|Latin America III 1998
|New Challenges for Leader Companies in a ‘Commoditising’ Telecommunications Industry
|Luis Carlos Sanabria
|Business Development Manager
A wave of change is transforming the economic, social, and political landscape for nearly every person on the planet. For telecommunications operators, it is imperative to focus on understanding the challenges that they are and will be facing in order to be part of this projected US$1 trillion sector in year 2001. This article discusses the trends affecting the industry, its driving forces and impact on Brazil’s new telecommunications scenario, and concludes with the sectoral and structural resources required.
It is generally accepted that in our world of competitive choice, the customer is King. However, it is questionable whether we all understand this to mean the same thing. Often it is all too tempting and easy to become immersed in and focused on our own particular area of technology without stopping to think if it is really what the customer wants or whether it can be delivered in a form the customer can profitably use or even understand. Major Change in Thinking For many companies this is a major change in thinking. Historically, in telecommunications the market has been led by technology and production. Competition was not really an issue; but now this US$750 billion industry is not only the fastest growing industry but living an explosive evolution under rapidly changing rules, defined by those customers. Trends and Driving Forces The dramatic evolution is driven by three basic factors: · Rapid Technological Innovations: Technological advances are driving the exponential increase in hardware and software performances. Transmission performance is doubling every year, integration density is doubling every 1.5 years, and productivity in software development is doubling every 5 years. This is opening new frontiers to telecommunications operators using this technology. · Sector Deregulation: Deregulation is not up for discussion any more. According to our forecasts, by the year 2000 more than 85% of the world’s Gross Domestic Product (GDP) will be produced in countries with deregulated telecommunications markets, covering 80% of the world’s population. Today’s still regulated services as a form of market protection is no longer an argument for established telecommunications operators. They now have to deal with the requirements of facing competition and exploring new market opportunities. · Revolution of Customer Expectations: In addition, customers are getting used to the fact that basic problems are solved in more imaginative ways. Communications used to mean writing a letter, then it went to mobile chatting and soon it could mean mobile virtual reality chatting through a cybemet. From Fragmentation to Convergence These driving forces are modifying the industry, leading from a phase of fragmentation and confusion today, to a consolidation in the near future, from multiple full network operators specialised by region, to a handful of customer-specialised service providers. In this redefinition of the industry three basic trends can be recognised: convergence, specialisation and expansion. Convergence Technology has made possible the provision of the traditional telephone services over other networks (television, energy), and at the same time has allowed different networks to provide advanced television services. At the same time, technology has eased the handling and accessing of information. This has increased the end-users’ perceived value for information, and changed the expectation on their communications providers. Residential customers are now expecting one-stop shopping for their high-quality personal communications with others, others meaning not only local friends, family, digital banking, delivery and buying systems and entertainment services, but also the cyberworld. This decrease in the traditional technological boundaries between dissimilar industries has provoked a rush for alliances, merges and acquisitions, in order to retain access to the customer which, in the end, will still be the part of the value chain with the highest margins. This is not limited only to communications with others, but makes possible the bundling of traditional commodity services, like gas, energy etc., with communications, so customers are facing bundled services including mobile telecommunications services, cable television (CATV) services, Internet services, energy/gas/water services and security services upon others. Here begins the service scene convergence, in which the run for the control over the customer is bringing apparently different services together. In the business arena, one-stop shopping is positioning information technology (IT) companies like EDS and IBM as competitors of telecommunications operators. Customers expecting more than simple communications, who are also looking for accountability and services that will impact their business, are willing to outsource their telecommunications infrastructure to companies specialised in the handling of their specific information sector. As a result, the information industry (financial institutions, newspapers etc.), infrastructure industry (utility companies), entertainment industry (film and television productions) and retail industry (supermarkets, distributors, etc.) are all coming together bringing the industry convergence into play. The main lesson to be learnt is that technology alone does not matter any more. Without the right technology you are out of business, and with it you are not at all safe. If you do not own the customer, consider yourself in an uncomfortable situation. Specialisation This rush for owning the customer has developed the concept of owning the right customer, creating companies with the ability to deliver services and technology-integration to particular niches. This includes not only potential high revenue customers (multinational companies, business customers, class A residential etc.), but also the less cost intensive ones (other operators, specialised branches etc.). Specialisation does not require owning the infrastructure – only the customers themselves, so that the provision of services is split from traditional operators, opening a window for re-sellers. Even the appearance of traders of telecommunications capacity, comparable with the stock market, shows the commoditisation of these carrier businesses. Expansion Specialised telecommunications companies are focusing on customers who do not have a geographical boundary, playing in industries with a long-standing global presence (financial sector, automobile sector, etc.). The customers’ needs, particularly in the arena of international business telecommunications, are growing rapidly in scope, both geographically and technologically. There is increased demand for wide coverage through partnerships or acquisitions, but operators are expanding with an additional motivation: their traditional markets are being eroded by other operators in a similar process of expansion. But not all the core-competencies required in all corners of the world will be dominated, which raises a further issue. The delivery of communications services means that service providers are dependent on each other and on their suppliers, so while success requires that lean operators make competitive moves, it also depends on being able to effectively collaborate with suppliers, allied providers, and even competitors. So the expansion implies not only a geographical scene, but also a broader, reachable knowledge dependent on location. Impact of these Trends Convergence, specialisation and expansion are playing a significant role in modelling the new type of industry in which Siemens is active; therefore they are crucial in the elaboration of a company strategy. The impact of these trends on users’ expectation for quality will force our traditional customers (operators) to deal with a new knowledge demanded and will include new companies coming from different industries in our customer list. The change in our customer paradigm, from one driven by technology and regional infrastructure, to one focused on creating value for customers through the provision of services, redefines the services we should offer and the value of our solutions. It means the ability to live in an industry with customers still living with the old paradigm, and with a growing number of more demanding ones. We expect that in year 2000, 33.5% of total investment will be done by new operators, the so-called new entrants. Traditionally it was said, let your customer focus on their customer. Now this is no longer the case. Supporting customers’ core activities is crucial, due to the strong link between customised technology and competitiveness. As such, a thorough knowledge of the customer’s customers, and of the processes involved in providing value is important. Customers who are developing regional business practices therefore require a regional focus. Sectoral and Structural Impacts This situation will be particularly salient in the Brazilian telecommunications sector. Upon the most radical and successful sector redefinition in Latin America, which allows the complete liberalisation by year 2001, established operators (now with international management) will have to redefine the old technology focus in order to be able to face competition in year 1999. By December 3rd 1998, between one and three Competing Local Exchange Carriers (CLEC), and one Competing Inter-Exchange Carrier (CIXC) will be granted a licence and will be able to select their markets to serve, with an incumbent committed to fulfil universalisation rules. Conclusion We will see specialisation, expansion and convergence occurring simultaneously, in a huge telecommunications market which today only represents 2.7% of the Brazilian GDP and has the potential of growing to match US levels of 3.5% of GDP. Challenging times have arrived in Brazil’s telecommunications market; times that will last and will bring growth and wealth to Mercosur.