven 10, 20 or 30 MHz licenses could be issued in each region. However, the FCC will allow aggregations of regions (without limit) and spectrum (up to 40 MHz) during the competitive bidding process. The FCC is mandated to begin the PCS bidding process by May 6, 1994, pursuant to the Omnibus Budget Reconciliation Act of 1993. Although the FCC did not approve a national PCS license, it will allow PCS aspirants to bid on multiple local licenses to create a nationwide system. Multiple licensees can, and most likely will, form nationwide roaming consortium. Cellular carriers, which had argued hard for eligibility, will be allowed to bid for one 10 MHz BTA license within their service area, or an unlimited number of licenses outside their cellular service areas. The issue of set-asides was left to a separate proceeding on spectrum bidding. For unlicensed PCS, the spectrum was equally divided for voice and data applications. In its decision, the Commission attempted to balance many competing interests and build in mechanisms for market correction, for example, combinational bidding. As a result of the decision, the first half of 1994 will be a period of intense decision making on PCS strategic alliances, valuation of desired PCS territories, and the sale and purchase of cellular holdings. The final award of PCS licenses will most likely occur toward the end of 1994. PCS licensees will then have five years to provide service to at least one-third of the population in their service area(s). The possibility remains, however, that litigation over the FCC's rulemaking could delay the commercial availability of PCS. Moving forward to make the 2 GHz band available for PCS, the FCC issued two key rulings earlier in 1993. In June, the FCC authorized spectrum in the 900 MHz band and issued the rules for narrowband, advanced messaging services. The ruling also made permanent Mobile Telecommunications Technologies Corp.'s Pioneer's Preference that gives the company preferential licensing treatment for pioneering new services. The second action, in July 1993, established a two-part, three-year transition period for incumbent microwave users to relocate their facilities to make room for PCS, and ordered the rechannnelizing of the 6 GHz, 10 GHz and 11 GHz bands to make them more suitable for microwave use. The FCC chose not to rechannelize the 4 GHz band in order to minimize interference with existing satellite users. Both decisions will help to clear the 2 GHz band for emerging technologies such as PCS. Fixed microwave users in this band, such as utilities and railroads, will first be encouraged to voluntarily negotiate with new PCS licensees during a two-year period. The period begins when the FCC accepts applications for PCS services. After the two-year period, the emerging technology provider can petition to move the incumbent microwave user; both parties must then negotiate in good faith for one year or face settlement of unresolved relocation disputes by the FCC. If disputes arise during the second one-year transition period, the parties can utilize non-binding alternative dispute resolution (ADR) procedures to settle disputes. The ADR procedure appoints an independent mediator or arbitrator to help settle disputes. PCS service providers in the unlicensed band are subject only to the one-year negotiation period. To facilitate voluntary relocation, the FCC will grant tax certificates to incumbent microwave users. In all instances of voluntary relocation, new licensees will assume all associated costs. As established in 1992, certain public safety microwave users (e.g. police, fire, emergency medical) are exempt from involuntary relocation by an emerging technology provider, as well as others on a case-by-case basis. The microwave and PCS communities appeared satisfied with the FCC action. Hopeful PCS players issued major announcements aimed at positioning themselves for the future. In July 1993, long distance carrier MCI formed a consortium with more than 150 companies in the cable television, cellular and publishing fields, all of which will take an equity share in the new entity. The consortium will have a two-tiered structure, with MCI acting as manager of local PCS providers. MCI's announcement marked the first attempt by a major noncellular company to stake out a competitive position for future PCS services. MCI will be particularly well positioned for the newly authorized spectrum auctions. A second entity, the National PCS Consortium, was announced in June 1993 to pursue an FCC license for a national PCS trial. The group was formed by 16 companies, including cable television, cellular, specialized mobile radio, alternative access providers as well as entrepreneurs, and will be the first group of independent companies to conduct national PCS trials. The National PCS Consortium's goal is to promote seamless interoperability and the accelerated introduction of PCS through the creation of industry standards. The consortium has established a cooperative research and development relationship with MIT's Lincoln Laboratory, which will have overall responsibility for conducting the trial and validating and reporting the results to participating companies and the FCC. If successful, the trial may eliminate the need for a national PCS licensee. At the same time as new companies are maneuvering for entry into the emerging PCS market, cellular carriers are positioning themselves to compete with PCS. For example, Southwestern Bell Mobile Systems introduced what it called the first commercially available "personal communications service" in the United States in March 1993. The FreedomLink Personal Communications System is a new wireless business phone service employing cellular technology. When employees leave the FreedomLink environment at the work place, the pocket phone functions as a regular handheld phone using the external cellular system. FreedomLink is being offered with flat-rate pricing ranging between $10 and $40 per month. Other firms such as