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Transformation Interrupted - Part V: Jump-Starting Alternative Business Models
(Please note: Originally published in July 2002, exhibits from this report can be seen in the downloadable .pdf copy)
V: Jump-Starting Alternative Business Models
Place Your Bets, Please
We are now at a rather remarkable turning point in the telecom industry.
One view is to (literally) write off the current, still on-going trillion dollar plus disaster as a once-in–a-generation, capital-caused calamity – a Perfect Storm. In this view, distressed assets are salvaged to the extent possible, stranded assets are liquidated, incumbents consolidate or tough it out until there is a cyclical upturn, and capital flows to 3G wireless and beyond. In this view, the industry is restructured by The Carlyle Group, CD&R, KKR, Forstmann-Little, and Carl Icahn – buy-out firms as cleanup crew. In this view, we at least implicitly accept that telecom gradually goes the way of the steel industry. Darwinism, helped along by a meteor crash, extinguishes the unfit.
Another view is that it’s finally time for the telecom industry to start letting go of what’s no longer working and change. We have tried to demonstrate that despite all the new technologies, buzzwords and venture investments, fundamentally it really hasn’t – not in its value proposition, not in the innovation of services it provides, not in its core business models. It’s “me too, but cheaper”. It’s “more”, but not “different.” If the telecom industry wants to enjoy the fruits of “silicon economics” it will have to start applying some of its principles, rather than just appropriating its terminology.
Those are two extreme ends of a continuum. “Bet the industry decisions” don’t really exist, except in retrospective historical accounts. But in the real business world, every once in a while, “bet the company” decisions do, and they take a long time to play out. Unpleasantly, so far it appears the likely outcome for the industry as a whole is probably skewed much, much more towards Perfect Storm restructuring, and comparatively less to the more optimistic, “let’s dig out and innovate.” What we are suggesting is giving due consideration, especially by surviving challengers, to growth alternatives instead of waiting for euthanasia.
Growth Gridlock
Because defaults are so massive and liquidity crises so pervasive, much of the industry has already had no choice but to pursue brute force financial restructuring—the shot clock does not pause for a “strategy time out”. For some buyout firms carefully-chosen distressed asset situations may well prove to be profitable, if the discount on the assets was sufficiently deep, and a cyclical upturn in basic demand arrives simultaneously with stabilizing prices. We are not optimistic, however.
Even with financial restructuring as the predominant interim solution, the fundamental question remains – where is revenue growth ultimately going to come from?
- A zero-sum, share-stealing game benefiting only a few players? The long-distance industry has shown us where that leads.
- A return of macro-economic growth? Not a scenario that deals with the treadmill of continued unit price erosion, all but conceding that telecom is a commodity like potash.
- Change the rules, or else…? The ILECs, SBC most prominently among them, are pursuing the tactic in Washington and state regulatory commissions of “change the rules or else less broadband and fewer jobs”. The idea being that incremental investment in broadband deployment will be held hostage to more favorable regulatory treatment. While not exactly stimulating growth, except in the sense of gaining some margin of advantage in a zero-sum game, it is a reminder that there is still ample room for the regulatory squabbling which continues on unabated. In May 2002, a federal appeals court ruled that the FCC must overhaul rules and cost accounting under which ILECs are compelled to provide competitors with access to unbundled network elements.
- Incumbent consolidation? Putting two shrinking slices of pie on a single plate doesn’t restore them to full size – “synergies” may result in temporary earnings growth or at least stabilization, but what about revenue? The real, non-trivial, driver behind consolidation is the need to improve balance sheet quality as a fortification to additional stormy weather. With even ILECs paying as much as a 300 basis point premium for working capital, improvement of the capital structure is increasingly urgent in the short term.
- Cost-cutting? Surely. But only to buy time, not to gain ground. It’s a lot like consolidation, above, except remove one slice from the plate. Operating and capital expense reductions, while obviously not revenue producing, are an inevitable, required interim response, especially by the larger incumbents. Given their margin pressures they have little choice, and there may be still substantial unrealized cost-savings – some analysts argue as much as 40% of the post-merger synergies at SBC or, more likely, Verizon, are still untapped
The problem here is that while challengers have died the Death of a Thousand Cuts, for incumbents without a growth strategy it will be the Death of Cutting Thousands. Each 5,000 person RIF (reduction-in-force) does restore hundreds of millions to the still-eroding bottom line. But ultimately chasing the downward slope of revenue with commensurate cost reduction is not a solution.
