 | Issue: | Global-ICT 2002 |
| Article no.: | 8 | |
| Topic: | The end of the beginning of telecoms | |
| Author: | Chris Dines | |
| Title: | Chief Executive Officer | |
| Organisation: | Ovum | |
| PDF size: | 40KB |
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Article abstract
The old familiar structure of the telecom industry is changing. Traditional carriers are evolving into data service based infocom companies. Fixed and mobile telephone, broadcast, Internet, local, wide area and home networks are all converging through multi-provider partnerships to create a pervasive environment to deliver text, voice, data, music and images. Content will play a central role. The transformation of the industry will require companies to invest and hone their skills to meet the changing customer demands.
Full Article
The end of the beginning of telecoms The cosy old voice telecoms industry that has evolved since 1876 is metamorphosing into a rapidly-changing collection of data-centric, immature industries that are highly competitive, largely ill-defined and poorly understood. The phase of creative destruction in 2000 and 2001 is an exciting market development that is changing the global telecoms industry forever. The industry’s financial collapse is not the cause, but rather a symptom of the demise of the old telecoms supply chain, of the emergence of a new broadband communications industry, and of investors’ and suppliers’ collective failure to understand that the fundamental business drivers have also changed forever. After years of massive investments in network infrastructure, telecommunications players are reducing their investments in Latin America considerably, due to the economic conditions and the political and economic uncertainty surrounding the region. The telecoms market in Latin America still needs infrastructure development, but this should beaccompanied by the development of higher-margin, high-value services. Companies that build broadband networks need to understand the trends underlying demand from wholesale and retail customers in each country as well as at intra and inter-regional levels. Only by matching system buildout to demand will network operators ensure optimum network utilisation levels and a decent return on their investments. Emergence of the infocomms industry Telecoms will no longer exist as a discrete industry in the future. As broadband proliferates, many previously separate industries are converging, notably the broadcast, fixed telecoms, mobile telecoms, Internet, media and IT sectors, and forming a new infocomms industry. This new industry is based upon the communication of information, in its broadest senses. · Communication will take place via a multitude of networks – such as telecoms, broadcast and Internet, local, wide-area and home – and via a multitude of devices – such as PC, TV, web access devices, mobile and fixed phone, in-car navigational aids and telemetry handsets · Information will include both user-generated and publicly-available information in a variety of formats – such as text, voice, data, music and pictures – and will increasingly be continuous and animated in nature, rather than static. The infocomms environment requires that investors and competitors target different business objectives for each type of infocomms business and revise them over time in line with rapidly-changing market, product and customer life cycles. However, many telecoms players are trying to move into the new environment using the legacy behaviour and structure of an industry that has failed to recognise that the telecoms sector has changed completely, and that there is no going back. Furthermore, out-dated regulatory structures are exacerbating the disconnect between new market realities and old-style organisational approaches. From supply-driven to demand-led: crossing the chasm Latin American users have been on the end of a massive wave of innovations for the past few years. These take time to digest and understand, and the current economic climate is certainly holding back end-user investment in broadband services and devices. However, most of today’s so-called “broadband applications” consist simply of old applications delivered via new communications or distribution channels. Suppliers continue to be largely technology-driven, rather than demand-led. Telecoms suppliers principally define broadband in their own terms – as technology, physical infrastructure, network infrastructure, network services, content provision and so on. Broadband networks have been built with no sound understanding of where demand for applications and solutions that run over those networks will come from. For example, after five years when no new fibre cables were activated in the region, operators in Latin America put a great deal of new fibre into service between 1999 and 2001. This led to bandwidth capacity that far exceeded the demand and caused a drastic drop in bandwidth prices. Customers increasingly want quality and added value, on their terms, not just infrastructure. This means that in the future users will buy broadband communications solutions from those companies that best understand their requirements – not necessarily from telcos. Most Internet demand in the region comes from business customers and is based on dial-up narrow band connections. There is high pent-up demand for very basic narrow band Internet connectivity across the region from both business and residential customers. Demand for high-margin, high-value products is proving slow to materialise, even in well-developed countries with higher-than-average broadband penetration. Crossing the chasm between delivering supply-led, technology-centric products to early adopters and delivering demand-driven, service-centric infocomms solutions to mass markets is proving hard for telcos to achieve. Making the end-user connection In future, the functionality required to deliver a user-centric solution in infocomms will be available from a multitude of highly-specialised providers, rather than from a single, vertically-integrated supplier. This will lead to the formation of a value web of functionality around a user, with many different providers delivering different elements of the end-user solution. Telcos increasingly recognise that “owning” the end-customer is not necessarily the best option for them in the infocomms value web. In the future, telcos will have to become more focused. They will be unable to continue to be all things to all men. As the telecoms industry shifts, and customer demand changes, many distinct markets and new roles are emerging that