AccessLine Technologies are marketing a form of personal communications using existing technologies and spectrum through programmable networking and call processing. Using an advanced intelligent network platform, AccessLine's ContactLine system is a call processing system capable of replacing landline, cellular, fax, pager and voice mail numbers with one "smart" telephone number which is adaptable to specific user needs. Demand forecasts by numerous well-respected market research firms have become more refined and remain exceedingly optimistic. In one forecast, BIS Strategic Decisions expects nearly 15 million PCS users in the United States by the end of the decade. Frost & Sullivan Market Intelligence has gone one step further and estimated that PCS revenues will approach $14 billion in 1999. The company also anticipates that more than half of all communications will involve some form of wireless component within the next 10 years. Telocator--the PCS industry's trade association--released its first Market Trials Report in July 1993 indicating that broad area coverage and low cost are the two most important considerations for consumer acceptance of PCS. Most researchers believe that a third desirable feature is the ability to control when and where to receive calls, i.e. consumers want to be able to turn off their phone, and to route incoming calls to a voice mailbox. Although voice transmission accounts for the vast majority of current cellular revenues, many industry observers predict that within the next 6 years data transmission will account for about one-half of all cellular revenues, amounting to more than 10 million users. Data transmission is expected to comprise an ever increasing portion of the future wireless market. From an estimated 1993 base of about one million users (over cellular, mobile radio and satellite systems), the wireless data market is predicted to grow to about 20 million users during the next 10 years. During the next 2-3 years, the wireless data market will take off on a rapid, sustained growth cycle driven by: 1) increasing market penetration of portable computers and personal organizers; 2) the introduction of additional new products incorporating radio frequency modems; 3) broader user familiarity with networking; 4) the development of mobile data protocols; and 5) greater expectations about personal accessibility to information. In fact, in May 1993, Motorola announced its mobile network integration (MNI) technology, a type of intelligent data gateway across communications networks. MNI, which aims at making mobile data easy to use, should encourage the proliferation of these services. In addition to wireless access to databases, proposed wireless data services already include American Personal Communications' "Postcard" of an interactive electronic version of the Washington Post, monitoring of patients in remote locations, and mobile access to vital patient information to support emergency medical personnel. Although precise market estimates vary widely, it seems clear that PCS is poised for success. In addition, as the introduction of PCS further expands competition and service offerings in the wireless arena, the growth rate of all wireless services is expected to increase, similar to the effect cellular development has had on the paging industry. Ultimately, the launching of widespread consumer-oriented PCS will likely change both the way society communicates and the way it views communications for the foreseeable future. SATELLITE SERVICES Revenues from satellite services, both fixed and mobile, amounted to $1.85 billion in 1993, up 23 percent from $1.5 billion the previous year. Growth was steady in fixed services, punctuated by the introduction of direct-to-home satellite broadcasting services and rapidly increasing international traffic via satellite. Mobile satellite service revenues, although small relative to overall industry income, continued to boom as existing companies expanded service offerings and numerous new ventures entered the dynamic mobile satellite services arena. Fixed Satellite Services Satellite services using fixed earth stations--or fixed satellite services (FSS)--including broadcasting, data transmission, and telephony--generated about $1.6 billion in revenues in 1993, or about 85 percent of total U.S. industry services. The bulk of current domestic satellite capacity is used for video transmission; terrestrial cable and fiber optics carry most domestic voice and data telephone service. Video transmission for entertainment, news, education, and private business contributed about 60 percent of total FSS revenues, or slightly more than $1 billion in 1993. Satellites are used by the major television networks to distribute regular programming to affiliates across the country and to transmit special events programming. In addition, cable television (CATV) is transmitted either via satellites to more than 11,400 cable headends for terrestrial distribution to 57 million U.S. cable television households or beamed directly to 4.1 million viewers with home satellite dishes (television receive-only dishes, or TVROs). The same six U.S. companies operated domestic communications satellites (domsats) in 1993 as in 1992: Alascom, GTE Spacenet, General Electric American Communications (GE Americom), Hughes Communications Inc. (HCI), AT&T, and Comsat General. According to the National Aeronautics and Space Administration (NASA), these companies operated 34 U.S. domsats as of September 1993, carrying 707 total transponders (transmit/receive devices ranging between 27 and 72 MHz in bandwidth). This capacity represented slightly more than 25 percent of all civilian transponders available worldwide. Hundreds of additional companies, including satellite brokers, television and radio networks, cable television companies, private businesses and educational organizations, leased U.S. capacity for their own use or to resell to end users. Transponders can be leased on a full-time or occasional use