Wednesday, June 27, 2007

Impact of Telecom and Internet on economic growth

[Some excerpts from Business Week article--BSA]

Telecom: Back From The Dead

All those YouTube videos and MySpace pages zipping back and forth on the Net have revived the telecom industry—and charged up the economy

In those taken-for-granted wires, cables, and computers lies a remarkable tale of resurrection. Seven years ago the communications business, made up of companies providing everything from phones to computer networks to routers and switches, was laid low by the worst collapse to hit a U.S. industry since the Great Depression.

Over the past year, however, the telecom industry has roared back to life. Credit a steady rise in appetite for broadband Internet connections, which enable easy consumption of watch-my-cat video clips, iPod music files, and such Web-inspired services as free Internet phoning. Indeed, this year broadband adoption among U.S. adults is expected to cross the important threshold of 50%.

About half of the Internet's transmission capacity was going unused in 2002. Today that pipeline has almost doubled in size, and yet the unused portion is down to about 30%. As a result, the price that companies pay for bandwidth in some parts of the U.S. is on the rise after six years of declines.

But telecom's revival has implications way beyond Wall Street. A dollar spent on telecom infrastructure produces an outsize impact on the U.S. economy as a whole. Indeed, a growing body of research has found that telecom investment plays a vital role in stimulating economic growth and productivity--more so than money spent on roads, electricity, or even education. Communication assets generate massive benefits by slashing the cost of doing business across the economy.

A 2001 paper in the American Economic Review, written by Lars-Hendrik Röller of Berlin's Social Science Research Center and Leonard Waverman of the London Business School, concluded that the spread of land-based telecommunications networks in 21 developed nations accounted for one-third of the increase in economic output between 1970 and 1990. Other studies suggest fiber-optic and wireless networks provide their own special jolt to the economies of rich and poor nations alike. "Out of the ashes of the tech crisis we got a world-class, spanking-new communications network," says Mark Zandi, chief economist for Moody Corp.'s (MCO ) Inc. "That has been key to outsized productivity gains ever since."

The $900 billion industry looks far different than it did in 2000. The balance of power has shifted toward Web upstarts such as YouTube and MySpace that barely registered seven years ago. The Bell phone companies, meanwhile, have consolidated and are furiously developing services they hope will let them capitalize on the billions they're investing to build speedy new networks.

It's not clear, though, how much of the value flowing from those networks will be captured by the Bell companies themselves. The big phone companies don't have a history of developing game-changing technologies in a competitive arena. "They've got a high hill to climb," says William E. Kennard, a former Federal Communications Commission chairman who is now managing director of Carlyle Group, a large private equity firm that has purchased some telecom assets.

Online video barely existed in 2000. Today, fully one-third of all Internet traffic comes from Web videos, The Landlord included. Thanks to bandwidth-hungry services such as YouTube, global Internet traffic from 2003 to 2006 grew at a compounded annual rate of 75% a year, according to TeleGeography. "When you compound those numbers, I don't care how much inventory you have, it's going to disappear off the shelf," says Level 3 CEO Crowe.

If the old telecom world was dominated by bloated regional monopolies, the new world is a competitive mosh pit stocked with sinewy players. That's reflected in how much more productive the industry has become. While telecom revenues are now 19% higher than they were in 2000, that money supports just 1.1 million workers, down nearly 30% from boom-era levels. "It has gotten unrelentingly competitive in every area: broadband, land line, and wireless," says AT&T's new CEO, Randall Stephenson.

For the big carriers such as at&t, Verizon, and Qwest, the main challenge is to slow defections of traditional land-line customers while producing faster revenue growth in new markets such as wireless, Internet service, pay TV, and advertising. The carriers must overcome their reputation for being "dumb pipes" and prove they can fill their networks with innovative bundles of products and services that strike a chord with customers--all while battling cable operators, which are poaching millions of phone customers, and fending off or making peace with aggressive new entrants such as Google and Apple. (AAPL )