Practically speaking, it’s not even clear how much further the RIF approach can go – productivity gains have been stalled for some time now, as shown in Exhibit 13. At very lean companies like Worldcom, it is unlikely there are substantial cost savings to be obtained short of exiting certain businesses. At ILECs like Verizon, while in principle there may be substantial remaining “fat” to be synergized away, much of that is tied to business processes that are very, very hard to change and might require billions in capital expenditure (yet more billing and OSS system overhauls, substantial expenditure on new CRM systems, etc.).
Inevitably, given the degree of financial distress now affecting even incumbents, consolidation will be a main feature on the strategic menu. These restructurings provide an unprecedented opportunity for strategically-driven major cost reductions and capital efficiency improvements by adopting some elements of a marketplace business model.
Bearing the Risk: Aligning Capital and Strategy
In a recent interview5, AT&T Chairman and CEO, C. Michael Armstrong reflected on the state of the telecommunications industry, its future, and his tenure at AT&T. Among his themes was the challenge of aligning capital structure with business strategy in an AT&T that spanned a profitable low- or negative-growth long-distance business, a high-growth, cash-producing national cellular carrier, and a debt-burdened, capital-hungry broadband business with the promise of enormous future revenue.
For AT&T, the long-term strategy was that the cash cow of long-distance would pay for and collateralize investments in taking cellular national and digital, which, in turn, would do the same for massive investment in “the next big thing”—broadband. The cyclical decline of one cash cow would be replaced by the even greater ascendancy of another. But two-thirds of the way through that cycle the industry began imploding and now AT&T finds itself selling its broadband assets to Comcast.
While relatively cash rich, AT&T exemplifies the capital and strategy challenge facing the telecom industry at large: funding capital-intensive infrastructure businesses whose discounted cash flow models plainly indicate negative returns for as long as seven or even ten years.
Even with financial restructuring as the predominant interim solution, the fundamental question remains – where is revenue growth ultimately going to come from?
The Bell System network grew organically over a century, financed in part by a government-protected economic model. But even with today’s radically cheaper, more efficient technologies, the nature of the new businesses seeking to compress one hundred years into five is inherently such that you can’t really build “a little bit of network”, see how it goes, and then add on with “pay as you go” capital expenditures. For better or worse, the structure of most network infrastructure businesses is that extremely high fixed costs must be borne up front, followed by the utmost effort to fill the infrastructure to capacity as rapidly as possible with the help of “silicon economics”: application-driven demand which far outruns declining prices.
Assume Nothing
Mr. Armstrong says he not long ago placed a sign on his desk which reads: “Assume Nothing”.
It used to be you could assume quite a bit. Regulatory guarantees provided stable, predictable cash flows, and large infrastructure expenditures (e.g. digitalization) could be borne with a relatively high degree of confidence. As with airline industry deregulation, absent “rate base” tariff protection telecom became subject to potentially extreme volatility in its cost of capital. Regulation as a framework for capital allocation was replaced with large strategic bets on new demand and new technology, the former often being fuzzy, the latter having the illusion of clarity. A race ensued: it was essential to be the first with the biggest, lest your network be the one stranded with half-dug trenches, a few strands of fiber, and no traffic.
The problem remains that the largest players in the industry have been unable to find a new strategic framework that is simultaneously growth-producing, affordable, and acceptable to the capital markets. The conservative ILECs, for example, were not “morons” at all, but are guided by DCF analyses showing decade-long negative cash flows for broadband deployment under fairly optimistic circumstances.
They made about as much of this dilutive investment as Wall Street would tolerate. Down the block in the cable industry, long-measured by EBITDA vs. profitability, cross-subsidized by much richer video ARPUs, broadband cable installations motored on at nearly twice the rate of the ILEC’s DSL deployments. While cable modems, at least initially, seemed to work much better than DSL, they weren’t twice as good.