basis. On average, full service applications, including radio and television network broadcasting, cable television, private satellite networks, and restoration for interrupted terrestrial cables, consumed about 45 percent of domestic satellite capacity in 1993. The type of transmissions on the remaining, occasional use transponders fluctuates dramatically from month to month, and commonly include such periodic services as satellite news gathering, sports and news events, and network feeds. The cost of leasing transponders varies significantly, based on a diverse combination of factors including the time of day, frequency, power, level of protection, length of lease contract, orbital position and type of satellite. According to EFC Startime, which publishes a transponder newsletter, domestic analog C-band channels can cost from $200 to $600 per hour or $55,000 to $230,000 per month, in contrast to higher-frequency, Ku-band transponders that range in price between $250 to $800 per hour or $150,000 to $210,000 per month. U.S. satellite operators have largely completed the launch of the next-generation domsats, replacing aging satellites with higher-powered, higher-capacity follow-on models, many with hybrid configurations of both C-band and Ku-band capacity. EFC Startime predicts that the surge in capacity from two Hughes and two AT&T domsat launched in 1993 and five domsats launched in 1992 will take some time to be absorbed, causing the usual annual rise in transponder prices to flatten in the next 2 or 3 years. Apart from new direct broadcasting satellite ventures, domestic satellite capacity is expected to grow at a progressively slower rate over the next three years, with only two domsat replacements scheduled for launch between 1994 and 1996. Broader use of digital compression and ongoing competition from terrestrial communications networks will dampen demand for satellite capacity during the next three to five years. A recent study by Irwin Communications concluded that wider use of digital compression techniques will effectively increase already expanding domestic satellite capacity by making more efficient use of available radio frequencies. Transponders will have to be aggressively priced to maintain or increase net demand during this period. The study also predicts that, although broadcast networks are migrating to signal compression techniques more slowly than their cable counterparts, digital compression use for satellite news gathering will begin as early as 1993, with compressed program distribution a few years away. The planned launch of Hughes Communications' DirecTV satellite will mark the inauguration of the long-awaited direct broadcasting satellite (DBS) industry, beaming television signals directly to viewers at home. Using digital compression technology and high-power, Ku-band satellites, DBS services promise to challenge CATV by offering viewers hundreds of channels carrying cable superstations, pay-per-view movies, sports programming, and specialized educational and entertainment programming, using satellite dishes as small as 18 inches and significantly cheaper than the TVRO dishes currently used by home satellite dish owners. In addition to attracting new, unserved households, DBS ventures must woo existing CATV and TVRO viewers to be successful. This challenge will intensify as the number of cable channels also rises through broader use of digital technology and as telecommunications companies enter the CATV field. The first U.S. satellite solely dedicated to DBS services, DirecTV 1, will be used jointly by Hughes' 150-channel DirecTV service and a 20-40 channel service offered by the U.S. Satellite Broadcasting Company (USSB). DirecTV and USSB project that by the year 2000 more than 10 million Americans will subscribe to one of the two services. In addition to DirecTV and USSB, three of the seven other applicants before the FCC had DBS satellite launches scheduled as early as 1995 (Direct Broadcast Satellite Corporation, DirectSat, and Echosphere). Investor and CATV interest in DBS ventures solidified as the industry neared its inauguration. A further vote of confidence in DBS came as the nation's largest CATV multiple system operator, Tele-Communications Inc., joined with Loral Corp. and Cablevision, Inc. to announce a new, two-satellite DBS proposal for launch in 1996. While high-power DBS flourished, several mid-power, direct-to-home satellite television ventures struggled financially in 1993. The proposed 80-channel venture, SkyPix, fought to avoid bankruptcy, and PrimeStar, which serves 100,000 subscribers via leased satellite capacity, faced antitrust action on programming access. Full implementation of domestic DBS will have an enormous impact on the U.S. domestic satellite services market. In the near term, virtually all new domestic capacity planned is dedicated to DBS. One DBS satellite is scheduled for launch in 1994, three in 1995 and as many as eight in 1996. The proliferation of digital satellite transmission capacity through the advent of DBS will also facilitate the widespread introduction of high-definition television and may serve to augment the Clinton Administration's information superhighway initiative. Several U.S. satellite companies and organizations, including the Society of Satellite Professionals International, have advised the U.S. Government that existing and planned satellite ventures should be included in plans to institute a digital information highway for high-speed data communications nationwide. Satellite technology's accessibility in remote areas, its distance-insensitivity and its ability to be rapidly deployed have encouraged its use for specialized narrowcasting applications for educational or corporate programming. Private business television (BTV) is one of the fastest-growing sectors, with most point-to-multipoint BTV applications provided via private networks using very small aperture terminals (VSATS). An estimated 270 VSAT networks were installed in the United States