telecom@ucbvax.ARPA (10/22/84)
From: Jon Solomon (the Moderator) <Telecom-Request@MIT-MC>
TELECOM Digest Monday, 22 Oct 1984 Volume 4 : Issue 105
Today's Topics:
Secure Voice Facilities
Today's World of Phones...
usage sensitive pricing
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Date: 18 Oct 84 18:14:58 CDT (Thu)
From: nbires!uokvax!emks@Berkeley (Kurt F. Sauer)
Subject: Secure Voice Facilities
/***** uokvax:fa.telecom / ucbvax!telecom / 6:57 am Oct 11, 1984 */
What a joke! The NSA-designed phones will of course use DES chips
(where else will you get 500,000 chips capable of "secure" speech
encryption in 2 years) which they can read but few others can.
Putting half a million cheap, *truly* secure phones on the US/world
market would make it possible for all countries and interested parties
to keep their information safe from the NSA. Somehow I think they're
sharper than that -- so what's the hidden purpose? /* ---------- */
John,
The US government only uses DES for sensitive *unclassified*
information. There are better algorithms/systems for encrypting data;
they're used to protect classified information. I can't elaborate
much, but users don't just "pick" keys, they're provided. (I.e. the
government won't just give the phones to just *anyone* who happens to
want one.)
kurt
[...I think "cheap" and "truely secure" are mutually excl.
properties...]
------------------------------
Date: Sun, 21-Oct-84 11:48:09 PDT
From: Lauren Weinstein <vortex!lauren@RAND-UNIX.ARPA>
Subject: Today's World of Phones...
PHONES By ANDREW POLLACK c.1984 N.Y. Times News Servvice
NEW YORK - When the historic breakup of the American Telephone and
Telegraph Co. was announced in January 1982, executives at scores of
telecommunications companies were certain that a huge, lucrative
market had been laid at their feet. ''It's what we've been pushing for
for a long time,'' William G. McGowan, chairman of the MCI
Communications Corp., said the day he heard the news.
McGowan probably winces when he remembers those words now. On
Monday, MCI reported a plunge in quarterly profits from 1983. In
addition, its third-quarter revenues actually dropped from the prior
three months. Its main source of comfort is that none of its
competitors - including AT&T itself - is doing any better.
The year 1 A.D. (after divestiture) has proved a bonanza of sorts
for consumers, who have seen prices for long-distance phone service
and telephone equipment plummet as myriad companies battle for their
business. But it has been a brutal year for MCI, ITT, GTE-Sprint, and
other contenders for shares of what had once been the domain of AT&T.
For them the Jan. 1 breakup of the old phone monolith has brought
price wars, management shake-ups, foreign competition, depressed
profits - even red ink in some cases - and plunging stock prices.
''No one's doing well,'' said James M. McCabe, telecommunications
analyst for Prudential-Bache Securities. ''It's a miserable market for
everybody.'' Wall Street isn't predicting a rapid recovery. Asked
about his list of recommended stocks, William Becklean, Kidder,
Peabody & Co.'s telecommunications analyst, said, ''It's kind of dried
up.''
AT&T has fought harder to protect its markets than competitors had
expected. It has slashed prices and rolled out new products at a rapid
pace. Although its efforts have often been clumsy and ineffectual -
AT&T, too, is having a bad bottom-line year - even a staggering
elephant inflicts damage on those around it.
What is more, the breakup has called attention to the new market
opportunities, attracting Japanese and European companies as well as
the newly independent Bell operating companies. Thus, the few
companies that once had considered AT&T to be the only competition are
finding themselves competing with one another and with newcomers.
Severe competition is expected to continue for at least another
two years, and a shakeout is inevitable. No one doubts that the big
companies such as MCI and GTE-Sprint in long distance and Northern
Telecom and the Rolm Corp. in so-called private branch exchanges -
telephone systems used mainly in offices - will come through the
debacle intact. But the future of some of the smaller contenders
remains uncertain.
There have already been casualties. In the residential phone
market, Phone-Mate and Technicom International had to be acquired by
other companies just to survive the fray. Datapoint, Rockwell
International and Telesciences have folded their tents in the private
branch exchange (PBX) business. In long-distance service, U.S.
