A recent Ernst & Young study on the future of the communications industry, which claims to be “one of the most comprehensive investigations yet into the sweeping changes taking place in global communications,” warns that success in future will go to those companies that manage to address customer needs fastest and best. Nothing terribly surprising there, you may think, since it is hard to imagine an industry sector in which this comment would not be true. However, Ernst & Young’s report carries some grim warnings for traditional telco giants. Wireless communication, it claims, “will increasingly overtake landline as the standard model for voice customers anywhere and at any time.” If true, this raises some interesting questions, for example about the sizeable debts some companies have incurred for all that expensive cable-laying. It also suggests some interesting scenarios in which new entrants could leapfrog traditional players by providing innovative services at rock bottom prices. Nor is this the report’s only prediction. “Long distance communications will cease to be a viable stand-alone business,” it says. It argues that to survive, long distance transport providers will have to migrate to what the firm calls “end-to-end services”. This means getting right in there with services to the doorstep, and trying to grab the largest possible customer base. Again, this would be a lot easier to do if anyone had a clue as to what those future services are likely to be. However, one of the oddities about the telco market is that although it is undergoing massive change, customers are still mired in the traditional telco business model, which consists of per-minute charging for voice calls, ridiculous interconnect deals between telcos that don’t yet reflect the (much reduced) real costs of carrying calls, and insufficient or overly expensive bandwidth. Paul Gemski, director of finance at Energis, takes the view that although the future is unpredictable, the major players can take some comfort from the fact that matters are more stable today than they were in the early days of deregulation. “Back then it was very difficult to tell how things would develop. We saw a number of competitors jump into voice telephony services, led by the cable TV companies. As a proposition, that business went south, as the saying goes, but it is coming back into order with some hefty market consolidation. Here in the UK we have quite a well developed competitive position,” he says. UK companies, he argues, stand to benefit from the fact that the UK is more advanced than most European countries as far as deregulation is concerned. “It offers us excellent opportunities to work with European partners and drive better services and lower prices throughout the European market,” he says. Gemski sees the present business model of per-minute charging for voice-based services as likely to continue for a while. However, he believes that technology changes, such as Asymmetric Digital Subscriber Line (ADSL), combined with new requirements for corporate networks, will eventually open the way for a change to an “always on” model, based on a flat fee. (In July, for example, BT announced plans to roll out ADSL to 420 or so exchanges.) It costs the operator next to nothing for an ADSL connection to stay open while idle. So a per-minute charging policy for this kind of service has no justification other than the tired argument that this is the way telcos have always done things. Moreover, Gemski points out that even without ADSL, as the cost-per-unit falls under competitive pressure, it follows that the relative costs of managing a metered billing system will keep rising, generating further pressure to abandon it. He agrees with the fundamental finding of the Ernst & Young report, that telcos will have to focus on value-added services in some way or other to stay in the game over the medium term. “We have seen how the computer industry has moved from a box delivery to an added-value service business. In our view, the delivery of managed services will be the cost driver in this industry. Companies which make this transition will continue to enjoy rapid growth,” he says. Graham Cove, managing director of Redstone Telecom, and a founder of the cell phone company One2One, says that his firm’s solution has been to invest in intelligence in the network platform, and in related technologies such as billing and switching. He points out that dramatically cutting the scale of investment needed to get into the game is always a good way of leveraging a lower price model. One Redstone trick is that when buying the large switches it requires at each of its nodal points (it has six in the UK), it does not follow the traditional practice of buying a fully equipped switch for £4m or so. It buys the carcass and adds circuits as required, thus matching investment with revenue increases. Redstone’s wholesale arrangements with other telcos also tend to be coupled to volume, so that it ends up paying only for what it uses. Cove says this cost model is different to traditional telcos, such as BT. “We lease bandwidth instead of digging up roads. The people we lease our fibre from, such as FibreNet, use dense-wave-division multiplexing (DWDM) technology to get greater bandwidth down the same fibre, which drives down costs,” he explains. In other words, DWDM performs the same job as ADSL does with copper wire – increased traffic down existing infrastructure. Redstone is pressing forward on new fronts too, one instance of which is its pilot of packet-switching technology known as Voice over Internet Protocol (VoIP), which allows voice and data to ride the same network. VoIP chops up voice calls up into the type of data packets that corporate Local Area Networks (LANs) use to transmit data. This technology is already being harnessed to convert voice calls into data on the Internet. A VoIP Internet call to the US, for example, costs only what your Internet service provider charges to connect to the Web (usually a local rate). Cove is also interested in ADSL. “With six switches and access points in 43 cities across the UK, we have the option of building new local loops or leasing BT’s loops to gain customers in both the business and consumer sectors. All this is very exciting,” he says. Jeremy Preston, marketing director at Global One, observes that as the biggest single location in Europe for multinational corporations, the UK market is hugely interesting for European telcos. His strategy here is to focus on building metropolitan area networks (MANs). These are rings of fibre-optic cable run around major cities that provide high-bandwidth for corporate customers. The company brought its