in 1993, up 10 percent from the previous year. However, VSAT usage grew significantly faster as customers expanded individual networks by installing new terminals and increasing their reliance on these systems for intracorporate data, video and voice communications. Revenues from domestic VSAT services were estimated at more than $45 million in 1993, an increase of about 25 percent over 1992. In the United States, VSAT networks are used most heavily to relay point-of-sale credit authorization and inventory control data among multiple remote locations. Heavy users of VSAT network services include the automotive, retailing and financial services industries, each representing nearly a third of the market. The travel, manufacturing and energy industries are also significant VSAT customers domestically. Satellites also transmit the bulk of U.S. distance learning services for corporations, primary and secondary schools and universities. The National Educational Telecommunications Organization's EDSAT branch notes that interest in educational television emerged at all levels of educational institutions, with particular growth in grade schools. EDSAT estimates that the number of educational satellite program providers neared 120 in 1993, the 20 largest of which spent between $53-55 million for satellite time during the 1992-1993 school year. Budget-conscious distance learning users will benefit from the lower transmission costs of digital compression and greater availability of domestic satellite capacity. However, some corporations, schools and universities may delay implementation and expansion of distance learning systems until migration to digital services offerings is completed to avoid retrofitting existing analog C-band systems. Only a handful of digital distance learning systems are currently in place, according to EDSAT, and about half of all systems operate in the Ku-band frequency range. INTERNATIONAL COMPETITION U.S. revenues from international fixed satellite services reached $760 million in 1993, up 22 percent from $624 million in 1992. The bulk of these revenues comes from services provided through the International Telecommunications Satellite Organization (INTELSAT), a consortium of 126 countries providing satellite capacity serving about 180 countries and close to 1,700 earth station sites worldwide. The organization's fleet consists of 20 satellites with more than 1,200 transponders, representing about one-third of worldwide satellite capacity. The first of the INTELSAT 7 generation satellites was launched in October 1993, with capacity to transmit 18,000 telephone circuits and three television channels simultaneously. In addition to the 12 additional INTELSAT satellites scheduled for delivery between 1994 and 1996, the organization also announced plans to lease transponders on Russia's Informkosmos satellites and the full capacity of up to 3 Russian-made Express satellites to meet burgeoning international demand. COMSAT Corp., the U.S. signatory to INTELSAT, reported U.S. revenues of $450 million for its INTELSAT business in 1992, up 20 percent from the previous year. In contrast to domestic FSS, international FSS revenues draw significantly on basic telecommunications traffic; they accounted for 63 percent of INTELSAT revenues in 1992. More than one-third of INTELSAT's member countries rely on its satellite services for domestic telephony. Although proliferating submarine fiber optic cables may capture more basic telephone traffic internationally, remote and less densely populated regions will continue to rely on satellite technology for basic domestic and international communications. INTELSAT projects that public switched telephone services will remain its largest business area for the next 10 years, contributing about a third of the organization's business. Satellite services also serve a critical backup function for terrestrial systems, providing restoration services when undersea cables fail. International private line and business services, such as VSAT services, will continue to expanded in importance, benefitting from the greater capacity of the next generation of higher power, higher-frequency INTELSAT 7 and 8 series satellites. INTELSAT's VSAT services alone have grown about 65 percent annually during the past three years. Vigorous competition from separate satellite systems prompted INTELSAT to further its efforts toward administrative and operational reform and more market-driven practices. In a landmark decision, INTELSAT's board agreed in June 1993 to allow non-signatory companies to invest in the consortium. The move formalizes existing practices of member nations such as the United Kingdom and Australia that have allowed non-signatory users to share in both calls for investment capital and in the resulting return. Although each signatory retains liability for payments and capital contributions, the new rules will give INTELSAT signatories more flexibility in financing their participation in the consortium and broadening the input of the system's end users. In addition to INTELSAT, two privately-owned, separate U.S. satellite systems were in operation in 1993, with an additional five systems planned. PanAmSat, the first operational U.S. separate system, reported 1992 sales of $40.3 million, up 33 percent over 1991. PanAmSat offers private network services, broadcasting and voice services for customers in North America, South and Central America, the Caribbean, and Europe, on a single, fully-booked satellite. Three additional PanAmSat birds scheduled for launch in 1994 will complete its global satellite coverage. To finance the expansion of the PanAmSat constellation, Grupo Televisa, the leading Mexican television broadcaster, bought 50 percent of PanAmSat in December 1992; PanAmSat also announced plans for a $435 million bond sale to complete its financing. Columbia Communications, the second operational U.S. separate system, won its first international contract in 1993 to serve U.S. military communications