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

  • This article was originally published on 07-05-2005
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