Increasing telecommunications channel capacity: Impacts on firm profitability

In calling for the deployment of high-capacity telecommunications infrastructures, the Clinton Administration is relying on market forces to drive demand toward self-sustaining development. There is little doubt that many firms will embrace the new telecommunications services for a variety of reasons including market differentiation, vertical market integration, and other organization-specific factors. However, there is little evidence at the firm level that adopting the use of increased-capacity telecommunications technologies is associated with improvements in firm profitability. This study seeks to identify the presence of impacts on firm income that can be associated with the adoption of T1 telecommunications services. The findings of previous studies are used to formulate a model of expected impacts of increasing telecommunications channel capacities on revenues and costs. The model posits that these impacts operate along independent paths increasing revenues and decreasing costs resulting in increased income. An interrupted time series model is used to test the hypothesized effects. Any threats to validity from the main effect of history are controlled by including a matching control group of firms. Autoregressive, integrated moving average (ARIMA) models are used to identify and control for systematic components of the data series' stochastic processes. Residuals of the ARIMA models are then analyzed in a panel design. Statistical analysis using a random effects model reveals that adopting T1 telecommunications channel capacity has a positive, significant relationship with firm income. However, the findings do not support the underlying model. There is no significant relationship found between adopting T1 services and revenues. In addition, the relationship between adoption and costs, though significant, does not carry the expected sign. Further analysis reveals the presence of a significant three-way interaction term, combining costs, revenues and adoption, that is positively related to income. In calling for further research to replicate and expand on these findings, it is speculated that the adoption of higher-capacity telecommunication infrastructures may induce a synergistic effect between a firm's costs and revenue structures that positively impacts profitability.