needs throughout the Pacific Basin, in partnership with MCI. Columbia, which holds a six-year lease for the C-band transponders on two NASA tracking data and relay satellite system (TDRSS) satellites, also received FCC approval to provide domestic services between the continental U.S. and Pacific territories, such as Guam. Missed lease payments forced the company to restructure its lease agreement with NASA in mid-1993, allowing NASA to collect around 70 percent of revenues from the transponders until Columbia pays off most of its original lease commitment. A third U.S. separate satellite system, Orion, is scheduled to begin service in late 1994, covering North America, Western Europe, and West Africa. Orion will offer less capacity than originally envisioned, using a single Ku-band satellite after canceling its order for a second satellite. Video transmission continued to dominate the separate system business in 1993, representing about 77 percent of PanAmSat's revenues, compared with 20 percent from business communications and only 3 percent from long-distance telephony. However, future separate satellite traffic is certain to include higher shares of voice and data transmissions as the international regulatory climate continues to evolve. In 1993, INTELSAT increased to 1,250 the number of switched circuits that non-INTELSAT satellite systems may apply for under INTELSAT's expedited coordination process. This move will invite broader competition in international voice and data satellite transmissions, once a monopoly reserved to INTELSAT. Not only U.S. separate systems, but also U.S. domestic satellite systems will benefit from this broadened authority to meet international satellite demand. All separate system restrictions on providing switched services are expected to be lifted by January 1, 1997. Mobile Satellite Services Existing mobile satellite services (MSS) providers continued to refine their services offerings in 1993, while other companies with pending MSS applications solidified their financial and regulatory foundation for service inaugurations in the mid-1990's. MSS revenues are estimated at $245 million in 1993, up 22 percent from 1992. Revenues will explode by the mid-1990's when firm customer bases are established and new satellites dedicated solely to mobile communications are launched. A 1993 Frost and Sullivan study projects that U.S. MSS revenues will expand to $473 million by 1996. However, smaller, financially strapped MSS entrepreneurs may be hampered by pending new Federal legislation to allocate spectrum by auction, particularly if the precedent is mimicked by other countries. Land mobile satellite services (LMSS) continued to drive the MSS industry's dynamic growth, both domestically and abroad. LMSS includes satellite-delivered applications such as cellular telephony, positioning and navigation services, and digital radio. LMSS proponents hope to capitalize on the acknowledged efficiency and safety offered by mobile services such as cellular telephony, with the added enhancement of complete nationwide and eventually global coverage. A new venture, Mobile Data, applied to the FCC in March 1993 to provide radio-determination satellite services using ground assets originally owned by the now defunct Geostar Company, as well as leased satellite space. Qualcomm, the provider of Omnitracs, a satellite-based two-way data communications and positioning service, reported more than 40 percent growth in revenues and nearly 60,000 units installed in trucks, fishing boats, helicopters and other vehicles in the United States and Canada. In 1993, the company extended its service to fleet-based customers and remote industrial users, and announced plans to extend its service into Mexico by early 1994. The American Mobile Satellite Corporation (AMSC) signed on new customers for its mobile data and position location services in 1993, and prepared for initiation of its nationwide mobile satellite cellular service in 1994. In 1993, AMSC served about 25 mobile and fixed customers in the trucking, rail and maritime industries in the United States, Puerto Rico, the Virgin Islands and 200 miles of coastal water, using leased capacity on COMSAT's Marisat satellite. AMSC also sold 10 million minutes in bulk capacity to IDB Communications for resale to the maritime shipping and cruise industry. After the launch of its own satellite in July 1994, AMSC hopes to attract as many as one million subscribers for its SKYCELL mobile voice, facsimile and data services. To distribute these services, AMSC concluded agreements with nearly 70 cellular carriers nationwide in 633 markets, representing 152 million potential customers. AMSC must await legal approval to conclude distributor arrangements with the regional Bell companies. This will require a court ruling under the Modified Final Judgement, expected by yearend 1993. As a result of additional funding commitments from its investors, AMSC's $470 million capitalization will now see the company through launch and into revenue producing services, in sharp contrast to the financial restructuring problems of its Canadian counterpart, Telesat Mobile. AMSC will also benefit from a 1993 FCC proposal to allocate an additional 38 MHz of spectrum to domestic, geostationary mobile satellite services, eventually easing frequency congestion between AMSC's services and those of the International Maritime Satellite Organization (INMARSAT). The bulk of U.S. MSS revenues came from services transmitted via INMARSAT, a consortium of 66 countries. Services through INMARSAT reached more than 30,000 users worldwide, including 18,000 ships, 300 commercial planes, 85 business jets, and 2,000 users of suitcase-sized, transportable satellite terminals. INMARSAT approves four terminal standards: INMARSAT A, for analog voice, telex, FAX and data; INMARSAT B, a digital follow-on; INMARSAT C, for digital, store-and-forward text and data services on small, low-cost terminals; and INMARSAT M, a voice and facsimile service