Subject: [NEXTEL-1] What's Wrong With Telecom

From: [email-masked]
Date: Wed, 01 Jan 2003 01:47:40 -0500

What's Wrong With Telecom
http://www.spectrum.ieee.org/WEBONLY/publicfeature/jan03/comm.html

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What's
Wrong With Telecom

Broken
business models and crippling debt are the wages of greed,
corporate crime, and misguided regulation

By
Peter A. Bernstein

Never,
since the modern communications industry began in the first
half of the 19th century, has it been in worse economic shape
than it is today. Through much of last year, it was hardly
possible to pick up a newspaper or business magazine without
finding a story about a bankruptcy or seeing another once-high-flying
magnate being deposed (or maybe even led off in handcuffs).

But
what may have eluded you amid the barrage of plunging financial
data and stories of lavish lifestyles are the fundamental
reasons for the downward spiral. After all, users today are
paying for wired and wireless services of unsurpassed variety
and utility. We are pretty clearly at the dawn of a networking
era in which almost everything we use—and even wear—will
be capable of being interrogated and manipulated by means
of reliable, always-on, always available, two-way broadband
networks. The developed world, at least, is on the path toward
the full distance-independent interactive engagement of all
our senses.

So why
is the business of communications in such dire straits? The
problem is a convergence of factors, each of which would have
been quite serious by itself. Unfortunately, they came not
singly, or even serially, but all at once. In so doing, they
triggered what may reasonably be called the Telebomb.

Five
costly sins

The Telebomb
has five key ingredients:

Greed.
Too many companies chased too few customers and—to
make matters worse—many were using similar technology.

Corporate
crime. As the stupidity of some greed-inspired decisions
emerged, some players misrepresented the facts by lying
about their financial health (often with the connivance
of the accounting and investment communities), thereby destroying
investor confidence and casting a cloud of mistrust over
the entire communications business.

Misguided
regulation. Policies that protected incumbent phone companies
but were disguised as competitive reform, like the Telecommunications
Act of 1996 in the United States, were the timing mechanism
for the Telebomb.

Too
much debt. Global Crossing, WorldCom, Qwest, Deutsche Telekom,
France Telecom, Lucent, Nortel, Verizon, AOL Time Warner,
and others have incurred a collective debt of almost US
$2 trillion. Until that debt is somehow made manageable,
communications companies [see "Optical
Fiber Overcapacity: Serious Disease or Manageable Headache?"]will
find the financial markets closed to them.

A
broken business model. Although the Internet is truly a
wondrous phenomenon, its sudden surfacing in an industry
accustomed to slow, carefully thought out ways of making
progress (and 30-year depreciation cycles) has so disrupted
business models that telecom companies are today giving
away services that used to contribute mightily to their
revenue streams.

While
all the elements are strongly linked, greed and corporate
crime are very tightly coupled. Along with misguided regulation,
they represent categories of specific actions by individuals
or groups. The debt problem and broken business model are
two critical outcomes of those actions, abetted, of course,
by advances in technology. And as ill luck would have it,
they are ongoing, dynamic, festering conditions that make
cleaning up after the Telebomb very difficult. Reducing greed,
crime, and bad regulations are essential first steps for reducing
debt and fixing the business model.

Each
of the five ingredients is worth a brief analysis.

Greed
is not good

Bear in
mind that increasing the world supply of facilities-based
service providers—that is, service providers that own
their own networks—from several thousand to several tens
of thousands did not significantly change the number of customers
from whom revenues could be extracted. Each new start-up carrier
had to believe, and induce investors and lenders (including
equipment suppliers) to believe, that it would be able to
wrest market share from those who held it.

Among
their exhortations: incumbents won't counter-react; the other
guys don't have our talent; and unique new services will win
the day and allow us to become profitable quickly. Unluckily
for the start-ups, incumbents do know how to defend their
turf; and lacking significant new technology, the start-ups
had little choice but to choose price as their market differentiator.
This proved destructive to everyone: capacity exploded as
dumb money chased bad ideas and waited for the other guys
to blink, and we are still waiting for those lucrative "new
services" that customers will find it impossible to do without.
The result: ongoing operating losses, crushing debt, a capacity
glut, and seemingly endless price wars.

It seems
inexplicable that one of the largest sectors and employers
in the global economy—the engine driving most of the
world's nonagricultural gross domestic product—is now
not just broken but broke. Greed certainly played more than
a minor role in this.