Telephone was bought out after it plunged into the red and its chief
executive resigned.
There are some healthy companies, too, of course. The local Bell
operating companies, still isolated from most competition, are doing
well. So are players in certain market niches, such as data
communications and equipment used by the phone companies themselves.
Indeed, industry executives, despite the bruising of 1984, remain
optimistic about the breakup's ultimate effect on the survivors. ''I
still think it's going to be an opportunity,'' said Allan L.
Rayfield, president of diversified products and services at the GTE
Corporation. ''I'd say in the ability to grow the business and attract
the customers, we are better off,'' said William E. Conway, chief
financial officer of MCI.
For now, however, gloomy news abounds throughout the industry. In
the last 10 days alone, GTE reported losses in both its telephone
equipment business and in its communications sector, which provides
long-distance and data communications service; ITT said it was laying
off about 800 employees because of problems in its telecommunications
business; Rolm, the major manufacturer of business telephone equipment
that is being acquired by the International Business Machines
Corporation, reported an operating loss for the quarter. And the
third-quarter earnings that AT&T itself reported this week were a
sharp drop from its second quarter and well below analysts' cheery
expectations.
All of the companies are suffering from a fierce struggle to
position themselves in the new era of telecommunications. ''I've seen
in 18 months as much change in products and markets and customer needs
as I saw in the past 10 or 15 years,'' said Desmond F. Hudson,
president of Northern Telecom Inc., the United States arm of the
Canadian telephone equipment giant.
Many of the entrenched telecommunications companies, most of which
had cheered on divestiture, had it better in an odd way when they were
still fighting a monopolistic AT&T. MCI, for instance, had taken huge
bites out of AT&T over the last few years by charging lower rates for
long-distance telephone calls. Because it could not get equal
connections to the AT&T-owned local networks, its service was a bit
awkward for users, requiring that they punch in complex numerical
codes to tie into the MCI system. MCI's connection costs were low,
however, and it passed those savings on to consumers in the form of
lower long-distance prices.
Now, however, the AT&T breakup has given MCI what it always
thought it wanted - equal access to the local networks. The unwelcome
side effect is that its costs - and thus its prices - are no longer
well below AT&T's. MCI, in effect, used to offer a unique product. Now
it offers the same product as AT&T and a host of smaller newcomers and
is feeling the effects of competition.
''MCI was always yelling for equal access,'' said Becklean of
Kidder, Peabody. ''They never wanted equal prices. But unfortunately,
you can't get one without the other.''
Although price cutting and other forms of fierce competition have
characterized the entire telecommunications industry this year,
different sectors have been hit with differing degrees of ferocity.
The first market to turn sour was the residential phone market,
which started to go bust even before the breakup occurred. Customer
phone sales were deregulated last year, and people began buying their
phones rather than leasing them. It seemed like a great opportunity
for manufacturers of all sorts of telephones.
But consumers did not react the way phone makers had hoped. Many
continued to lease their phones. And many bought the AT&T equipment
that they already had in place. ''The consumer was a little slower
than we expected,'' said Rayfield of GTE, which recently liquidated
500,000 phones at bargain-basement prices.
Meanwhile, new, often defective, phones flooded the market.
Factories had sprung up throughout Asia with one thought in mind: to
ship cheap phones to the newly deregulated and vast United States
market. Everyone from blow-drier makers to consumer electronics
companies entered the business.
The result was a huge pile-up of inventories. To make matters
worse, there was a consumer backlash against relatively poor quality
phones. Also, a government-ordered switch in frequencies used for
cordless phones made most of the existing ones obsolescent.
The punishment was brutal. Phone-Mate, long a major manufacturer
of answering machines, reported a huge loss and was taken over by
Asahi Corp., its Japanese supplier. Technicom International is merging
with its majority shareholder, TIE-communications, to stay afloat.
Teleconcepts, Webcor Electronics, Comdial and Dynascan have all
sustained heavy losses.