for use with $20,000 terminals as small as briefcases or vessel-mounted marine units. INMARSAT's Aero-C store-and-forward text and data service for aircraft was initiated in 1993. Although overall INMARSAT services have expanded about 25 percent annually, the organization sees particularly strong growth from smaller vessels, cruise ships, and aeronautical services, and as many as 500,000 users of the INMARSAT M briefcase-sized terminal by 2005. To augment its capacity, INMARSAT plans to launch four INMARSAT 3 generation satellites during 1995-96, each one of which is eight times more powerful than the second generation satellites. COMSAT, the U.S. signatory to INMARSAT, reported 1992 revenues of $145 million from its maritime, land mobile and aeronautical mobile services. Maritime services remain COMSAT's largest mobile business area, contributing nearly 90 percent of the company's MSS revenues, but land mobile services have been particularly dynamic. An April 1993 FCC decision authorized COMSAT to provide international LMSS to mobile terminals located outside North America, including services between foreign countries. COMSAT revenues from LMSS should show strong growth as INMARSAT refines its newer services, such as global paging, in-flight phone service, video and data. Low Earth Orbit Satellites Proposers of worldwide personal, portable and mobile telephony using small satellites focused their efforts on financial backing, international operating agreements, licensing, and spectrum sharing arrangements in 1993. Five companies have applied to the FCC for voice services using low-earth orbiting (LEO) and middle-earth orbiting (MEO) satellite constellations: Motorola's Iridium, Loral and Qualcomm's GlobalStar, TRW's Odyssey, Constellation Communications' Aries plan, and Ellipsat. Although most of these "big LEO" applicants made strides on financial and technical fronts, the five failed to reach consensus on whether to share spectrum using code division multiple access (CDMA) or time division multiple access (TDMA) techniques. The FCC is expected to release its final rule on how the spectrum will be shared by yearend 1993. Two additional, satellite/cellular proposers also entered the field in 1993: Celsat petitioned the FCC for authority to build a hybrid geostationary satellite system for nationwide personal communications services (PCS) using the same frequency bands as the big LEOs, and Calling Communications announced plans to seek FCC approval for a constellation of more than 900 Ka-band satellites in 21 orbital planes. In addition to their financial, regulatory, technical and commercial challenges, the U.S. LEO proposals also face competition from a growing number of international LEO proposals. Consortia in France, Mexico, Russia, and Belgium are all considering separate proposals to launch or develop small satellite technology, but none is considered as far along as U.S. entrants in technical or financial planning. INMARSAT took itself out of the LEO field at its August 1993 Council meeting, ruling out a LEO configuration for Project 21, its plan to provide a global, hand-held satellite telephone service. INMARSAT cited cost, production and implementation complexities, and on-orbit management issues as some of the deciding factors favoring either a geostationary (GEO) or medium earth orbit (MEO) system. INMARSAT is expected to make a final selection between the GEO and MEO options in February 1994. Launches could begin as early as 1995 for "little LEO" services--non-voice proposals that offer data services for satellite positioning and messaging. Three companies, Orbital Sciences' Orbcomm, STARSYS Global Positioning, Inc., and Volunteers in Technical Assistance (VITA), have applied to the FCC to launch little LEOs. In January 1993, VITA received the first Pioneer Preference offered by the FCC in recognition for demonstrating the utility of small LEO systems for civilian communications. In January 1993, the FCC allocated 4 MHz of spectrum for the three little LEO applicants, which will be utilized through a mutually agreed-upon spectrum sharing arrangement. Direct Audio Broadcasting In 1993, five new proposals were added to proposals already pending for domestic direct audio broadcasting (DAB) services via satellite; the FCC is still to decide which firms will receive licenses. The value of the combined satellite DAB proposals now exceeds $2 billion. The original DAB applicant, Satellite CD Radio, plans a domestic, 30-plus channel DAB service for use with playing card-sized receivers. New applicants include AMSC's American Mobile Radio Corp., Digital Satellite Broadcasting Corp., Loral Aerospace, Primosphere and Sky Highway Radio Corp. Most DAB proposals include a monthly subscription fee for commercial-free broadcasts, while others will finance the programs through advertising. Two additional companies have proposed international DAB via satellite: Worldspace, which has targeted Africa first for its global high-quality radio programming using eight planned satellites, and Radio Satellite International Corporation, a three-satellite system for international DAB targeted at shortwave broadcasters. Global Positioning System The first commercial service revenues began to flow from Global Positioning System (GPS) services in 1993. GPS, a 24-satellite constellation operated by the U.S. Department of Defense (DOD), reached full global coverage for its navigational and positioning services in July 1993. GPS provides a degraded, civilian signal with accuracies of about 100 meters for civilian users in such industries as delivery services, surveying, trucking, nautical navigation and air traffic control. Although GPS signals are available to commercial users without charge, several U.S. companies introduced value-added services in 1993 to enhance the accuracy of civilian GPS. DCI and Acc Q Point, the latter a Magnavox and CUE Network Corp. venture, broadcast corrections to GPS signals that can provide accuracies of less than 10 meters