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Telecommunications markets: where is the recovery?

In addition to the global economic downturn, the telecommunications sector has been plagued by a regulatory overhaul, excessive debt burdens and reduced investor interest. Mark Purdom of CriticalEye explores the future of the industry and attempts to answer the question: where is the recovery?

KPMQwest have finally closed the network, as well as the door. WorldCom is teetering on the edge of oblivion and even encumbent carriers like France Telecom are inundated with debt. Life has never been harder in the telecommunications field. Investors are flocking away, redundancies are continuing all across the industry, spend on infrastructure equipment is significantly reduced and debt becomes a larger burden every day. Every time we believe we cannot drop any further another event drags us down. The question everyone wants the answer to is ‘where is the recovery?' How can the markets evolve from here? How can we stay in business when all around us, our customers, our partners and we ourselves are falling by the wayside?

Of course, ultimately the downturn can be put down to simple greed. For three years we have been driven to further increase already impressive results, to beat growth forecasts, to make more money for shareholders. Is it any surprise that some took extreme measures in order to maintain their market position? Remember, in a buoyant market, those seen to be faltering may never recover. Customers will make alternative plans in the event of rumour, even changing suppliers! So should we really be surprised at the measures chosen by some to prolong that success?

Of course dishonesty does not sit well with anyone and those found to be achieving success through fraudulent means should be cast aside as pariahs of the industry.

The question remains as to just how many more will fall in the debacle of financial reporting. Do not be surprised if more large named carriers falter with some of their leading suppliers in tow.

The point of this article, however, is not to band on about the faults in the telecommunications industry (although that in itself could consume many pages) but rather to look at the light at the end of the tunnel. A straw (or even a life raft?) that vendors, carriers and investors may grab hold of in the hope that the storm is about to abate.

One vital first fact is that telecommunications services are necessary to consumers, large and small. Just consider the importance of telephones, mobile telephones and the internet on how we conduct our daily life. In spite of the telecoms bubble bursting, businesses are continuing to update their communication facilities. IP Virtual Private Networks (VPNs) are the flavour of the current year, although this is being rivalled by Voice over IP (VoIP, broadband or wireless networking. In short, technology innovation has not slowed, and neither has the willingness to consider new technology in order to progress business, or gain competitive edge. The impetus is being maintained despite the current need to conserve financial resources. One such technique is to outsource these functions in order to keep capital spend off their own books.

In this positive, we also find a negative. None of these new technologies are easy or cheap, to implement, run and integrate with existing technology. Yet, in the competitive markets that carriers have been forced, they must provide innovative services at prices which cannot be drastically undercut by their possibly desperate rivals. So, as a carrier, you are ‘boxed in'. You may have more than enough raw capacity to deliver new innovative services but be held back by financial constraints on the necessary investment for the new services The ideal solution would be a service, which is in demand but also cheap to install and run. Sadly this magic is lacking in today's markets.

In the telcommunications boom of the late 90s it was all about bigger, faster and better. Networks were built out with more capacity by using faster routers and switches than before. Fibre capacity was increased through wave division multiplexing. Even the local loop connections, the copper that has been in the ground for close on 100 years, was allowed to deliver high-speed services to users through the use of Digital Subscriber Line (DSL) technology. So, now we have big and fast (some would argue we have too big and too fast) but do we really have better? WE have pipes that can link virtually any location in the world and deliver high-speed voice and data services. This is simply connectivity, linking one location to another (considering that the internet can be seen as a multitude of locations). An ‘intelligence' that is require for the traffic that uses the links must reside at one or both ends of the link and often is not delivered by the carrier, it is owned and managed by the customer. A good example of this is internet security where a firewall will often sit at the customer end of the internet connection providing security from the evils of the great unwashed internet.

So carriers are limited to transport services (hence the term ‘carrier').

In the deregulated markets that most of them operate, they must deliver their product in competition with other carriers with an obvious result. The services become commoditised.

When the service is transport, with no clear differentiating factor, the lowest price is often key to winning the deal. In a commodity market with low profit margins, when the balance sheet is already under intense pressure, the net result is for many carriers (as we have seen) is to go out of business.

Some carriers have looked to ‘advanced' transport services such as Virtual Private Networks (VPNs) to increase their service margins. For a short period this might prove successful however, with this capability enabled by a simple upgrade to much of the equipment that delivers their transport services (at little cost), others soon move in the same direction and place them all back at square one in no time.

The dilemma is what next? Many carriers have already begun the evolution towards becoming service providers (SPs) be delivering more advanced services over their transport infrastructure. Some have acquired hosting centres in order to integrate these services with their existing transport portfolio. Others have offered managed services whereby the equipment, which resides on the customer site to deliver intelligent services, is owned, installed and managed by the SP. This provides a service portfolio, which can be clearly differentiated from competitive carriers and is less likely to be commoditised as quickly. The drawback is that these services require a high investment. Consider the cost of deploying equipment at every site within a customer's network. Overall margins may remain low!

The old analogue voice world solved this problem by building out a separate ‘intelligence network', an overlay network, within the boundaries of their control. This could enable advanced services such as call routing, caller ID, voicemail and many others which could be delivered to all their subscribers, but at a fraction of the cost compared to deploying intelligence at every customer location. Logically the same concept of ‘network-based' intelligence is now required for carriers to complete their migration to becoming service providers. Hopefully one, which is not as cumbersone or costly to deploy as the ‘subscriber located' model described above.

Such technology is now available and becoming accepted by the carrier community as their key to developing new, profitable services, which meet the requirements of their subscribers. A battle remains to convince their subscribers of the value of locating these services within the SP network rather than at the subscriber premises. Winning market battles has always had the reward of securing a position in a market war. It is these network-based services, SP location based, which will open the door to a variety of other service areas, such as multimedia hosting and extranets. The margins to be gained will allow SPs to build confidence back into their balance sheets and the investor community.

There will be no overnight change. Regardless of how the markets develop, there will be no easy return to stability. It is likely that we have not yet hit the bottom and even then there will be no automatic bounce back to normality. There is much work to do beyonf the realms of services before we can be confident of an upturn, however there is light at the end of this tunnel. A profitable model for service delivery is achievable; a healthy telecommunications market will be rebuilt.

Mark Purdom is marketing director to CoSine. Mark is responsible for marketing, product marketing and management, and market development in Europe, Middle East and Africa. He has more than ten years' experience within the data communications industry with a focus on carriers, service providers and the internet.

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Critical EYE provides a platform for CI professionals to communicate with each other and their target market, containing articles on topical, market-related issues. To preview Critical EYE and its articles visit, www.criticaleye.net
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