Corporate
crime

"How do
those guys do it?" That is what WorldCom's competitors kept
asking themselves as they followed that disgraced company
into the financial abyss. It turns out that misstating earnings
to the tune of $9 billion was a great way to fool not just
investors but also competitors into believing that it could
be profitable to sell services below cost. It was also a great
way to fuel a price war as competitors broke the business
model to compete with WorldCom, making things they once charged
for either free or virtually free.

Regulations
that mandate deployment may be the only way to ensure the rapid
distribution of local broadband facilities

Competitors
also boosted their spending on new equipment and mergers and
acquisitions to chase the mirage. Now they have spent themselves
into a quagmire of debt and in the process have acquired technology
that will accelerate the crumbling of what is left of the
business model. For example, outfitting computers and next-generation
handheld devices of all kinds with the capability to carry
voice over networks based on the Internet protocol may well
sound the death knell for metered voice services. For another,
the explosive growth of new wireless technologies like IEEE
802.11 and Bluetooth make it possible to provide ubiquitous
broadband service over meshed network facilities neither owned
nor controlled by traditional carriers.

Misguided
regulation

In parts
of the world (South Korea is the best example), the ubiquitous
availability of interactive broadband communications at reasonable
rates is seen as essential to the development, and ultimately
the competitiveness, of a country. Not only does South Korea
have the highest penetration of wired broadband homes and
businesses in the world right now, but it recently committed
to hooking up its entire population by 2008. Contrast this
with the United States, where public policy requires that
broadband Internet access be treated differently depending
on whether it is delivered over cable or over traditional
telephone facilities.

Regulation
in the United States is based on the belief that government
can do better than the market to ensure universal availability
of telecom services at reasonable rates. But in fact, the
only thing that U.S. regulations seem interested in ensuring
is old-fashioned dial-tone service. Broadband utility service,
which much of the rest of the developed world views as a necessity,
is left to the mercies of the marketplace—a marketplace
that has turned out to be far from the competitive ideal.

This
policy's results are not encouraging. Within a year, over
85 percent of U.S. homes will be passed by broadband lines—that
is, they will be close enough to those lines to be connected
to them; yet only about 20 percent of these homes will actually
order the service. On top of this, U.S. Federal Communications
Commission (FCC) chairman Michael Powell and Representative
Billy Tauzin (R-La.), chair of the House Committee on Energy
and Commerce, now talk of granting further immunities to the
very same regulated entities that have failed to make broadband
service universally available.

To make
matters worse, the same companies that own the wires own the
vast majority of wireless assets. Lacking competitive pressure,
they have little motivation to deploy next-generation wireless
service, which requires a very substantial investment and
in its present form doesn't seem to promise sufficient return
on that outlay.

Revised
regulations that mandate deployment rather than protect incumbents
are not only viable, they may be the only way to ensure the
rapid distribution of local broadband facilities at reasonable
rates. In the United States, at least, it's not just the industry
that needs fixing: regulation does, too.

Too
much debt

What happens
when too many companies chase too few customers with too similar
products? When they believe that owning facilities is the
way to own customers? When they are urged to buy communications
infrastructure around the world at grossly inflated prices?
When the people urging them are fee-seeking financial advisors
whose analysts, laboring under a severe conflict of interest,
are at the same time touting to an unsuspecting public the
creed that "prospects are unlimited, we are living through
a valuation paradigm shift"? How about when equipment vendors
eager to boost their sales (and market value) extend credit
to enterprises that cannot be deemed creditworthy by any objective
standard?

What
happens is you get what we have: overcapacity, little spending
on new equipment, companies defaulting on their financial
obligations in previously unheard-of numbers up and down the
industry supply chain, a ton of finger pointing, and a bunch
of wealthy lawyers.

Bad as
the other problems are, job No. 1 is to restructure the industry
in order to manage down its $2 trillion of debt, to end the
malaise. We are still early in the global industry- and debt-restructuring
cycle. Elements of the solution will include: extensive industry
consolidation as the strong cherry-pick the assets of the
weak at steep discounts and force the elimination of nonperforming
assets; enormous writedowns of outmoded plant; spectacular
bankruptcies of former industry stalwarts in the equipment
and services sectors; massive government intervention in countries
where incumbent financial ties remain strong (such as the
recently proposed $9 billion bailout of France Telecom by
the French government), and/or a complete forgiveness on the
3G auction obligations. Indeed, the consensus of industry
executives and observers is that before things can get better,
they are actually going to get worse for the next few quarters.