In contrast to that kind of bloodbath, the situation in private
branch exchanges - machines that connect all the phones in a large
office - has been downright tranquil. Ever since the government's
Carterfone decision of 1968 opened telephone equipment up to
competition, a group of companies has steadily gained ground at the
expense of a Bell monopoly that was lackadaisical in marketing and
lethargic in innovating. Led by Northern Telecom, Rolm and Mitel, they
whittled AT&T's share of PBX shipments to below 25 percent.
Since the leading companies were already firmly entrenched by the
time the breakup took place, there was not much benefit they could
derive from it. In fact, they will probably lose market share. AT&T
has become more aggressive in its own marketing. Japanese and European
companies are making inroads, as are start-up domestic concerns. And
most of all, the newly independent Bell operating companies are coming
on strong.
To make matters worse, the overall growth of the PBX market is
slowing to less than 5 percent a year, compared with 8 percent or so
in the late 1970s and 1980s. That leaves an estimated 40 companies
vying for a PBX business that can now support maybe a half-dozen
players.
The result is the usual price war and consequent profit plunge.
PBX systems once sold for $1,000 a line; prices are now down to $600
to $700 a line. Earlier this year, prices plummeted briefly to as low
as $400 a line - well below break-even for any of the companies.
''There is no such thing as a final price'' anymore, said James T.
O'Gorman of the ELRA Group, a consulting firm that advises companies
on the purchase of telecommunications equipment ''The PBX market is in
trouble,'' said Alan Fross, vice president of the Eastern Management
Group, a Parsippany, N.J., consulting firm.
Some of the upheaval is traceable to the entry of the Bell
operating companies into the market. The consent decree breaking up
the Bell System originally prohibited the local phone companies from
selling equipment to customers. But Judge Harold H. Greene changed the
decree to allow the companies to sell, but not to manufacture,
equipment.
That has been a mixed blessing for the PBX companies. Some -
notably NEC, Japan's leading telecommunications company - have
increased their sales by using the Bell operating companies as
distributors.
But for others, the operating companies represent an unwelcome new
source of competition. This is especially true for the legions of
small distributors, known collectively as the interconnect industry,
that sell and install business telephone equipment. The Bell companies
often compete with existing distributors carrying the same products,
which only adds to the confusion and price competition.
Union College in Schenectady, N.Y., which is in the market for a
new PBX, last week received three bids for the same Northern Telecom
PBX
- one from Northern Telecom itself, one from Continental Telephone, an
independent telephone company, and one from a distributor. It also
received three bids on an Intecom PBX - one from the manufacturer, one
from General Electric and one from Nynex, the Bell company serving New
York State. Not only are the Intecom bidders offering the same
equipment, but they have all contracted with the same local company to
perform the installation. Yet all three offered different prices.
The school has not yet decided which bid to accept. ''It should be
interesting,'' said Diane Winkler, the school's telecommunications
manager.
Nor are the Bell operating companies sticking to their own
backyards. Both the Southern New England Telephone Co., which serves
Connecticut, and US West, which serves most of the Western part of the
country, are vying for business in New York, along with Nynex.
The operating companies are also attacking in another way. They
are reviving Centrex, a service that connects phones in a building
through the phone company's switching center, rather than through a
box on the customer's premises.
Most people expected Centrex, which offered few sophisticated
features, to go the way of the dinosaurs. Instead, the Bell companies
have cut prices and started to incorporate many of the features found
in PBX's, such as the ability to transfer a call automatically to
another phone if the first one is not answered or is busy.
The North American Telecommunications Association, which
represents the interconnect industry, has cried foul. It filed a
complaint with the Federal Communications Commission, charging that
adding such features violates the ban on the Bell companies providing
computerized or ''enhanced'' services from the same facilities that
provide basic telephone service. The FCC has not yet acted on the
complaint.
The association predicts even tougher times ahead for its
industry. It estimates that total shipments by the interconnect
vendors - all those besides AT&T and the Bell operating companies -
will drop from 1.4 million lines worth $1.13 billion at the
manufacturer's level in 1983 to 990,000 lines, worth only $700
million, in 1985.
The major players are developing new, more sophisticated PBX's.
For example, PBX's are now being made to transmit data as well as
telephone conversations. Perfecting them will require a heavy and
risky investment in software, one that not all of the interconnect
companies may be in a position to make.