“The Sporty Game”: We Don’t Play That Anymore
Forcible re-assessment of how to syndicate the risk of massive infrastructure investments may be a small silver lining in the black clouds of the ‘Perfect Storm’.
In the late ‘60s and early ‘70s the commercial aircraft industry introduced a new generation of wide-body jets in the midst of a severe recession. With characteristic swagger, industry executives referred to the high-stakes, winner-take-all game as “sporty”. While ultimately winning, Boeing came within inches of a fatal crash from the enormous risk it undertook in launching the 747. Lockheed’s L-1011 brought it staggering to Washington seeking government loan guarantees, and after the DC-10 program a diminished McDonnell Douglas muddled along on its comparative strength in defense-related aerospace, ultimately being swallowed by Boeing after the “peace dividend” arrived, drying up the US military budget6.
Yes, the industry did consolidate but something much more fundamental happened in high-stakes, capital-intensive industries around the world – they began hedging their bets.
Airbus’ subsequent challenge to Boeing, the development of new, multi-billion dollar automobile “platforms” by Ford and Chrysler, the launch of direct broadcast satellite (DBS) television by News Corporation and GM’s Hughes, Boeing’s subsequent partnering in post-747 airliner development, even Hollywood movie making, all involved systematically syndicating risks and sharing value with partners in the value chain or, more accurately, the value network.
A new risk-sharing model replaced “one big bet, go-it-alone.” The central player retains operational control of the undertaking, decides where it adds the most value, how much of the value it needs to or is able to keep, and builds a partnership network of suppliers, customers, and complementors (often also competitors) which simultaneously add value and “co-capitalize” the undertaking.
All these partners have “skin in the game”, offering their balance sheets, cash investments in exchange for minority equity, sharing in operating expenses, and all manner of other capital risk-sharing devices, in exchange for profit-sharing in the total undertaking. The DCF scenario is essentially the same, the profits if successful don’t come any earlier (although they are more widely shared), but risk is hedged, traded-off against the increased complexity of managing a business in this networked structure, or the possibility of one-big-bet capital structures preventing the business from being built at all.
A Low-Derivatives Diet
For the telecom industry, the “Telco as marketplace” model inherently diminishes risk (because it is less capital-hungry, pacing capital expenditures to services-created cash flows), and contains risk by spreading capital requirements across the strategic partners actually involved in directly creating value.
the “Telco as marketplace” model inherently diminishes … and contains risk by spreading capital requirements across the strategic partners actually involved in directly creating value.
Capital expenditures are less infrastructure-intensive because “build outs” are about small, service-enabling increments of equipment not large expansions of network reach. And there is already an environment of transport network over-capacity with deeply-discounted network assets.
Finally, risk can be syndicated in other ways (inter-connecting and cost-sharing networks to make them more like shared utilities, for example) that needn’t involve stimulating services, or separating them from the underlying commodity network – simply re-using “what’s out there” more efficiently and cheaply.
This model has the potential to both better align capital with strategy, as well as significantly improve capital efficiency through reduction of up front costs and keeping revenues more closely “in phase” with incremental capital expenditures. Throughout the telecom bubble, the capital markets relied on largely debt-heavy sources of financing.
These, in turn, were supported by secondary or derivative markets relying on financial tools from the high-yield markets: securitization and CDO (collateralized debt obligation) structures, whereby risk/return is arrayed in slices or tranches available to purely financial investors. The “Telco as marketplace” model would suggest a return to (technically) simpler, more transparent, and less volatile financing structures in which risk is distributed more directly and in proportionally higher levels across strategic partners, and less to the broad financial markets in general.
Designing the Telco As Marketplace
The “Telco as marketplace” model is a partly strategic, partly opportunistic response to the above “ledger” of market realities. It is one ingredient with the promise of significant longer-term top line growth, much as IBM’s gradual shift in focus to services greatly lessened its dependency on hardware platforms and freed it to pursue open source operating system and middleware innovations.
