 | Issue: | Global-ICT 2003 |
| Article no.: | 8 | |
| Topic: | Global consolidation – a step towards long-term sustainability | |
| Author: | Chris Clark | |
| Title: | President | |
| Organisation: | BT Global Services Wholesale Business | |
| PDF size: | 100KB |
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Article abstract
Telecoms – the first sector to feel the effects of economic downturn in 2000 – remains under pressure, and although the preconditions for a global economic recovery are in place, the upturn is hesitant. Has retrenchment in the sector, though, really been detrimental to the telecoms roadmap? Examining the obstacles facing the industry shows that the consolidation may have actually delivered the conditions for lasting success – but only for those carriers prepared to radically alter their business models.
Full Article
The collapse The collapse of the telecoms market came to a head in 2000 when the extortionate fees for 3G licenses stripped an already over-inflated and hyped market of its cash. As investors pulled out, and analysts corrected their projected profit growth numbers, the market stumbled. Some players left the industry, while others used Chapter 11 legal protection to restructure their financing. Finally, the telecoms industry is showing signs of improvement. While consultancy BDO Stoy Hayward predicts that in the near term business failures in the technology, media and telecoms (TMT) sector will continue rising by three per cent from 687 in Q4 2002 to 706 in Q4 2003, it believes that from 2004 on, this industry will enter a gradual upturn. But total recovery will not be easy. So how can carriers stop themselves becoming one of the statistics, especially when they are still forced to contend with a number of ‘legacy’ issues such as fibre oversupply, competitive pricing and crippling operational expenditure? The fibre glut Just as mobile operators underestimated the time it would take for 3G communications to take off, so fixed operators misjudged the speed of take up of demand for high bandwidth solutions. Of all the fibre laid, an estimated 15 to 20 per cent is currently lit, and of this, only about 20 per cent carries traffic. As a result, there is too much capacity in the market, quashing hopes of many gaining any significant revenue growth. The only way forward is further consolidation in order to win market share from the competition Fiercely competitive pricing Associated with this is the fact that some telcos have attempted to win business at any cost, forcing prices down. In some areas prices are still dropping – around the bandwidth and IP market for example, as providers aggressively compete to survive. This needs to be addressed. For a start, all companies must make a margin, even if it is a slim one – you need to make money. Otherwise, how do you keep the business operational, pay employees and satisfy your shareholders on an ongoing basis? There is also the issue of where the money will come from to invest in the future, given the principle that businesses have to move forward and invest even to keep still. Even if, as identified above, there is no demand at present for further investment in fibre in the ground, without development into future technologies or improvements to existing ones, companies face being left behind. In some areas, price stability is emerging around some voice routes and on some sub-sea cables, between Asia and America for example. But it is limited and is really only occurring in areas where a significant number of carriers have gone under or into Chapter 11, bringing reduced competition, allowing prices to be forced upwards. Crippling operational expenditure This brings us onto the linked issue of operational expenditure, the other key challenge that operators face. Corporate customers need carriers for their global networks for email, ERP and the like. However, the cost of designing, implementing, running and maintaining a network is not insignificant, in particular as quality of service (QoS) becomes increasingly important. This is aside from other costly but necessary overheads like customer service and support. Even without the need for any new equipment, it requires a substantial number of highly trained people and this is an ongoing cost. So while some companies have been able to write off their past capital expenditure, the same cannot be said of their operational expenditure – you can’t zero cost a network engineer, they expect to be regularly paid! These challenges should not be underestimated. The competitive pricing issue is not going to go away in the short-term – there are still carriers taking a price aggressive stance. The problem of over investment in the ground – excess capacity – will not be resolved overnight. So what else can carriers do to their business models to make their future more certain? A lesson in business management? A number of carriers, including BT, have made good headway on this front. They recognised the signs of an unstable market early on and acted to minimise their non-essential assets and costs, so they could focus on their core competencies. BT, for example, disposed of assets such as shares in Japan Telecom to allow it to focus on where it is strong – Europe. Other companies have opted for very narrow business models focusing on niche markets. A lesson can be learnt from all this: to survive and thrive in the current marketplace, telcos must have well structured and tightly focused business models. Predominantly, those carriers that were badly affected by the downturn had all previously spread themselves very thin with extensive global operations. Many held the vision of a wholly owned, end-to-end network and sought to single-handedly provide customers with complete global networks