|Asia-Pacific III 2009
|Telecom companies in a smaller, flatter, faster world
|Vice President, Asia-Pacific Region
John Tolton is Vice President for the Asia-Pacific Region for Arbinet Corporation, a provider of international voice and IP solutions to telecommunications carriers and service providers. Prior to joining Arbinet, Mr Tolton served as Vice President, Asia-Pacific for iBasis and as the Chief Operating Officer at Nextel Philippines. Mr Tolton previously established one of the first joint ventures in the Indonesian mobile telecommunications industry to form PT Mobile Selular Indonesia. John Tolton holds a graduate degree in Asia Pacific Management from the McRae Institute for Management from Capilano College in Vancouver and a Bachelor of Arts in International Relations from Victoria College, the University of Toronto.
Technological developments have led to deregulation, economic liberalization and integration of a range of industries across the globe. Information and communication technologies and pervasive media are shrinking the world, letting people in remote villages experience far off places and communicate with their family and friends. Distance learning develops their skills for outsourcing, off-shoring and remote jobs. The world’s technological transformation puts pressure on the very businesses that are facilitating the change and creating today’s smaller, flatter and faster world.
Today there are more than four billion active mobile phones and close to three billion people connected via the Internet, an Internet that is increasingly available and useful on a handheld device. The impacts of the availability of communications to a rapidly increasing portion of the world’s population are great and affecting everyone – consumers, regulators, governments, hardware manufacturers, software developers, service providers, educators and others. There are few, if any, industries that are not confronted with the need to adapt or presented with new opportunities as a result of this smaller, flatter, faster world. The companies in information and communications technology industries are benefiting and struggling to adapt more than most. These are the companies that are helping to develop, deploy and support the technology that is enabling the world to shrink. They are making, marketing and selling the smaller and ever lower-cost devices that are being adopted by people around the world. They are trying to satisfy the needs, aspirations and desires of a new world of users that now have access to and are adopting the new devices that bring them into contact with information, people and opportunity that is untethered to their locality. Many of these companies are desperately trying to hold onto current business as their existing customers develop new needs and gain new options for products and services. Innovation has enabled convergence between a number of related technology industries. Now companies are crossing industry boundaries. Computer companies are colliding with telecom equipment manufacturers and consumer electronics companies. They are influencing the results and prospects of network operators. Media companies, television networks, cable companies and traditional telecom service providers are competing, collaborating and cannibalizing each other. The pace of change and the resulting forces of competition are leading most ICT companies to alter their business models. For the converging technology companies that are reshaping the world, market growth is not the problem. Global telecommunications revenue across all segments is estimated to exceed US$2.5 trillion for 2009 and forecast to grow at a CAGR (compound annual growth rate) of more than ten per cent in coming years1. The telecom industry is not a bad place to be. Although there are significant pressures on margins, there are also significant opportunities to win. Given the challenges of the new world, and the opportunities that smaller, faster, cheaper devices offer, it is clear that, to succeed, companies need to pick their battles. No one company can be all things to all people. They need to become horizontally organized and horizontally focused as fast as possible. They need to find models for collaboration with companies in other horizontal segments of the industry. Those that do will thrive. Those that do not will be in peril. What is a phone company? If we pause and ask ourselves, “What is a phone company?”, the answer today is varied. Is it the national or regional company that we grew up with? Is it your mobile service provider? Or is it a company like Skype, a software company like Google, or a computer company like Apple? Apple shares the revenue generated on some of the networks on which the iPhone operates. Skype spent virtually no money on advertising, deployed no fibre, but today its ‘network’ carries more international voice traffic than any telecommunications carrier in the world. Not all of it is free calling. The company’s mid-year results indicated it was well on its way to generating more than US$600 million in international calling revenue in 2009. Or is the phone company the provider of your cable television or Internet access? In today’s smaller, flatter, faster world, the phone company is all of the above. All of these companies are competing in an expanding marketplace, but all cannot succeed by working in the same ways that they did in the past. Mobile The new ‘winners’ in the marketplace are not immune to the challenges