Risky Business

The telcos face big risks. Competitors - cable guys, wireless players, CLECs, ISPs, and the like - want to empty their networks of customers. Meanwhile, telcos must invest constantly and heavily to modernize their networks, adding high-speed broadband connections on top of voice services, to keep those customers. In addition, Federal and state regulators keep a firm rein on what the local telcos can and cannot do even as most telcos are losing voice lines and customers faster than they can add new broadband services and users.

That said, many telcos, including the largest ones, do things that don’t help their causes and, in fact, increase their risks. Here’s how.

1) Squeezing equipment prices. The biggest carriers hold reverse auctions to extract low equipment prices from their vendors. One carrier buys DC power equipment this way. It’s good for the carrier but leaves vendors scrambling for margins. This makes it tough for any vendor to do business or even to stay in business. The carrier doesn’t care, citing “capital efficiency.” It believes that some vendor will always try to win its business. Maybe so. But, without DC power, the network doesn’t work. Do you want to risk your network’s reliability on the cheapest rectifiers and batteries? Remember Hurricane Katrina?

2) Slashing services prices. One long-time turf vendor for a large telco was told by the telco that it needed to lower its prices or else lose the business. When the vendor pleaded its case for more margin, the telco was unmoved claiming it had 10 more companies lined up waiting for their chance at the business. That too was a risky assumption. Not all services vendors are the same. Each has different experience, know-how, manpower, coverage and quality of work. Barriers to entry are pretty low – a little experience, a toolbox and a truck will get you started. But, that doesn’t mean every company can handle the job, especially across a large operating territory. Covering large territories with lots of installed plant requires a first-rate organization and professional management. And, in-house telco expertise is retiring or being downsized to the point where outside services will become the norm, not the exception. Fragmenting network maintenance and short-cutting the quality to shave opex dollars puts networks at risk just when customers are demanding more reliability in anymedia, anytime, anywhere services.

3) Ignoring stimulation. The American Recovery and Reinvestment Act (ARRA) provides funds and incentives for telcos to modernize their networks and extend broadband coverage to underserved and unserved customers. The biggest telcos have many such customers in their rural territories and in inner cities. But these telcos are not likely to apply for stimulus funds. Why not? Because there are strings attached to government money. For one, they would have to implement 100% broadband coverage, at least 768 Kb/s downstream. More importantly, they would have to share their networks with other service providers. After the Telecommunications Act of 1996 (TA96), the big telcos beat back the CLECs but ended up with large portions of their network unused. Yet they are spending billions in capex for major broadband deployments that will only achieve around 40% take-rates. So most of the new networks will remain unused or underutilized, putting the telcos and their massive capital investment at great risk. Their shareholders might be a little upset by this!

It’s time for this industry to consider a new paradigm for building and operating wired and wireless networks. Why not have a few large companies build the networks that can be shared with a multitude of carriers? This would boost utilization, productivity, and capital efficiency. Network sharing is already being done in other countries. So, it can work. And, we can learn from the past. The great failing of TA96 is that its framers did not anticipate how much capex would be required to construct competitive facilities- based networks. CLECs quickly ran out of cash!

Telcos operate in a new environment buffeted by financial, customer, competitive and public policy forces. It’s the Internet Age with its high-speed anymedia, anywhere, anytime promise. In this environment, no one service provider can do it all by itself. It takes too much capital, and it’s way too risky.

A socialist utopia? Not at all. This proposal is based on a hard economic reality. Customers want it, regulators expect it, and shareholders demand it. Conglomeration is not the name of the game. Delivering advanced services is, regardless of who delivers them.

Let the top network operators build and operate the most advanced platforms possible, then sell capacity from those platforms either directly to customers, or indirectly to any services provider who is willing to pay. They should be thinking about loading up their networks, and how to make money selling both retail and wholesale services. In the end, they’ll increase their profits and lower their risks.

John M. Celentano is President of Skyline Marketing Group, a Baltimore, MD-based market analysis and consulting firm. He can be reached at john@skylinemarketing.com.