The new model

If you thought the communications industry was in a bind, you’re right. But it won’t be for long, said James Crowe, president and CEO of Level 3 Communications.

“The previous three years were unhealthy for our industry,” he said. “There were excesses in our industry—at the component level and the equipment level. That excess is going to disappear, there is no doubt about it, but we will remain one of the fundamental industries in the economy.” 

The opportunities are so great—and companies rely so heavily on it—that telecom will ultimately thrive. And despite the plethora of applications available today, more advanced services will continue to push the limits of existing networks.

“We have not yet scratched the surface if we can build the network, then drop the price and [enable] new applications,” Crowe said.

But to do this, carriers must review the laws of supply and demand. “For every 1% you drop in price or cost, you have to get more than a 1% increase in demand,” he said. “In our industry, value creation requires rapid performance improvement and rapid increases in demand. The magic occurs when you have both.”

Communications has the clear potential to be more price-elastic than other information technologies for two reasons, Crowe said:  “Decades of high prices have created many years of substantial latent demand, and communications is getting less expensive more rapidly.”

Further propelling the change will be new systems, processes and financial models for companies and new relationships between value chain partners, Crowe said. The market will shift from the utility model to a technology model, he added, meaning the way companies do business must change. As networks become more enmeshed, a provider can’t maintain five-9s reliability by denying others access to its network, he said.

The “new communications supply chain” Crowe described forces more partnerships between companies and between carriers. Starting at the base level, component providers will sell to equipment providers, which will sell to network providers—companies that own the backbone and access networks. In turn, those providers will sell to or partner with service providers, including portal companies, ISPs, application service providers and hosting companies.

“To get big economic improvements, you have to coordinate the entire stack,” he said. “That is visible today in computing when you go from a 486 [processor] to a Pentium.” 

The technology model hinges on the new organizational flow and new financial models, he said. “The future is bright for all of us if we continue to push down cost and prices.”