The telecoms industry continues to under-perform on all major stockmarkets around the world.
At the same time, not a day passes that doesn’t see the announcement of another interesting telecoms development. Billions of people around the globe can’t wait for telecoms products such as mobile, Internet, broadband, VoIP and so on.
So what’s wrong with this industry? Shouldn’t it be out-performing on those stockmarkets?
An estimated 500,000 companies around the world now generate more than 50% of their revenues via the Internet (e-commerce), a further indication of the value of the underlying telecoms infrastructure to the global economy. Why can’t we cash in on this success story?
Thousands of new companies are sprouting up around the telecoms and Internet industries. They can’t all be making the wrong bet on the wrong industry. So the potential for growth and financial success is most certainly there.
I remain convinced that most of the problems the industry is facing at the moment have to do with its current structure. Demand is certainly there, but the industry fails to deliver along the lines of customer expectations.
This applies to both the business and consumer markets.
Unless the industry restructures itself we will continue to have major problems of misalignment between demand and supply. With the market moving away from the one-size-fits-all voice product to a large number of broadband-based applications, specialists rather than generalists are needed in the industry. This applies to both the infrastructure and the end-user services.
In order to fuel the Internet economy the infrastructure providers (telcos) need to move much faster and deeper into NGN, IP and FttN, and to expand their infrastructure with what I call value-added infrastructure services. This what the Internet economy is looking for, and it includes data centres, content hosting, network management at a Layer 2 level, billing, outsourcing, back-office applications based on ASP, and so on.
This would help the telcos to reverse their downward spiral of shrinking margins.
Broadband delivers applications and there is a clear requirement for these applications to be delivered by a very large number of specialised content and service providers. As in any other consumer-based industry this necessitates a well-functioning business model. Such a distribution model (manufacturing, wholesale, retail) has not yet been properly developed in the telco industry, and unless this happens the industry will continue to under-perform.
There are too many bottlenecks in the old model that prevent the industry from being efficient and effective. Unless an environment is created that will allow these companies to deliver these services in economically viable models this market will be unable to achieve its full business and financial potential.
With 90% of all the industry profits in the hands of a few national operators – who, in the meantime, have seen their market share drop to 60% and lower –this is most certainly not the right balance for a well-functioning and ultimately prosperous industry.
The current vertically-integrated networks from these incumbents don’t allow other companies to utilise these networks in any viable way. They operate as huge bottlenecks in the Internet economy. For example, the content providers in the mobile market are unable to develop business models that stack up, because those engineering-focussed operators don’t really want them as independent sales and marketing companies on their network. A further complication, of course, is that the mobile networks can’t handle a large number of content providers – we need wireless broadband (IP) based networks for that.
In the broadband market new players are struggling to get proper wholesale services from the incumbents, to enable them to develop new innovative services on the fixed network.
It has finally become clear that, unless the incumbents change, or are forced to change, this situation will continue, to the detriment of the national economy and telco shareholders. So something will have to give, and it had better be sooner rather than later.
All the signs point to the incumbents having to give in. So, they should initiate their own structural changes, or they will be forced upon them.
The financial market sees the mismatch between what the market wants and what the industry delivers, and they don’t like it. Financial analysts in the UK believed that, for the benefit of the future of BT, the operational separation didn’t go far enough. Nevertheless, the first financial signs from BT are looking promising (large financial improvements in wholesale and value-added infrastructure service revenues in the half year following the operational separation).
It is to be hoped that other slow movers in this industry will see the light and begin to move in the direction of this long overdue restructuring.
Some of the investment companies are starting to get into the action also. They see an opportunity to step in where telcos fail to act. By buying themselves into these companies they are looking at structural separation models that are driven by commerce rather than by regulation. The ultimate result will be a deconstruction of the incumbent telcos, which will also include others –duopolists and many of the mobile companies – followed by a restructure which will see a flurry of mergers and acquisitions along the lines of the new converging industry and the market models that are emerging around the world.
In short, this is not an easy transition, and it will take many years. Some of the Europeans are on the right track. BT is leading, and France, Netherlands, Ireland, Sweden and some of the others are following. None of these models are ideal, but the restructuring has to start somewhere.
Those who have already begun to address the issue will need at least 2-3 years to make the transition and these companies could start seeing the light at the end of the tunnel in 2008. Others will follow after that.
While it will be a slow development, I wouldn’t be surprised if further intervention from the financial market led to a speeding-up of the process. I stand by my decade-old prediction that by the end of this decade more than 40% of the old incumbents will have gone. I may be a few years off, but the essence of that prediction remains in place.
See also: Global – Analysis – Telecommunications Industry