While the telecommunications industry is more than a century old, the industry today finds itself in the middle of a communications revolution as broadband and wireless technologies radically transform the industry.
In the United States:
The mega-trends in telecommunications - the rapid adoption of smartphones and the availability of 100+ Mbps broadband connections - have fundamentally changed the way people communicate. Customers no longer just talk to one another over a wireless or wireline connection, they collaborate through instant messaging services, document sharing, video conferencing and even telepresence. And pay TV subscribers no longer use their services exclusively in the home - they enjoy them anywhere they want on computers, tablets and smartphones.
While not as hard hit as other industries, the telecommunications business was not immune to the global recession in the late 2000s. Since 2009, the industry has rebounded, largely thanks to the continued growth of mobile and broadband, but also the rapid evolution of the video market. Looking ahead, the rollout of new 4G mobile broadband networks will fuel continued wireless growth. Cloud computing will continue to emerge in both consumer and enterprise markets, and business customers in particular will continue to use this technology to expand their capabilities beyond the desktop computer. Emerging markets such as China, India and Latin America are expected to see strong growth.
The U.S. Market
The U.S. continues to be the largest telecom market in the world and is expected to grow faster than most other developed countries to a total of $721 billion by 2015, or 3.7 percent every year. However, the U.S. share in the global market will decrease as developing nations experience higher growth rates.
On a national basis, wireline voice revenues are expected to continue their long-term decline, while the mobile market could grow to over $200 billion by 2015. Highlighting an overall theme in the telecommunications market, however, wireless voice revenues are expected to be flat to slightly down in the coming years but will be more than made up by rapid growth in data revenues thanks to the adoption of smartphones and the emergence of machine-to-machine services.
Segmented by markets, the overall U.S. revenue picture shows that more than half of telecommunications spending is still in the consumer market segment, although the general business and enterprise (large-business and government) markets continue to grow.
In the U.S., a number of incumbent and emerging competitors offer some or all of these products and services. Some of these labels no longer accurately describe the present-day companies they are applied to:
Case Study: Verizon
The changes in the industry can be illustrated by a more detailed look at one of the largest telecommunications companies in the U.S. and in the world. Verizon, a full-service communications provider, generated 2010 revenues of $106.6 billion, placing it 16th in the Fortune 500.
A bellwether for the industry (added to the Dow Jones Industrial Average in 2004), Verizon has a global IP network reaching customers in more than 2,700 cities in more than 150 countries, a nationwide wireless network in the U.S. and a regional wireline network in the U.S. with well more than 100 million Americans connecting to a Verizon network daily.
Changing Revenue Mix
A look at Verizon's revenues and recent strategic moves demonstrates the change in demand for telecommunications services over the past several years. Wireless services made up approximately 60 percent of Verizon's revenue in 2010, while traditional wireline services are shrinking as a percentage of Verizon's total revenue -- both through decreasing connections and strategic divestitures of wireline assets. Within the wireline market, however, Verizon has generated growth in revenues from broadband and video services, as well as strategic enterprise services such as managed security, IP (Internet Protocol) and cloud-based services. Verizon's fiber-optic based FiOS Internet and TV services now account for 54 percent of consumer wireline revenues, while strategic services represent 46 percent of global enterprise revenue.
At year-end 2005, Verizon reported annual operating revenues of $75.1 billion -- with wireline services generating $37.6 billion and wireless services generating $32.3 billion (directory publishing and international operations - since divested -- predominantly accounted for the remainder of revenues). Five years later, at year-end 2010, Verizon reported annual operating revenues of $106.6 billion -- with wireline services generating $41.2 billion (including revenues for a new Verizon Business unit formed after the 2006 acquisition of MCI, Inc.) and wireless services generating $63.4 billion. In addition to changing market demand and technology, part of the change in revenue mix was due to divestitures of traditional wireline assets combined with acquisitions of wireless assets.
The growth businesses for Verizon have evolved as the industry has evolved. A decade ago, long-distance services provided revenue growth in wireline markets, even as some customers began migrating away from traditional landline phone services. Long-distance had been a mature market for traditional long-distance carriers (sometimes called Interexchange Carriers, or IXCs). Verizon predecessor companies Bell Atlantic and NYNEX and their peers (sometimes anachronistically referred to Regional Bell Operating Companies, or RBOCs) were prevented from offering long-distance services at the 1984 divestiture of AT&T.
The Telecommunications Act of 1996 paved the way for RBOCs to begin offering long-distance services, and Bell Atlantic and NYNEX were early insurgents in this market. NYNEX merged with Bell Atlantic in 1997, and by the time Verizon was formed in mid-2000, with the merger Bell Atlantic and independent telco GTE, it was one of the largest long-distance carriers in the nation.
However, technology was beginning to have a dramatic impact on wireline markets at the beginning of the decade, and Internet access services provided the potential for greater future growth than traditional telephone services. Predecessor companies had already begun selling DSL copper-wire-based broadband wireline services in the late 1990s, and Verizon introduced next-generation FiOS fiber-based broadband wireline services in 2004.
Today, FiOS broadband service is growing at a consistent rate -- adding new customers and attracting existing customers who are migrating from DSL-based High Speed Internet services. In 2010, Verizon added nearly 800,000 FiOS Internet customers, even as the overall wireline Internet-access market neared saturation, as customers are upgrading to faster, more-advanced wireline broadband connections.