The Telco as Marketplace model’s emphasis on low-cost services innovation is potentially part of a new round of more productive growth strategies which, when combined with greatly increased capital productivity and operating leverage from process efficiencies, can position communications service providers for growth.
We can proceed in two steps to map the landscape of possible Telco as Marketplace business models, and in a further three steps an industry participant can use this framework to assess and model specific opportunities:
1.Finding Potential Anchor Tenants
The summary ledger above points to potential constructive points of overlap between distressed infrastructure owners, and sub-scale, “distribution-less” service innovators. Currently, most of the minus side, the “liabilities”, apply either to infrastructure owners with every incentive to “de-commoditize” their business and restore growth, or to aspiring players outside the industry (e.g. Microsoft, Cisco) who don’t “own” those liabilities. These non-industry players see the landscape as a grand scale, long-term business opportunity to capture value while reshaping the business models of the infrastructure owners themselves.
So the “Anchor Tenant” framework in Exhibit 14 classifies the largest businesses, with sufficient scale, scope, and resources to act as the organizing force in setting up new Telco as Marketplace businesses in parallel with their core operations. They are categorized in two dimensions: the extent to which their existing infrastructure or strategic intentions are PSTN- vs. internet-centric, and their market focus, enterprise vs. consumer.
We are deliberately refraining from expressing a point of view as to which player type is “the most likely to succeed”. That is to say, depending on the continued deterioration of the industry, the degree of distress, etc., it is conceivable that an ILEC may be as attractive a starting point as a distressed national player (XO or McLeod, for example), or a strategic, cash-rich, non-industry player (i.e. Microsoft).
2.Identifying Complementary Service Innovators
In an identical framework, we classify potential service or application innovators, by rough category of service. In reality, there are dozens if not hundreds of small, aspiring innovators still surviving, and their market focus, if not their underlying technology, is highly flexible. So the “Service Innovator” framework Exhibit 15 is a highly simplified illustration of today’s services landscape – the more “real” (albeit comparatively small) the business (e.g. WebEx in conferencing), the less likely the opportunistic flexibility in their service aspirations.
To explore potential marketplace combinations, we select an anchor tenant type (e.g. an ILEC’s enterprise business), and survey market- and technology-compatible innovators in the same quadrant (PSTN-centric, enterprise) for potential service innovators. In fact, we may explore and populate a given quadrant in much more detail based on our chosen anchor tenant focus.
Matching potential anchor tenants to service innovators based on market and technology focus is the first step in defining the scope of potential business cases. It also sheds light on where greater investigation is required into potential companies (which ones, their market success, their funding status, etc.) in order to thoroughly survey opportunities. Following that, the next three steps are specific to potential business cases.
3.Designing the Value Net
Value Net analysis is an approach to examining how value is created and distributed7. It takes its name from an approach to business strategy which extends the traditional, somewhat linear, notion of “value chains” and looks at how a business can optimize the distribution of value across a network of suppliers, customers, competitors, and complementors, as shown in Exhibit 16.
The philosophical alignment of Value Net analysis and the Telco as Marketplace business model is strong in three respects. First, in a general but also game-theoretic sense, there is sometimes more value to be captured by an individual player when enlarging the total pie for multiple, often non-traditional players. In the Telco as Marketplace Model, an example would be infrastructure providers giving the bulk of application-related revenue to services innovators hosting their offer through the Telco network.
Second, the boundaries of competition and coöperation are redefined (“co-opetition”), engaging competitors in a value network of business resources which can be operated more cheaply by sharing downstream value than by creating an alternative monolithic business model.
In the Telco as Marketplace model, an example would be conferencing services for enterprises in which a conferencing server vendor offers deeply discounted infrastructure to carrier competitors as a alternative and comparatively inexpensive way to access premium corporate customers.
Third, is changing the rules of the game. The art of designing Value Nets is in allocating more value collectively to network partners (sharing the incentive), while simultaneously capturing more than any other single player (i.e. being strategically central to the Value Net). In the Telco as Marketplace model, for example, generally the value distribution would be proportionate, but not linearly so, to the reach of the underlying infrastructure, its sunk capital expenditures, and distribution power (by virtue of points of presence, sales channels, etc.).