will provide good opportunities for different types of telecoms players. Telecoms players will need to form partnerships with those companies that best understand the end-user’s demands for content and for services built upon the underlying communications networks. Many potential partners may be outside the telecoms sector altogether. For example, there is a large potential market for the distribution of Spanish-language content in Latin America. This provides an opportunity for players from outside the telecoms industry that are forging ahead with customer-centric content solutions based on ‘triple-play’ (TV, telephony and Internet) services. Companies such as VTR (Chile), UnitedGlobalCom (Mexico and Brazil), NetUno and Intercable (Venezuela) are all looking to build on their strong penetration, and take advantage of deregulation, to offer converged content-based services. The success of these ventures is likely to depend upon the partnerships these operators sign. Most of them have already announced that they will look for telecom partners in order to offer telephony services. With the tight market conditions they need more than just their own expertise to offer phone service. The role of politicians in promoting user demand Government officials in the region recognise the importance of the Internet to economic growth and are open to capital and technological inflows to promote web development. Most observers agree, however, that policy pertaining to use of the Internet, particularly legal recognition of commercial transactions done via the web – vital to generate consumer confidence and e-commerce – is in short supply. Efforts to remedy this situation are occurring only at a local level, and a broader approach needs to be taken. Regional policies are needed so regional e-commerce can really develop. Regional recognition of the legality of e-commerce will promote the confidence needed to generate Internet transactions across borders and really foment Internet use. Such regional cooperation is less advanced than the efforts of individual nations and depends upon the framework of organisations like the Southern Cone Common Market (Mercosur) and the North American Free Trade Agreement. A range of new business models is required Telecoms companies are now beginning to face up to the realities of having to deliver sustainable profits to shareholders in the infocomms environment. Organisational structures and processes that worked in a monopolistic environment cannot be sustained; they are unsuitable for the new industries and competitive pressures that are emerging. The old organisational structures will need to be replaced by more flexible ones that adapt quickly as markets change. Telecoms will not disappear overnight. The challenge for telecoms players will be to find ways to manage their legacy business, while simultaneously adapting their business models and organisations to the realities of the infocomms environment. One size fits all no longer applies; successful infocomms companies will replace their old business models with a range of models that fit the industries and market sectors that they address. Latin American countries have different levels of telecoms development and competition. New entrants and global operators need to address the different markets with different mixes of product and services. Moreover, there is a clear division between business and consumer markets. Higher-value applications and services are being developed first for the more lucrative business markets, while consumers are still mainly interested in getting basic Internet access. Actions for suppliers Technology and network companies must become customer-focused. There has been much introverted activity by developers who move on to more innovative schemes before their basic developments have been accepted by users. This business model will not deliver long-term revenue or profitability. Technology innovation must continue, but must be better aligned to underlying wholesale and retail demand trends, as providers and investors will seek to generate an early return on their investments. This will be a major shift in behaviour for many technologically and network focused organisations but cannot be avoided. Identify core competencies. Do-it-all companies will not survive in the new broadband world. All providers in the infocomms sector need to identify their core strengths that will form the basis for a long-term sustainable business model. Weaknesses should be removed – either sold off, or written off. Streamline business structure. Once core competencies have been identified, companies need to optimize their structures. There are two key objectives to bear in mind: ensure the right balance of operating expenses to revenue so that profitability is maintained; and ensure the right management structure so that decision-making is swift, flexibility is maintained, and time-to-market is reduced. Companies that maintain old structures, with heavy internal operations, will see profitability decline rapidly. Network investment must continue. The local loop is still a major bottleneck for the expansion of broadband services; it stifles potential growth, especially in the consumer and small business markets. The local loop unbundling model has largely failed, preventing new entrants from offering innovative broadband services at competitive prices. Both industry and government must invest in broadband access networks to enable economic growth based on the technologies and communications patterns of the future, not the past. Backbone network investment must also continue, as old technologies and architectures must be replaced. Although over-capacity is a fact of life on the main city-to-city routes, upgrades are still required for older infrastructure on secondary routes, and for the last mile. Only those companies that are focussed horizontally on delivering latest-technology, lowest-unit cost networks will survive. In many cases, the network owners of today will need to decide whether it is more economic for them to upgrade their existing legacy infrastructure, or to ditch it completely and either replace it with new networks based on latest broadband technologies, or buy their networks, wholesale, from specialist providers. Identify partners. No company will be able to deliver complex end-user solutions on its own. Some companies need to accept that they may no longer be the main end-user partner in a solution. Companies need to move fast to identify solutions niches and their role in them, and to pick key partners that can add value to the total solution.