Mitel, once a front-runner, has had serious problems with its
newest PBX, leading to losses, and it is unclear whether, in the
current unforgiving market, it can ever fully recover. GTE has also
had production problems with its newest PBX, contributing to the
company's equipment losses. AT&T is having production wobbles with its
new System 75 PBX and its equipment subsidiary is eternally in a state
of reorganization.
Nevertheless, AT&T is too big to fall by the wayside and has the
resources of Bell Labs behind it. Rolm-IBM and Northern Telecom also
are certain to remain major players. Intecom, NEC, GTE, Mitel, ITT and
others are fighting for the remaining spots in the top five.
It is, however, in the market for long-distance service that the
breakup has created a truly unprecedented opportunity to pick up
market share. For the first time, the alternative long-distance
companies will be given ''equal access'' to the local telephone
systems. That means consumers will be able to use a competitive
service without dialing many extra digits and without needing a tone
phone.
For the competitors, the opportunity comes at a high cost. Since
May, all of the long-distance companies have had to pay higher charges
for access to the local networks. In areas with equal access, they
must pay the same charges as AT&T. And late last week the local
companies asked the FCC to allow them to raise those access charges.
A year ago access charges were 17 percent of MCI's revenues, said
Conway. Today they are 26 percent and the percentage will go up as
more equal access is phased in.
AT&T, meanwhile, has lowered its rates by 6.1 percent since May.
That has forced the other long-distance companies to remove their
monthly service fee and take other measures to stay price competitive.
To win new customers, companies have been advertising heavily and
also spending money to build new networks. MCI is investing about $1
billion this year and plans to spend $1 billion next year. GTE is
putting almost as much into Sprint. Earlier this year, Sprint had to
quit accepting new customers in some areas because it ran out of
capacity.
MCI said that in cities with equal access, it is winning 10 to 15
percent of the market, triple its current market share. Rayfield of
GTE said Sprint is winning 6 to 15 percent of the market in equal
access cities.
But price competition, combined with rising costs, has resulted in
lower revenues for the companies, even when their volume sales
increased.
Both MCI and GTE-Sprint picked up many new customers in their
third quarters, yet saw their overall revenues drop from the second
quarter. In the old days, MCI used to grow 20 percent between
consecutive quarters.
Profit margins were squeezed badly, too. MCI's earnings for the
quarter were only 3 cents a share, an 86 percent drop from the 22
cents a share it earned in the third quarter of 1983. Toward the end
of the quarter the profit squeeze became so painful that MCI had to
raise its rates back up.
Clearly, the companies need better market penetration to get a
robust bottom line. But they are not gaining as quickly as they had
hoped.
Part of the problem is that consumers are not forced to choose a
long-distance company. If they do not specify differently, they are
assigned by default to AT&T. Indeed, in Charleston, S.C., the first
city to get equal access, AT&T retained 75 to 80 percent of the
customers. Nearly half of those were customers by default, people who
failed to specify a carrier. ***************
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Date: Sun, 21 Oct 84 20:00 EDT
From: Dehn@MIT-MULTICS.ARPA (Joseph W. Dehn III)
Subject: usage sensitive pricing
While it is true that the cost of the plant is insensitive to usage
only up to some level of usage, after which more capability must be
added, it is also the case that a large part of the plant is
completely insensitive to usage. What is not clear to me is what
fraction of the plant has this characteristic.
The lines from my house to the central office, including the part that
enters my house, the part along the street, all the poles, and
whatever circuitry is involved in connecting the line to the switching
equipment, all must be installed and maintained in exactly the same
manner whether I make one five minute call per month or stay
continuously logged in to some computer. This part of the plant is
physically large, and does not seem (to the outside observer) to have
benefitted much from advancing electronic technology.
The actual switching equipment, and the trunk lines between local
central offices, however, seem to be subject to decreasing cost due to
advances in electronics, fiber optics, etc. Thus, the part of the
plant which would have to be expanded if there were more usage seems
to be the part which should be a decreasing part of the total cost.
Does anyone have any meaningful estimates of how these costs break
down? How are they changing?
-jwd3
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End of TELECOM Digest
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