for subscriber fees ranging between $300 and $1,200 a year. Also, GPS service received important approval for air navigation applications in June 1993. The Federal Aviation Administration ruled that U.S. pilots of both private and airline aircraft may use satellite navigation signals to determine their positions, even while navigating over oceans or while making certain, non-precision landing approaches into about 2,500 airports, many of which do not currently have instrumented landing systems. The Federal Radionavigation Plan forecasts 96,000 GPS users by 1996, growing to 250,000 users by 2003. Outlook for 1994 Overall satellite service revenues are projected to grow at slightly less than 25 percent in 1994, reaching around $2.3 billion. Even stronger growth may result if the newly introduced DBS and satellite-delivered cellular applications attract significant subscriber bases. With domestic capacity replenished, U.S. transponder prices will likely flatten in the near term. However, overseas demand for video and business services will continue to expand just as INTELSAT and U.S. separate systems augment their capacity. Expected FCC rulings on little LEO ventures will likely spur a flurry of investment and partnership activity among licensed companies, charting the longer-term outlook for mobile satellite revenues. Long-Term Prospects Satellite services revenues from both fixed and mobile applications are expected to exceed $3 billion by the late 1990's, fueled by expansion in domestic direct-to-home broadcasting ventures and new international capacity operated by U.S. separate satellite system operators. Competition from terrestrial communications systems will erode international voice transmission business, but revenues from emerging mobile and broadcasting applications will compensate for these losses. Industry performance will be determined by the success of U.S. ventures proposing constellations of smaller satellites for global cellular, messaging and positioning services.--Daniel W. Edwards, Telecommunications Services; Linda L. Gossack and Stephanie W. McCullough, Cellular and Radio Services; and Patricia Cooper, Satellite Services, Office of Telecommunications (202) 482-4466, August 1993. Additional References U.S. Telecommunications in a Global Economy: Competitiveness at a Crossroads, August 1990, U.S. Department of Commerce, Washington, DC 20230. Telephone: (202) 783-3238. International Communications Traffic Data Report for 1991, Federal Communications Commission, December 1992, 1250 23rd St. NW, Plaza Level, Washington, DC 20254. Telephone: (202) 632-0745. Long Distance Market Shares, Federal Communications Commission, June 1993, 1250 23rd St. NW, Plaza Level, Washington, DC 20254. Telephone: (202) 632-0745. Reference Book: Rates, Price Indexes, and Household Expenditures for Telephone Service, Federal Communications Commission, May 1993, 1250 23rd St. NW, Plaza Level, Washington, DC 20254. Telephone: (202) 632-0745. Statistics of Common Carriers, Federal Communications Commission, 1991/1992, 1250 23rd St. NW, Washington, DC 20254. Telephone: (202) 632-0745. Telephone Companies and Six Other Contributors to Competition in Local Telephone Service, Congressional Research Service, February 18, 1993. Copies available only through your district or state U.S. Congressional representative. Trends in the International Communications Industry Through 1991, Federal Communications Commission, June 1993, 1250 23rd St. NW, Plaza Level, Washington, DC 20254. Telephone: (202) 632-0745. U.S. Spectrum Management Policy: Agenda for the Future, U.S. Department of Commerce, National Telecommunications and Information Administration, Washington, DC 20230. Telephone: (202) 482-1880. Dossier: U.S. Telecom Service Markets 1993, Northern Business Information, 1992, DataPro Information Services Group, 157 Chambers St., New York, NY 10007. Telephone: (212) 732-0775. The TeleChoice Report on International Call Back Services, 1993, TeleChoice, 15 Bloomfield Ave., Suite 3, Verona, NJ 07044. Telephone: (201) 239-0700. Telegeography 1993, Telegeography, Inc., 1150 Connecticut Ave. NW, Suite 1000, Washington, DC 20036. Telephone: (202) 467-5700. 1993 World Satellite Directory, Phillips Publishing, Inc., 7811 Montrose Rd., Potomac, MD 20854. Telephone: (301) 340-7788. Communications Week International, CMP Publications, Inc., 600 Community Dr., Manhasset, NY 11030. Telephone: (516) 562-5882. Industry Basics: Introduction to the History, Structure and Technology of the Telecommunications Industry, 1991, 4th Edition, North American Telecommunications Association, 2000 M St. NW, Washington, DC 20036. Telephone: (202) 296-9800. PCS News, Phillips Business Information, Inc., 7811 Montrose Road, Potomac, MD 20854. Telephone: (301) 340-2100. Satellite Communications, Cardiff Publishing, Inc., 6300 S. Syracuse Way, Suite 650, Englewood, CO 80111. Telephone: (303) 220-0600. Telecommunications Market Review and Forecast: Annual Report of the Telecommunications Industry, 1993 Edition, North American Telecommunications Association, 2000 M St. NW, Washington, DC 20036. Telephone: (202) 296-9800. Telecommunications Reports, Business Research Publications, Inc., 1333 H St. NW, 11th Floor-West, Washington, DC 20005. Telephone: (202) 842-3006. Telephone Statistics 1993, United States Telephone Association, Suite 800, 900 19th St. NW, Washington, DC 20006-2102. Telephone: (202) 835-3100. Telephony, Telephony Publishing Corp., 55 East Jackson St., Chicago, IL 60604. Telephone: (312) 922-2435. Telocator, Telocator, 1019 19th St. NW, Suite 1100, Washington, DC 20036. Telephone: (202) 467-4770. Via Satellite, Phillips Publishing Inc., 7811 Montrose Rd., Potomac, MD 20854. Telephone: (301) 340-2100. Trends and Forecasts: Telecommunications Services (SIC 4812, 4813, 4822)1/ (in millions of dollars except as noted) Percent Change (1989-1994) Item 1989 1990 1991 1992 19932/ 199 43/ 89-90 90-91 91-92 92-93 93-94 Operating revenues4/ Domestic 143,086 146,147 153,942 160,480 168,975 180,70 0 2.1 5.3 4.2 5.3 6.9 International 4,982 5,752 7,158 8,720 10,375 12,40 0 15.5 24.4 21.8 19.0 19.5 Operating revenues (1987$) Domestic 140,349 143,803 151,473 157,441 165,321 175,86 4 2.5 5.3 3.9 5.0 6.4 Total employment (000)5/ 900.5 925.5 914.8 895.0 883.6 876. 