Telecom: Merged, Converged, On the Verge

By Edward Cone  |  Posted 07-05-2005

Telecom: Merged, Converged, On the Verge

Marvin Maynard feels the telecom industry's pain, and sometimes it feels pretty good. "Every time I do a new contract I get a lower unit cost, or a new service, or better reliability," says the chief information officer of Jefferson-Pilot Corp., a $4 billion insurer headquartered in Greensboro, N.C.

But the roiling telecom industry is causing Maynard some headaches, too. "The resolution of some problems has not been a good experience of late," he says, citing a recent phone outage at one of JP's key remote sites that dragged on, thanks to confusion over which network provider was responsible for fixing it.

Meanwhile, the technology that is driving change in the industry has not yet delivered on its promises. Voice over IP is the coming thing, but Maynard's data networks aren't ready to support it throughout the company, which operates nationwide. Powerful handheld devices and mobile services can keep JP's field agents connected, but a lack of standards limits the types of device the company can support.

"The networks are converging, and the opportunity is enormous," says Maynard. "But the platforms are diverging, and that concerns me a bit."

Opportunity, progress, confusion, concern: that's the telecom customer experience, circa mid-2005. Big mergers have been coming so fast that it's tough to keep track of which company owns what anymore, much less enumerate the different services they offer, and say they will offer soon. But those mergers have begun to bring the future into focus.

The combination of Sprint Corp. with Nextel Communications Inc., announced in December 2004; SBC Communications Inc.'s purchase of AT&T Corp., in January; and Verizon Communications Inc.'s pricey acquisition of MCI Inc., in May, created three behemoths built to compete in a converging market. Even if it is not yet clear who will dominate a future in which voice telecommunications are subsumed into data communications, the long-anticipated convergence of services and networks has taken a big step forward.

Like a Greek tragedy, the telecom industry story is a generational saga, complete with hubris and incest (see "Family Tree," opposite). The era of the standalone long-distance company has passed, and the era of price-per-minute voice communications is ending, taking hundreds of billions of dollars in revenue with it.

After more than a decade of consolidation, the mergers between the regional operating companies (formed after the breakup of Ma Bell) and the long-distance and wireless companies may be approaching a critical mass.

"I would never say consolidation has reached a steady state or a final point, but we are unlikely to see deals as big, or with such high impact," says Raj Pherwani, a San Francisco-based partner at Bain & Co. who follows the telecom industry.

The newly merged supercarriers—including SBC, Verizon and Sprint Nextel—aim to deliver what Pherwani calls the first wave of convergence: presenting customers with one bill and a single source of sales support for a variety of voice and data services via wireless and wireline networks.

He expects to see this front-end convergence happen in earnest over the next 12 to 24 months. The next wave is what he calls "feature convergence," where services such as voice mail will work seamlessly on any platform.

Then comes the ability to share data from various devices across both wireless and wireline networks, which will require a set of protocols still under development, as well as improvements to network intelligence. Finally, Pherwani says, comes network convergence: a common core network that can handle large volumes of any kind of data. That, he adds, is still perhaps five years from making a real difference in terms of ease of use and additional services to customers, and perhaps a decade away from full rollout.

This is the transition that the big phone companies must navigate. "The future of telecom is 'techcom,' the convergence of tech and telecom where voice is integrated into software applications and the phone is integrated into other devices," says Scott Cleland, principal of the Washington, D.C.-based Precursor Group, an independent analysis firm.

"Just as e-mail has largely replaced the fax, multifunction VoIP will replace circuit phone service, and multimode techcom handsets will increasingly replace traditional phones because they are substantially better and cheaper—a dream come true for the enterprise."

Lead Story:
Telecom Merged and Converged: The victory of the supercarriers and the transformation of American networking

  • Not as Easy as it Sounds
  • CIOs Optimistic, Not Expectant

    History of AssimilationTwelve major carriers shrink to just three.
    Deregulation Pays Off The regulatory picture still looks good—for customers.
    Tiny Chips and Lizard Brains As tech gets smarter, so must the networks that may eventually connect billions of devices.

    Next Page: Not as Easy as it Sounds

    Not as Easy

    as it Sounds">

    As attractive as the dream sounds, obstacles remain. Nearly a decade after the Telecommunications Act of 1996, regulation and taxation remain volatile issues, and a host of technology and management challenges remain (see "Long Arm of the Law," above). But the landscape of telecom 2010 is already being mapped.

    And for all the heft and power of the new Verizon, SBC and Sprint Nextel, or the ambitions of Qwest Communications International (still hungry after losing out in the pursuit of MCI), or the entrenched position in its home markets of the last traditional Baby Bell, BellSouth Corp.—your next phone company may not even be a phone company.

    It could be a software firm like Vonage Holdings Corp., or a tech services giant like IBM Corp. Or it might one of the cable providers, which, by analyst estimates, already provide from 5 to 10 percent of corporate data services.

    Jeffrey Eisenach, a veteran industry analyst and former White House advisor on telecom issues, now serves as executive vice chairman of the CapAnalysis Group consultancy in Washington, D.C. He says we are headed to an environment with nationwide, integrated companies.

    "We are moving from a world with far too many players to perhaps five or seven major companies, and lots on the margin. Ultimately, we'll probably see two behemoths going after each other."

    The danger to the incumbent phone companies is imminent. "Where you had to outsource to the big carriers in the past to have a global telecom network, now you just need access to the Internet," says Cleland. "You can be your own telecom operator, and do it better and cheaper." Technology is already threatening the market for value-added telecom services. Microsoft Corp., for example, has had VoIP capability embedded in its XP server since 2002, but the recent upgrade of its Live Communications Server makes the service scalable to an enterprise level.