Or, from a services innovator’s perspective, the value might be proportionate to the total size of the services portfolio which he has assembled, or caused to be organized in some services consortium. Value Net design involves creative re-thinking of traditional industry structure, as well as game theory and quantitative scenarios of potential outcomes.
4. Quantifying the Business Case
In our recent experience, traditional business case development in telecom has focused too narrowly on pro forma P&Ls in which top line growth is stretched and force-fitted to expense lines, including debt service. Two of our examples in Part IV emphasized the capital efficiency of quasi-Telco as Marketplace growth models, focusing in particular on investment turns – a crude measure of capital efficiency relative to revenues.
In the current environment, potential Value Net-based business cases will want to focus more on capital efficiency in two senses: avoiding fresh capital expenditures by levering the installed based of Value Net partner infrastructure assets, and efficiency also in the narrower quantitative sense of return on invested capital (ROIC) or something approaching economic value added (EVA)[8]. This will tend to result in a portfolio of comparatively small, non-“big bang” businesses which are more quickly accretive, and offer incremental growth through replicating and adapting the Value Net vs. aggressive scaling up of a solitary business case.
5. Experience-Based Business Development
An attractive Telco as Market business case that has been quantified and “war gamed” through scenario testing faces significant implementation hurdles. The main challenge is moving beyond business development practices akin to straightforward, two-party licensing, or “certified partner” and distributor arrangements, vs. building a business together.
There are three critical elements in building a Telco as Marketplace business: business structure and capital efficiency, multi-functional senior management attention, and applying multi-industry “lessons learned.”
We’ve discussed capital efficiency above, but it is also important to note that the potential business structure (equity joint-venture, minority equity cross-holdings, etc.) is one in which investor and CFO attention to capital structure and contingencies in financing agreements is an important and creative element in realizing the business model.
Additionally, building the Telco as Marketplace model raises significant questions in which marketing, finance, network engineering, etc., all at relatively senior levels, are lessons learned, we have tried to distill from non-telecom technology businesses, as well as the case examples we presented earlier. integral to designing a new line of business. Especially for large incumbent carriers, early separation of both the business development process and the resultant “business unit” will be important for effective co-existence with the core business.
Finally, to “lessons learned.”. We have outlined a five-part process, as shown in Exhibit 17, to mapping the landscape of Telco as Marketplace business opportunity, and developing and testing specific business cases. The sixth element, , lessons learned, we have tried to distill from non-telecom technology businesses, as well as the case examples we presented earlier.
Guidelines and Lessons Learned
There are four critical success factors in implementing a Telco as Marketplace business plan:
1.”Setting-Up”: Keep infrastructure and application initiatives “in phase”. Rein-in capital expenditures commensurately until demand-based, not technical feasibility, milestones are passed. No one is any longer going to attempt a multi-billion dollar AIN-like undertaking all at once.
Services must be small, developed individually, at low cost, by many, many aspiring providers. Relatively inexpensive infrastructure must first be organized and tested (capital conservation milestone 1), and deployed at increasing scale only after technical validation with meaningful services (capital conservation milestone 2), and rolled out in response to increasing application success and demand (capital conservation milestone 3), with the infrastructure potentially shared “Illuminet-style” (capital conservation milestone 4) by multiple network operators as demand increases.
Roughly speaking, we believe we are talking in two distinct orders of magnitude for initial deployment: the $100 million range for network infrastructure enhancement, and development and deployment costs per application in the low hundreds of thousand of dollars per service.
To put that in perspective, $500 million annually would be a good estimate of earnings contributions (it’s basically 100% margin, TELRIC accounting notwithstanding) for today’s CLASS services at an ILEC. Or, as an alternative point of comparison, half-a-billion dollars has been a routine (multi-year) expenditure for overhauling Telco billing systems.
Telco as Marketplace applied to the existing PSTN is analogous to the current roll-out of 2.5G cellular service, with i-mode-like services revenue potential.
