The Internet growth path

The exponential growth of the Internet has been good to telecommunications companies, driving robust growth rates in second lines, T-1 connections and data transmission services. However, to fully capitalize on the potential for the Internet to multiply their shareholder value, telcos must go beyond simply riding the wave of growth.

Internet-based portals, retailers, financial services companies and manufacturers boast of market capitalization-to-revenue ratios ranging from 5-to-1 to 100-to-1 and higher, compared with a range of 2-to-1 to 4-to-1 for more traditional businesses of similar size.

Telcos should steal a page from e-commerce companies such as Amazon.com, Schwab, Dell, Yahoo! and Cisco-companies that are using the Internet to fundamentally reinvent their business designs in their respective markets and are reaping enormous shareholder value growth as a result.

These new business designs capitalize on the Internet's capability to make huge improvements in the factors that turn revenue streams into shareholder value. By replacing physical stores with on-line customer interfaces, driving up fixed-asset use and driving down inventories, Internet business designs improve asset efficiency. By substituting the Internet for manual labor, and in particular by enabling customers to order, configure and gain service on their own, Internet business designs improve cost efficiency. Perhaps most important, by establishing a one-to-one, interactive relationship, these firms increase customer value.

To fully capitalize on the shareholder value potential of Internet economics, telcos should consider how they can redesign their business models in order to become Internet-based communications companies, much in the way that Amazon.com is an Internet retailer and E-trade is an Internet brokerage firm. Consider these three options:

Internet-based carrier. One direction involves basing infrastructure and operating processes on the Internet platform. IP-based infrastructures have the potential to be much more asset-efficient than traditional circuit-switched networks, particularly as bandwidth throughput increases. Internet-based provisioning, repair, customer service, sales, billing and marketing offer dramatic cost efficiencies vs. traditional manual processes. New players such as Level 3 are beginning to define models for this approach.

Communications services portal. Traditional Internet portals such as Yahoo! and Excite have created enormous value by providing an organized gateway to the resources of the Internet. As communications services accessed via telephone, PC and TV begin to converge, the need for a value-added portal emerges. Indeed, a number of companies in the Internet market are already working on voice-based browsers for conversing with the resources of the Internet. A communications portal business could combine the best of voice mail, e-mail, information search and community, giving customers a unified gateway to services delivered via phone, PC, TV and mobile devices.

E-commerce hub. Today, some of telcos' most lucrative businesses are built on facilitating commerce over traditional communications networks. Some examples include Yellow Pages and 800-number services. Similarly, as the Internet economy continues to dramatically grow, some of the highest value opportunities will be in serving as market-makers in business-to-business, business-to-consumer and consumer-to-consumer transactions.

A variety of start-ups are rushing in to fill this gap, ranging from FastParts in electronic components to eBay in consumer-to-consumer auctions. Many roles in market-making are available to telcos, including hosting, search and directories, and billing aggregation.

Each of these business models offers opportunities to provide communications services with order-of-magnitude improvements in asset efficiency, cost and customer relationship value. They begin to suggest that the Internet will ultimately do more than just expand the communications industry; it will also change its structure, eroding old profit zones and creating new ones. Telcos thus must view the Internet as an opportunity to re-invent what are fast becoming outmoded business designs, rather than simply being content to ride the wave of growth.