4 2.8 -1.2 -2.2 -1.3 -0.8 Production workers (000) 646.3 666.6 670.9 671.2 668.1 671. 5 3.1 0.6 0.0 -0.5 0.5 Average hourly earnings ($) 14.14 14.17 14.62 15.16 15.50 15.7 7 0.2 3.2 3.7 2.2 1.7 1/Includes AT&T, BOCs, cellular, independents, mobile radio, VANs, telex and telegraph. 2/Estimate. 3/Forecast. 4/Data include LEC access charge revenues. 5/Includes telephone and telegraph workers. SOURCE: U.S. Department of Commerce: Bureau of the Census, Bureau of Economic Analysis, and International Trade Administration (ITA); U.S. Department of Labor, Bureau of Labor Statistics; Federal Communications Commission. Estimates and forecasts by ITA. Table 1: Total U.S. Access Lines, 1984-1993 Year Lines Percent Change 1984 114,348,800 -- 1985 118,275,000 3.4 1986 122,202,600 3.3 1987 126,725,000 3.7 1988 130,000,000 2.6 1989 135,010,686 3.9 1990 138,059,000 2.2 1991 141,209,000 2.3 1992 145,117,000 2.8 1993* 147,584,000 1.7 *Estimate. SOURCE: United States Telephone Association. Table 2: Network Digitalization (access lines connected to digital switches) Company Percent Hong Kong Telecom 100.0 Telekom Malaysia 82.0 Telefonos de Chile 76.0 Bell Canada 65.0 British Telecom 64.0 TELMEX (Mexico) 57.0 RBOC average (USA) 56.1 NTT (Japan) 50.0 STET (Italy) 48.4 Telefonica de Argentina 34.0 SOURCE: Merrill Lynch. Table 3: Largest Local Telephone Companies by Access Lines, 1992 Company Lines Bell Atlantic Corp. 18,181,000 BellSouth Corp. 18,109,834 Ameritech Corp. 17,001,000 GTE Corp. 16,191,000 NYNEX 15,699,088 Pacific Telesis Group 14,551,000 US West Communications 13,344,975 Southwestern Bell Corp. 12,603,033 Sprint Corp. 4,241,443 Southern New England Telephone Co. 1,902,100 SOURCE: United States Telephone Association. Table 4: Regional Bell Company ISDN Deployment Plans, 1994 (in millions of lines) Network ISDN Company Access Available Percent Ameritech 17.8 13.8 78 Bell Atlantic 18.8 16.3 87 Bell South 20.0 10.6 53 NYNEX 16.4 9.5 58 Pacific Bell 15.4 10.4 68 Southwestern Bell 13.5 3.5 26 US West 14.3 9.1 64 SOURCE: Bellcore. Table 5: Total Toll Service Revenues (in millions of dollars except as noted) Company 1984 1985 1986 1987 1988 1989 1990 1991 1992 Total all carriers 51,156 54,815 57,468 58,519 62,600 6 6,024 66,792 69,375 Total local exchange companies 12,401 12,185 12,873 13,736 15,113 1 4,840 14,690 14,115 Bell operating companies 9,037 9,026 9,599 10,268 10,668 1 0,549 10,578 10,066 Other local exchange companies 3,364 3,159 3,274 3,468 4,445 4,291 4,112 4,049 Total long distance carriers 38,755 42,630 44,595 44,783 47,486 5 1,184 52,102 55,260 59,372 AT&T Communications 34,935 36,770 36,514 35,219 35,407 3 4,549 33,880 34,384 35,495 MCI Telecommunications1 1,761 2,331 3,372 3,938 4,886 6,171 7,392 8,266 9,719 (Telecom*USA) 105 201 291 396 524 713 US Sprint2/ 1,141 2,592 3,405 4,320 5,041 5,378 5,658 (GTE Sprint) 1,052 1,122 779 (US Telecom) 387 212 LDDS Communications, Inc.3/ 110 154 263 801 (Advanced Telecommunications Corp) 72 86 124 162 178 326 342 356 Cable & Wireless 146 171 180 218 275 359 406 495 Wiltel, Inc. 300 376 405 494 Allnet4/ 309 450 395 394 334 326 347 376 (Lexitel) 127 Metromedia Communications Corp.5/ 127 381 369 369 (ITT Communications Services Inc.) 161 241 282 287 379 404 ALASCOM 255 271 267 262 272 278 259 338 333 Litel Telecommunications Corp. 197 215 208 243 RCI Long Distance, Inc. 104 142 155 168 International Telecharge, Inc. 275 230 181 159 Comsystems Network Services 130 131 135 Telesphere Network, Inc.6/ 192 293 308 (National Telephone Services, Inc.) 150 Others7/ 414 639 992 1,352 1,823 2,359 2,582 3,765 4,927 Long distance carriers' share in percent AT&T Communications 90.1 86.3 81.9 78.6 74.6 67.5 65.0 62.2 59.8 MCI Communications 4.5 5.5 7.6 8.8 10.3 12.1 14.2 15.0 16.4 US Sprint 2.7 2.6 4.3 5.8 7.2 8.4 9.7 9.7 9.5 Others 2.6 5.6 6.3 6.8 8.0 12.0 11.1 13.1 14.3 1/MCI Telecommunications and Telecom*USA merged during 1989. 2/In July 1986, GTE Sprint and US Telecom merged into US Sprint. Effective February 26, 1992, the company's name became Sprint Communications. 3/LDDS Communications, Inc. and Advanced Telecommunications Corp. merged during 1992. 4/Allnet and Lexitel merged at the end of 1985. 5/Metromedia Communications Corp. and ITT Communications Corp. merged during 1988. Information for 1989 was reported separately. 6/Telesphere Network, Inc. and National Telephone services, Inc. merged during 1989. In 1991, Telesphere Network, Inc. went into bankruptcy. 7/Estimated by FCC staff. SOURCES: Federal Communications Commission: Industry Analysis Division. Table 6: Telecom Carrier Efficiency, 1993 (company revenue per employee in thousands of dollars) Company Revenue* MCI. 383 Sprint 216 AT&T. 213 Hong Kong Telecom. 200 NTT (Japan). 196 RBOCs (USA). 168 TELMEX (Mexico). 165 Cable & Wireless (UK). 163 GTE. 149 TEF (Spain). 147 Bell Canada. 143 STET (Italy). 136 Telecom New Zealand. 123 British Telecom. 120 Telefonica de Argentina. 101 Telefonos de Chile. 97 Telekom Malaysia. 51 *Estimate. SOURCE: Merrill Lynch. Table 7: U.S. Companies' Licenses to Operate Cellular Systems Abroad1/ Company Licenses Countries Millicom 18 18 BellSouth2/ 11 10 U S West3/ 16 5 Motorola 10 10 Pacific Telesis 5 5 Bell Atlantic 4 4 Ameritech 3 3 GTE 3 3 McCaw 3 3 Nynex 3 3 1/Partial list. 2/BellSouth has two cellular licenses in New Zealand. 3/U S West has 11 cellular licenses in Russia and two in Hungary. SOURCE: U.S. Department of Commerce, International Trade Administration. -------------------------------------------------------------------------- This file extracted from Dept. of Commerce, Economics & Statistics Division's Jan. 1994 NATIONAL TRADE DATA BANK (NTDB) CD-ROM, SuDoc C1.88:994/1/V.1 Processed 02/16/1994 by RCM (UM-St. Louis Libraries)/ USIO0034 .