faced by the former PTTs. In fact, in our smaller, flatter, faster world, pressures on business models appear in record time. Mobile subscriber growth is slowing in many countries as penetration reaches some level. This leads to pricing pressure. Competition intensifies forcing the mobile operators to focus on customer retention and to deal with the reality that most of their revenues are coming from voice and messaging – from services that, if not already, will soon be under pressure. Mobile penetration exceeds 100 per cent in many developed economies. It exceeds 100 per cent in Russia and the Ukraine. While India is at, perhaps, 40 per cent overall penetration, in Chennai it is at 111 per cent while in Mumbai it has reached 90 per cent.2 This summer in China, as the subscriber base exceeded 50 per cent of the population, there were signs that pricing pressure was emerging. Price competition broke out between the leading mobile providers as they fought for new subscribers. In Europe, market leader Vodafone waived roaming fees this summer as it sought to retain subscribers and pull others from competitors. In India, leading mobile companies are shifting their attention to the rural and lower ARPU segments of society as they look to continue their growth. As with traditional carriers, the mobile companies can see new areas for growth. There are new markets such as machine-to-machine communications and rural areas and users who seek new value-added applications – data applications. To enter these new markets and meet the new desires of users requires large outlays of capital. A recent article in OSS/BSS Magazine estimated that to increase revenue by ten per cent, companies would require a 10X increase in bandwidth. This is good news for equipment providers, but how can an integrated service provider win? How does a carrier win? The telecoms industry continues to evolve from one where the leaders were vertically organized national operators delivering all elements of the communications value chain – from equipment to infrastructure to end-user services such as inbound and outbound voice, domestic as well as international services and an array of data services demanded by customers large and small – to an industry organized in a much more horizontal fashion. Individual carriers can no longer competitively develop, assemble, manage and support as many elements of this value chain as they used to. This reality is forcing traditional telecom companies to fundamentally rethink and alter their businesses in order to survive and thrive in this new world. It is a trend playing out in developed as well as developing nations. Retail companies need to focus on innovation in services and products, on marketing these services, on customer acquisition and retention and on content sales. Behind the scenes, others are specializing in backbone operations, BSS and OSS, application hosting, international voice and/or network deployments. Thousands of individuals and companies big and small are designing applications to ride on the telecom networks. Movement towards outsourcing in all its guises is gathering steam. Network sharing and other forms of intercompany collaboration are deemed increasingly essential. International voice Examining one segment, where I have much recent experience, we can clearly see the trends and challenges outlined in this article playing out. International voice traffic grew at a CAGR of 14 per cent over the last 25 years. This was driven by the convergence of deregulation with the reduction in cost of equipment and infrastructure, the emergence of the Internet, which enabled calls to be packetized and routed more efficiently over new and existing networks, and the emergence of mobile networks and devices. Prices have declined significantly, but in all but a few recent years, they have not come down as fast as volumes have grown. International voice is estimated to be a US$100 billion segment of telecommunications industry3. And it is forecast to keep growing. While it remains essential for a retail carrier to offer its customers high quality international voice services, the challenges of supplying this service are significant. For most large fixed or mobile carriers, international voice represents between five and ten per cent of their total revenues. The majority of traffic from each country typically goes to just a few destinations, but a retail carrier must terminate calls to all countries. To succeed in international voice requires scale and most carriers will never have the volume of international traffic to be profitable in this segment when the investment in new IP-based infrastructure supported by optimized back-office systems combine with the expense of staffing and running an international organization. Declining end-user pricing driven by competition simply adds to the problem. As the international voice market has grown and evolved, a vibrant wholesale business has developed that now carries close to 60 per cent of all international traffic. Many companies are reducing the number of traditional bilateral interconnects and using international specialists to carry and terminate an increasing proportion of their retail calls. In the coming years, the forces pushing the industry towards a horizontal structure will continue to exert their pressures. It is incumbent on all service providers to determine what is critical to their success in their chosen marketplace and what can be trusted to partners.