The greater capacity of fiber optics also gave Verizon the opportunity to offer FiOS TV in addition to FiOS Internet, and by early 2008 Verizon already had more than 1 million FiOS TV customers a growth market that didn't even exist for the company until late 2005. At the end of 2010, that number grew to 3.5 million customers after Verizon added a net of 722,000 new FiOS TV customers over the full year.
To further accelerate growth by focusing on core network assets, Verizon took several additional steps over the past few years:
The Verizon Wireless network has been ranked highest in network quality performance among the largest wireless providers by a national research organization over the past several years. Since Verizon's formation in mid-2000 through year-end 2010, the Verizon Wireless customer base has grown from more than 25 million to more than 94 million, both from strong organic growth and through acquisitions such as Alltel and Rural Cellular.
So Verizon's most dramatic growth in recent years has occurred in the wireless market. With the wireless voice market near saturation at 95 percent penetration, this growth is shifting towards mobile data. In 2010, data accounted for 35.1 percent of wireless service revenues, compared to 29.9 percent in 2009.
This is demonstrated by the fact that while the total number of customers for Verizon Wireless has grown, monthly service revenue per user (sometimes called ARPU, for "average revenue per user") has also grown for Verizon Wireless -- even as the retail price for voice wireless service has decreased over time.
Data usage is having a significant positive impact on wireless revenues. During 2003 SMS (short messaging service) was the major non-voice contributor to revenues, but by 2004 downloads and picture messaging had begun to contribute a greater percentage. In the first quarter 2011, Verizon Wireless reported that its customers alone sent or received nearly 186 billion text messages and sent nearly 4.1 billion picture and video messages. This compares with 2.1 billion text messages and 21 million picture messages (video messages weren't available) in the first quarter of 2004. Now, customers are doing far more with their mobile devices, such as browsing webpages, downloading music and even watching full-length movies.
The deployment of broadband wireless network capabilities has accelerated the development and use of wireless data services. Verizon Wireless was the first carrier to build a national wireless broadband network. In 2003, Verizon Wireless launched BroadbandAccess, an ultra-high-speed wide-area broadband network and service in two U.S. markets, giving customers wireless access to the Internet, intranets, email and other applications at broadband speeds. This was based on EV-DO (Evolution-Data Optimized) technology and was quickly deployed nationwide. In early 2007, Verizon Wireless launched its next-generation high-speed wireless broadband network, based on EV-DO Revision A (Rev. A) technology. More commonly known as the 3G network, this gave customers the ability to upload files eight to nine times faster than before and giving them faster Internet and email access. Rev. A technology has been made available throughout the entire EV-DO network and at year-end 2007 covered more than 240 million people.
Now, Verizon Wireless is in the midst of launching its fourth generation wireless broadband network based on Long Term Evolution (LTE) technology. 4G LTE offers average data throughput speeds up to 10 times faster than the 3G network - ranging from 5 Mbps to 12 Mbps. The network launched at the end of 2010 in 38 markets and is expected to be in over 175 markets by the end of 2011 and cover the company's entire 3G footprint by 2013.
In 2008, Verizon Wireless made two announcements that will enable its network to provide even more robust data capabilities. First, the company announced its Open Development Initiative, sometimes called the "any apps, any device" initiative. The goal is to give customers the ability to use the wireless device, software and applications of their choice on the Verizon Wireless network. Subject only to meeting minimum technical standards, any device will work -- and any application can be downloaded.
Common factors involving the evolution of Verizon's wireline and wireless networks have positioned the company well in growth markets: ubiquity and reliability, commitment to investment, and advanced technology deployment.
Verizon's plan has been to invest in superior, high-tech networks to provide customers with services that will differentiate the company in a competitive, high-stakes marketplace:
In a larger context, this advanced technology deployment also promises - and has begun to deliver -- benefits in terms of product innovation, economic growth and job creation. In testimony to the U.S. Senate Committee on Commerce, Science and Transportation in 2004 (the year Verizon began its FiOS deployment), Verizon's Chairman and CEO Ivan Seidenberg said that delivering 100 megabits of capacity to people wherever they are - at home, at work, on the go - should be the long-term goal for the communications and high-tech industries. Today, Verizon's FiOS network delivers up to 150 megabits of capacity to individual customers. This network, integrated with nationwide wireless broadband and global IP capabilities, will create a platform for new applications, services and communications technologies, giving Americans even more choices in the electronic communications marketplace.
The communications industry covers a wide spectrum of services, ranging from wireline and wireless voice communications and data access, to video and content delivery. Worldwide demand for these services generated an estimated $1.85 trillion in revenues in 2010.
While the industry was hurt by the recession in 2008 and 2009, key players such as Verizon have maintained focus on pursuing new growth opportunities to transform their businesses. Future industry growth will be driven in particular by demand for broadband data, wireless and enterprise services.
In the U.S., this growth is dependent on developments in several areas: increased customer demand, successful industry consolidation and continued improved regulation. The pace of demand will play a large role in telecommunications growth.
Rapid advances in technology, made possible by global IP, fiber and wireless broadband investment and deployment, continue to transform the nature of the industry and add functionality for customers. Verizon, with its robust wireline and wireless asset base, is well-positioned to retain its status as a global leader in communications services.
About this Document: This document was prepared by Verizon Communications as an industry perspective for investors, potential investors and researchers.
Updated June 2011