Birmingham MAN on-line on 30 July, to complement its London one, and it will have its Manchester version working at the end of August. The trick for telcos like Global One is to win local, national and international business. The local “win” is based on its MAN business, where the aim is to persuade corporates to sign up to take advantage of the high bandwidth for data and, increasingly, for voice traffic. National and international private networks for corporate clients are achieved by striking interconnect arrangements with other carriers. “The telco business is very interesting in that we are all both competing for end users and wholesaling services to each other,” Preston says. The incentive for telcos to stay “honest” as far as the wholesale business is concerned is that if telco A does not supply a decent wholesale service to telco B, that business will simply migrate to an alternative supplier. The high level of competition in the UK market, compared to state-owned, newly privatised or still regulated European rivals, makes this model all the more viable. Bandwidth brokerage, as this wholesale buying and selling is called, is now a huge game. With DWDM technology, which sends signals simultaneously down different portions of the light spectrum, so creating many “virtual” fibres out of a single fibre optic cable, the opportunity exists for adventurous carriers to invest in transmission equipment that can create massive bandwidth, which would obviously have a major impact on the bandwidth brokerage game. However, as Preston notes, “People have to make economic judgements about their ability to fill the bandwidth they buy. The unit cost associated with vast bandwidths is only low if you manage to fill the capacity of the pipe with wholesale or retail traffic,” he says. This fear about whether sufficient demand will arise to justify the investment in high-bandwidth technologies is one of the factors acting as a brake on the entire industry at present. (The other, it is often said, is the way the incumbent telco giants in each country have been able to damp down drives for change – in some cases by successfully halting deregulation). Nigel Horne, chairman of Alcatel, a telecommunications equipment manufacturer, agrees that there is an underlying nervousness in the industry about over-investing in bandwidth. However, he regards this as a sign the industry has “forgotten its roots”. “The reason telcos all over the world have continually tended to make larger profits than anticipated is that their forecasts always underestimate the extent to which people like to talk. If they can see each other at the same time, which is what high bandwidth gives you the chance of doing, then they will take advantage of this. Video telephony will fill all the bandwidth that the telcos can generate, even if nothing else comes along,” he argues. David Rogerson, principal telecoms consultant at market research company Ovum, is similarly optimistic. Ovum released a report on the industry at the end of July, in association with Arthur Andersen, which called for the industry to rationalise interconnect charges between telcos along cost lines. One of the things Ovum uncovered in preparing the report is that demand for bandwidth is already insatiable. “Incumbent players with large national networks have to get used to seeing the telecoms business as a wholesale market that is potentially as big a revenue stream for them as their retail market to businesses and to consumers. In fact, many would argue that the big operators are not best placed to be retailers anyway, since their size slows them down. What (the big players) fear is that they will open the floodgates to competition through their wholesale arm, only to see the value of bandwidth falling, and then get crunched by the regulator on the retail side – leaving no profit there, either!” Rogerson says. John Mittens, founder of Interoute, an international telco carrier, admits that frustration with lingering monopolistic tendencies among traditional carriers is a daily fact of life when Interoute is trying to set up international private networks for clients. The company has launched a wholly-owned subsidiary, i-21, which plans to complete Europe’s largest and fastest wholly-owned fibre-optic network shortly after the start of 2001. The primary driver for this, Mittens explains, has been the absence of any pan-European network that was not cobbled together by interconnect agreements. “We compete aggressively, but we can only go so far in dropping our price point to our customers, because there is always a chunk of network in the middle of where we want to go, where the prices are controlled by the old monopoly carriers,” he says. Mittens has an equally firm view on the subject of how much bandwidth the industry needs and should aim for. “In my view, excess is not enough!” he says. When Interoute was building its US network, it only required a 10 megabits per second (Mbps) line. However, leasing that capacity turned out to be more expensive than buying a 155Mbps line, so it decided on the “extravagant” option of excess capacity. “We then found we could lower prices. This generated more business and we quickly filled the pipe to bursting. The moral of the story is that if the price is right, applications will come along to take advantage of the additional capacity,” he concludes. TELECOM FDS SURVEY: NUMBERS UNOBTAINABLE? A survey of 50 of the top telecoms companies has highlighted some of the major challenges facing FDs in the sector. The study, by recruitment and market survey specialists Chartwell Search and Selection, asked FDs to rate their business priorities and identify key areas within the telecoms industry. – 75% of those surveyed said that the greatest pressure facing new entrants to the market was the need to develop first class management accounting to support commercial activities. – 70% of respondents highlighted the need to introduce effective accounting systems and business controls in two major areas: network costing and traffic analysis; and customer profitability measurement. – 66% said they were hard pressed to find the financial skills in-house for bid preparation work. – 66% of respondents rated lack of integration between financial and non-financial reporting as one of the major barriers to implementing change. Other difficulties raised by the survey were: – the complexity of the telecommunications business, and the fact that it was a new arena for many of the executives interviewed. – the difficulty of obtaining “buy-in” from senior colleagues to the new financial disciplines. – the need to understand the sources of profitability and cash flow in a dynamic industry.