and services. But do the majority of businesses even really need their networks to be so extensive? From world domination to long-term co-operation Global reach, as I have said, is essential for today’s international business community, but for carriers to fully own the network down to the last centimetre in today’s turbulent economic times does not make commercial sense. Instead, alternative methods such as partnering and franchise agreements provide a more successful and cost effective approach. Through these means, network providers will be able to offer customers more in-depth reach than would otherwise have been possible and do so more easily and for improved value. Given the current economic restrictions on investing in network build out, this approach certainly makes sense. So, providing stringent criteria are applied in the selection of the carriers chosen to provide capability in given markets, partnering will form an important role in the new consolidated market place that is evolving. But what this means is that for many their existing business model must change; selling bits or minutes is no longer the primary business transaction, but building total relationships between two carriers is. Long-term co-operation, combined with competition, is going to return. But for it to happen, carriers must follow the business practice they have adopted in the voice market. Here they have worked together over the decades, and what we must do now is work on doing this across the whole portfolio. Operator or service provider: revolutionising the business model As you can see global partnerships will be an important means of optimising network provision and customer service. But for the market to really focus on offering the best customer service, a more radical change may be called for in terms of business model. If you take a step back and look at where it is that value is really added, allowing differentiation and money to be made, it is increasingly in the areas of customer service and branding – not generally network provision. Therefore, the winning strategies are those that concentrate on flawless execution and developing clear winning propositions. Consequently, I believe that many telecom providers stand to gain far more from sourcing and reselling network services than operating infrastructure, enabling them to focus on servicing their customers; and that this trend of ‘providing’ rather than supplying the network, will firmly take off. It offers a quick way for both the fixed and mobile operators to minimise costs. This is particularly essential in the fixed space, where few telcos are currently EBITDA positive. Many of the large mobile operators still, despite their huge debt, maintain their traditional business model built on significant operating cash flow from the voice business carried forward. However this will change in the near future as certain high margin tariffs like fixed-to-mobile rates or roaming charges are under immense market and regulatory pressure. Hence they too need to find new growth opportunities to leverage 3G and address its attendant costs. By outsourcing network provision, these companies can remove their upfront investment, ongoing maintenance costs and the headache of running a next-generation, robust and reliable network – and therefore much of the risk. Why spend millions on building your own that will take time to fill when someone else can do it for you? This route also allows the provider to focus on customer relations and service innovation – the key areas in today’s cut-throat communications environment. Consequently they will be able to add value to the market place by focusing solely on offering optimum customer service and, I believe, improve customer faith and loyalty. This model not only offers a more speedy way to making money but also allows for providers to achieve the lowest total cost of ownership, which in these tight times is a real attraction to this approach. In summary The downturn has undeniably taught telecoms players a great deal about how to best approach the market and run services – but this has not been the only positive outcome of what has been considered an era of telecoms ‘apocalypse’. As the market continues to consolidate, and operators focus on either supplying or ‘’providing’ the network, so it is being strengthened. Using alliances of partners is an opportunity to answer the long-standing quest to provide true global solutions, and from the reseller side there will come an increased customer understanding and focus, resulting in carriers offering solutions to meet real customer needs – and that can’t be bad. Additionally, the downturn and price collapse has also managed to open up the market for new technologies. It has forced telecommunications providers to roll out new technologies, like MPLS, more quickly and at a much lower price than they would have done in a buoyant market. As a result, these new generation networks have penetrated the market far quicker than expected. Conclusion Consequently, while some further consolidation in the industry is inevitable, I believe we stand at the dawn of a new era for the telecommunications industry. Those operators who have analysed the market and aligned themselves to it will not be deterred by current adverse conditions; they will seek to find ways of getting around the technical and commercial obstacles. And, once the industry has made a full recovery, it will be in a prime position for further development and implementation. In short, the winners will be those players who have a strong financial base upon which to build, a focused business model, the right propositions, strong partners and a relentless focus on customers. It is these that are the conditions for lasting success.