    "You're talking a few thousand bucks for 15,000 users to be able to initiate a conference call with a mouse-click," he says. Users don't need to schedule calls in advance, and they can work together over shared documents during the call.

    "In five years, the telecom sector will look more like the tech sector," Cleland observes. "It will be much more diverse, dynamic, competitive, and consumer electronics-driven than it is today. The winners will be technology companies such as Intel, Microsoft, Yahoo! and many others; and pure wireless companies that embrace the shift away from the network to the edge, like Sprint Nextel."

    In other words, users with smart handheld devices and a little software will become their own service providers, and phone companies will just carry bits.

    In Cleland's scenario, the incumbents don't necessarily die with their old voice business, because they'll still have those huge fiber networks in which they grossly overinvested during the bubble years—enough fiber to accommodate at least another decade of traffic growth, and perhaps more, as optical technology continues to improve.

    "There will be a lasting IP wholesale transport business for all the existing telcos, but at a fraction of current prices," he says.

    Kevin Werbach, a professor at the University of Pennsylvania's Wharton School who researches telecom policy, says it's not clear who the winners will be. "It's clear that any incumbents that try to tread water will be losers," he says. "The basic structure of telecom is fundamentally broken, and there is pressure for a real transformation as their revenue from voice charges goes from several hundred billion dollars a year to zero."

    To survive, says Werbach, the existing telecom companies need to stop thinking of themselves as network controllers and instead become operators that make it easy for a multitude of service providers to use their pipes. "If people want to use Skype, or get video on the Web, those aren't competition for the telcos, they're opportunities."

    With an estimated 43 million customers already using Skype Technologies's free Internet phone service, these challenges are already starting to hit home. Werbach wonders if companies weaned on the old regulatory mind-set can adapt their cultures.

    "Dealing with free distribution of software from some server in Luxembourg is very different from the traditional model of doing business," he says. "The politics of the industry have changed dramatically."

    A more sanguine view of the existing industry's prospects comes from IBM Global Services Vice President Dean Douglas, who says reports of the incumbents' imminent death are exaggerated. "There is some prevailing wisdom that the many disruptive technologies out there will supplant or totally displace the incumbent providers, but that's flawed logic.

    Sprint and Verizon will see people challenge their business, but they will find ways to compete," he adds. Bain's Pherwani agrees. "Ultimately you want a network provider that can give security and other guarantees of the type these companies have experience with," he says. "Those things are far more important than price alone."

    Whoever carries the traffic, erasing barriers between voice and data gives companies new ways to use the information they already possess, says Cleland. "There will be no reason to have a separate data center and call center," he says. The impact should go beyond cutting costs to goosing topline growth. "The techcom laggards will be competitive laggards," he says.

    Lead Story:
    Telecom Merged and Converged: The victory of the supercarriers and the transformation of American networking

  • Not as Easy as it Sounds
  • CIOs Optimistic, Not Expectant

    History of AssimilationTwelve major carriers shrink to just three.
    Deregulation Pays Off The regulatory picture still looks good—for customers.
    Tiny Chips and Lizard Brains As tech gets smarter, so must the networks that may eventually connect billions of devices.

    Next Page: CIOs Optimistic, Not Expectant

    CIOs Optimistic, Not

    Expectant">

    It sounds lovely, and it probably will be, someday. "That's what I keep reading," says Dana Deasy, CIO of the $40 billion global manufacturing giant Tyco International Ltd., about the telecom millennium. "I think we will get there, but I don't feel it today. I'm seeing business as usual," he adds. "The promise is there, and the need is there. The business scenarios are there. But fundamental change? Not yet."

    Deasy enjoys the pricing power big companies like his have established over their carriers. "We are dictating to the vendors," he says. "When we hear about a big deal, we say to the companies, 'Let us tell you how it will be.'" But he wants more than cheap service. He's ready for all this convergence to actually converge into something he can use. "I just don't have a business case for ripping out my existing infrastructure," says Deasy, of his cautious moves toward Voice over IP.

    Wireless technology is a must-have, but wireless service is still a problem.

    "It's a pain to manage multiple carriers," Deasy says. He's tired of paying for wireless access in the office, and then paying again when an employee is stuck in an airport, and yet again when she gets to her hotel.

    "Tyco has a national footprint, so we need the carriers to provide the ultimate in roaming agreements. That's not a technical issue, but an issue of how the companies play together, how they partner on things like administration and billing. I want that to be simple, and we're pushing for it now in negotiations with one of our key vendors."

    Meanwhile, he's watching the big deals with an eye to Tyco's global interests, too. "I hold my breath as consolidations play out," says Deasy. "How international will they be in breadth and depth of new offerings? We need that to get better before we're in any kind of new world."

    And it will be a while before the handheld devices so central to the techcom story can be counted on to work closely with user networks and each other. At Jefferson-Pilot, Maynard has decided to focus his resources on developing applications for BlackBerrys, but not at the same time for mobile phones or Palm products. "You have to write for specific devices when designing an application for the agents in the field," he says. "The real estate on each device—things like the shape and size of the screen—makes each one its own design challenge." (See "Tiny Chips & Lizard Brains," page 46.)

    Resources

    Book

    End of the Line: The Rise and Fall of AT&T By Leslie Cauley
    Free Press, August 2005

    Blog

    Werblog, the weblog of consultant and Wharton professor Kevin Werbach werbach.com/blog

    . . . and his related writings werbach.com/writings

    Deasy sums it up this way: "Think back to what was it like in the first years of the Web. That's where we are now. Is this going to be big someday? You know it is. I think we are close, but we need the killer apps, the universal ones that cut across different industries."

    In the meantime, at least the calls are cheap.