But, whereas the transition from TDMA cellular to 2.5G networks is often positioned as incremental (if you believe 40-60% additional capital costs are an “increment”), applying new hybrid internet/PSTN services in a Telco as Marketplace model is genuinely incremental.
This is because the network already exists – both of them (i.e. the internet and the PSTN). Light infrastructure is inserted at key control points in the network intelligence in order to host and coordinate service delivery at comparatively low infrastructure cost, and at negligible cost per new service (borne by service entrepreneurs).
So what we have for, say, a $250 million bet on long-term, comparatively high-margin revenue enhancement (both at the services level itself, and the stimulation of underlying network demand) must be contrasted with $250 billion in high-yield debt alone for Perfect Storm era raw infrastructure financing, of which less than 10% is likely recoverable.
Keep in mind, that either through cost- or revenue-sharing or both, an Illuminet-style, shared infrastructure which “glues” services to the network can further improve the economics.
Depending on a carrier’s view of the competitive value and differentiation of Telco as Marketplace, there is no reason why broader, shared, scale can’t be used to turn up the volume on service usage across networks – the more people who can access the services, the more valuable the services become— while further defraying the underlying costs of the glue technology.
2. “Priming the Pump”: Get as many applications as quickly as possible.
Only a market-based mechanism can do this. The simpler the technical standards, the more practical the expectations for any individual service are, and the more pro-active the program which stimulates their creation, the more services will be developed more quickly. At the end of this section we set forth in an exhibit what we believe to be the requirements, or at least some good ideas for stimulating application growth.
3. Growth: Learn how to market.
Bluntly offensive, but there it is. One of the persistent criticisms of the consumer and small-business side of the telecom industry is that marketing is inept, especially for so essential and valuable a service woven into the fabric of almost everyone’s daily life. And, indeed, the industry struggles quite hard, even while still ranking high on marketing expenditures, lavishly using television, sponsoring golf tournaments and NASCAR drivers, and existing side-by-side (in the US, at least) with the benchmark global marketing companies of our age such as Coca-Cola, Nike, and Disney.
In fairness, we think there are three things, two of them relatively recent, underlying this somewhat exaggerated image. First, for older consumers at least, there is the Bell System legacy, or as Lily Tomlin put it in her comedy sketches – “We’re the phone company. We don’t care, we don’t have to”. Arguably, this negative legacy may have been inverted into relatively fond nostalgia now, given the modern-day alternatives.
Second, there is the Perfect Storm itself. For the consumer it began in 1985 as they began feeling the effects of the AT&T divestiture, then accelerated as carriers proliferated, born of the Telecom Act of 1996. Hearing phrases like “Intra-LATA toll” and company names like “Nynex” (which most consumers now try pronouncing as “véruhzohn”), and then telecom bankruptcies as front-page news, it’s no wonder that confusion, and then resentment increased.
Satisfaction has also been in direct proportion to declining customer service levels brought on by the industry changes. To this day, over 20% of local customers believe their service, in fact all service, is provided by AT&T which tells us something about how much “brand equity” has been built recently.
Third, and Telco as Marketplace-related, the telecom industry has a very limited history of innovations needing creative, pro-active marketing. CLASS services, inside wiring service plans, and other hugely-profitable incremental extensions to the basic value proposition have been successfully and very conventionally marketed to the point of near saturation. But, broadband, wireless data, attempted bundling of video services, have been another story entirely
The real marketing problem in telecom is Marketing with a capital ‘M’ – product/service design, market segmentation, bundling, price structures, etc.
This is simply something the industry cannot yet be good at because it has never done much of it before, although it certainly studies it to death. AT&T Wireless’ migration to the Digital OneRate products stands out as one of the few exceptions. It reshaped competition in the entire industry by boldly, not incrementally, capturing the value proposition customers were looking for: predictability of their monthly bill including long-distance charges, much more location-independent pricing (mobility!), as well as a rich bundle of services (voicemail, caller ID, SMS, etc.) coincident with roll-out of a digital network.