The
broken business model

Telecom's
unworkable business model will be the subject of numerous
business books in the coming years. The easiest way to understand
it is within the context of one's own experience.

The world
was once a place in which scarce information was accessed
over a few expensive monopoly networks like the Bell System
in the United States. Prices were high, and all but local
services were metered, not provided on a flat-rate basis.
Into this setting entered all of the information technology
and communications technology of the past 20 years. Much that
was scarce became abundant. Information got digitized. Access
to it proliferated, becoming inexpensive and commodity-like.
The communications industry lost its ability to charge for
the things it had always charged for: time and distance in
the form of voice minutes between specific geographic locations.

Wish
List

Inexpensive and faster BROADBAND CONNECTIONS everywhere,
instead of just in South Korea, Singapore, and a few other
countries

Single
worldwide standards, and lower costs, for 3G AND HDTV
devices

Pervasive
implementation of IPv6, a new Internet protocol (IP)
that would allow every object in the known universe to have
its own IP address

Lightweight
low-power cellphone/PDA/digital camera/MP3 HANDHELD DEVICES
that can roam automatically across multiple kinds of networks:
Bluetooth, IEEE 802.11, and 3G cellular—and give people
a reason to spend more on their phone service

Easy,
effective SECURITY TECHNOLOGIES for wireless LANs and
virtual private networks

Dark
Horse

A spinoff of a spinoff (Lucent Technologies), AVAYA
has declining losses, still-robust cash reserves, and plenty
of new technology coming from a shiny new lab with over 80
researchers. If the company, which specializes in enterprise
and corporate IP-based and legacy phone systems, hangs on
for the upturn, it could be a strong performer in a profitable
market

Unsung
Hero

Digital
cowboy DAVE HUGHES has been using a variety of spread-spectrum
technologies to connect rural communities in Wyoming and Montana
to the Internet for over 15 years. By putting libraries, one-room
schoolhouses, and farms online, the retired Army colonel is
a model and an inspiration to other wireless warriors

Under
Fire

STEVE
CASE, AOL founder and current AOL Time Warner chair, is
increasingly isolated; executives from the Time Warner side
are now firmly in control. Expectations of solid ad revenues
have proven illusory, and perhaps fraudulent; AOL's pre-merger
accounting methods are under investigation. And it may have
to write off even more good will, after reducing it by a mind-bending
US $54 billion in 2002

In the
telecom industry, metered voice has traditionally generated
the bulk of the profits. Data, despite now being the bulk
of traffic, was and is only marginally profitable; it is mostly
flat rate. Voice is moving in that direction, too. If the
trend continues, what will pay the bills in the world of the
future?

In cable
TV, flat rates and advertising don't cover the rising cost
of content. Hence, the desire of operators for pay-per-view
and other metered services. Video-on-demand and inexpensive
voice services are two possibilities that spring to mind.

For the
telephone companies, as mentioned earlier, the prospects of
sending voice over data networks and uncontrollable wireless
deployment are frightening: the first takes the biggest revenue
source off the meter; the second could take traffic completely
off the network. The value of facilities management will continue
to diminish as value shifts to the nonmonopoly "intelligent"
part of networking. Technology might finish off what greed,
malfeasance, and irrational business and public policy behavior
got started.

Is
there hope?

The short
answer: yes. All the clichés apply: "Nothing lasts
forever," "This too shall pass," and so on. In fact, the industry
is already addressing the timely issues of illegal and/or
irrational behavior by individuals.

It is
a question of when, not if, new industry leadership will restore
trust by managing down debt and producing positive service
experiences for customers, as well as positive financial ones
for investors.

Fixing
the business model is more problematic. It will get fixed,
to be sure, because in a world that is ever more network-centric,
what the network does and delivers will always be valuable.

But figuring
out exactly where that value lies is still a challenge. When
the dust settles, the surviving and successful players will
be those among the new and established players who figure
out exactly what it is about a network that is most valuable,
how they could maximize that value in their networks, and—most
importantly—how they could best get potential customers
to recognize that value and become willing to pay a premium
for it.

Even
the worst of storms dissipate as they move into new waters,
and bombed-out landscapes almost always come back looking
better than ever. But when they emerge from the shadow of
destruction, they invariably look different. Old buildings
disappear and new ones take their places. There is every reason
to believe that history will repeat itself in the aftermath
of the Telebomb.

ILLUSTRATION:
JOHN HERSEY/CREDITS:
DAVID HUGHES EZIO PETERSEN/UPI

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