4. Underway: Be Easy to Do Business With Business process efficiency as perceived by potential service innovators is a very important aspect of successful implementation. The larger the Telco, the more its reputation precedes it—frustrated and skeptical potential service entrepreneurs must be convinced that this process is very different from the notorious big-ticket infrastructure procurement processes they may have heard about. Among the critical steps to win over new marketplace participants:
- Establish a collaborative tone to refinement of your technical platform specifications early in the process– invite potential service providers to comment, or offer “wish list” requirements for your consideration
- Design a revenue-sharing program in which, if successful, the vast majority of service revenue goes to the service provider
- Bypass slow-moving organizational channels, possibly with a separate business group for this undertaking
- Establish a developer relations program run by someone who will pro-actively and ceaselessly market it, assisting aspiring service developers in understanding the economic case and upside for their portion of the business model.■
Epilog: Now What?
Microsoft’s tanks in Redmond are out on maneuvers, Cisco is paddling out to catch the waves, and buy-out firms are trying to figure out whether gold might be mined from nearly-stranded assets trading at unprecedented discounts. Meanwhile, incumbents are looking with increasing nervousness over their shoulder as the tidal surge from a not-yet-spent Perfect Storm rises perilously close to their headquarters’ lobbies, with a weather eye towards unprecedented consolidation opportunities.
The telecom industry faces a classic “innovators dilemma”: when things are at their worst is often when the largest disruption and innovation opportunities arise.
The telecom industry faces a classic “innovators dilemma”: when things are at their worst is often when the largest disruption and innovation opportunities arise. Microsoft and Cisco’s efforts combined are more than an interesting, futuristic example. They are the most visible indication of meaning-fully directed strategic initiatives to transform traditional telecom architectures and services and dramatically re-allocate value in the telecom industry.
A layer below, invisible to most observers, are companies like Voyant, Telseon, Cogent, and others, making smaller-scale and increasingly successful forays at capturing high value services with low cost infrastructure in a quasi-marketplace model.
Short of an ultra-cheap roll-up strategy led by distressed asset investors, the next step mainly depends on existing Telcos themselves and their investors. Someone needs to be the catalyst, and in the short term that role likely falls to Telcos as the central meeting place for customers, services, and infrastructure.
Surviving, financially-distressed new entrants, stuck in “me too, but cheaper”, and “more” but not “different” have every incentive to seek low-investment, revenue-based ways to pull themselves out of the ditch, if they have sufficient remaining scale.
We would like to believe that incumbents, especially ILECs, are now poised step back from the abyss of shrinking top lines and reconsider fundamental aspects of their business strategy. Perhaps this will happen, but pre-occupation with consolidation does not suggest it is yet a top priority, nor does the further accumulation of hollow regulatory victories such as the recent appeals court ruling over unbundled network element wholesaling.
While our focus here has been on US wireline and data services, a good deal of our perspective applies to troubled, but not yet distressed, wireless carriers and foreign PTTs. Among the ironic developments is that newly de-regulated emerging market carriers in Asia, Eastern Europe, and Latin America, are contemplating VoIP-based infrastructure for international and national long-distance services to enjoy both lower capital and operating expenses.
Combined with renewed interest by European and Asian Tier 1 carriers (France, Germany, Japan), Voice over IP, thought by some to be dead, appears to be poised for a significant resurgence beyond large corporates, potentially paving the way for “bridge” technology enhanced services.
Perhaps more likely is that IXCs (inter-exchange, or long-distance, carriers) will take steps in the direction of service innovation. If not themselves absorbed in consolidation, these carriers bring substantial customer presence, distribution, brand, and traditional PSTN network assets and technical know-how. Having lived with a declining core business for multiple years now, these carriers have the incentive, the (partly) re-aligned cost structures, and the regulatory and network expertise required to make an evolutionary shift in their business strategies towards new sources of growth.
In the end, we believe Telco as Marketplace is a useful framework and ingredient in reconsidering the challenges of telecom industry growth and innovation Its implemenation involves begging, borrowing, and adapting from successful elements of network-oriented business models in other industries, and from telecom itself, as shown in our several examples. But its end result will be a major evolution of the economics of the industry, and, we hope, taking the interrupted industry transformation off hold and putting growth back on line.■
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11 July 02
