Subject: [NEXTEL-1] The Wireless Challenge

From: [email-masked]
Date: Sat, 11 Oct 2003 18:18:07 -0400

SPECIAL REPORT -- TELECOM

      The Wireless Challenge
      Can big phone companies prevail
      in a brave new world of mobile and the Internet?

      October 20, 2003

Since the days of Alexander Graham Bell, Finland's national phone company
has provided service for customers from the shores of the Baltic Sea to the
upper reaches of Lapland. But last summer the Helsinki-based telco, now part
of $9 billion Swedish-Finnish TeliaSonera, did something remarkable: It ran
radio and newspaper ads urging its own customers to drop fixed-line voice
service and switch to wireless.

Huh? A phone company asking its customers to cut the cord? To the
cell-crazed Finns, "the idea makes perfect sense," says Jukka Vatanen, a
freelance photographer and part-time taxi driver in Helsinki. That's because
TeliaSonera also operates Finland's No. 1 mobile-phone carrier and provides
speedy digital subscriber line (DSL) connections for Internet access.
Vatanen is the company's ideal customer: Two years ago he dropped
conventional voice service in favor of his cellular phone, but he kept a
line into his house for DSL. That suits the company just fine. Sonera's
long-term strategic plan is to shift all its voice calls to wireless,
reserving the 3.2 million copper lines it runs into Finnish homes for
broadband connections only.

Finland is but one example of telecom's wild new frontier. Consider the
strange case of Britain, where the two independent halves of the country's
former telco monopoly are chasing each other like hungry wolves. BT Group
PLC, the fixed-line carrier that spun off its mmO2 PLC mobile business in
2001 to reduce debt, has decided to get back into wireless. For customers
who want to buy all their telecom from a single source, BT resells mobile
services provided by an mmO2 rival, Deutsche Telekom's T-Mobile
International. Meanwhile, mmO2 aims to start siphoning off its former
parent's fixed-line customers next year by hitting where it hurts -- in the
home. The company will bring out innovative new cordless phones that skip
over the BT voice network entirely, instead directing calls over residential
broadband hookups.

A decade after deregulation shook the world's phone companies, and three
years into the worst downturn the telecom industry has ever seen, the tumult
is far from letting up. From Seattle to Singapore, the big telephone
companies that once dominated the business are battling new competitors,
sharply declining prices for conventional voice calls, and a relentless
movement toward wireless calling. Just as bad, young people are drifting to
other forms of communication, such as e-mail, online chat, and mobile-phone
messaging instead of the good old phone. "There is a tremendous shift taking
place," says Rudi Lamprecht, who heads the mobile-equipment business of
electronics giant Siemens (SI ).

There's no doubt the old order is crumbling. Although the total number of
fixed phone lines in the world is still creeping up, wireless is growing six
times as fast. This year, figures London telecom researcher Ovum Ltd., the
number of mobile subscribers will exceed fixed lines for the first time.
Wireless carriers now take home nearly half of global voice revenues, up
from 9% a decade ago. In Finland, an estimated 25% of households are now
mobile-only. Even worse for fixed-line operators, the amount of money they
take in from each line has fallen by one-third since 1997. As a result,
global revenues for fixed-line voice services are expected to fall by 2.2%
this year, according to the Geneva-based International Telecommunications
Union.

Turmoil, however, doesn't mean termination. Fixed-line phone companies will
still pull in $455 billion in revenues this year from voice services. And
the telcos remain veritable cash factories: The world's leading carriers
will spin out $131 billion in free cash flow this year, estimates brokerage
Merrill Lynch & Co., up 10% from 2002, thanks to aggressive cost-cutting.
Next year, Merrill says, cash flow will edge up a hair, to $132 billion.
Growth may no longer be what it was in the 1990s, but the 45 stocks in the
Standard & Poor's Global Telecommunications Services index are up 9% for the
year.

The fixed-line carriers have an ace in the hole: their wires. "The biggest
factor in their favor, bar none, is that they still own the local network,"
says analyst James Eibisch of market researcher IDC. How is that an asset if
the world is going wireless? Because the wired network will always have the
advantage of higher bandwidth, or communication speed, and in the emerging
world of digital media, faster is always better. That's why outfits like
Sonera are betting on DSL. "Broadband has become the driver for fixed
operators," says Bruno Duarte, a partner at consultant Arthur D. Little's
telecom practice in Paris.

Telco broadband is indeed finally taking off. After a slow start caused by
muddled regulations, immature technology, and skittish financial markets,
the number of DSL lines worldwide will nearly double this year, to 36
million, figures Ovum. By 2007, it's expected to hit 160 million. That's
still only 13% of the world's phone lines, but in many developed countries,
rates are already much higher. Sure, the phone companies also face a
challenge from cable television operators offering high-speed Net links over
their wires. Outside the U.S., however, DSL outpaces cable modem
installations by nearly 2 to 1. By pushing DSL -- and eventually hawking all
manner of snazzy services that run on top of it, from digital voice calls to
films -- carriers may be able to stave off the decline of traditional voice
service. Just look at the numbers from Korea. With the world's highest
penetration of residential broadband, the East Asian powerhouse shows the
way. While local phone-call revenue there is expected to drop 7.4% this
year, to $2.5 billion, the $2.2 billion that Korean carriers are expected to
get from DSL will more than make up the difference. By 2007, predicts
researcher Gartner Inc., DSL will be a $46.6 billion global industry.

Strangely enough, one service that carriers aim to provide over those DSL
lines will sound mighty familiar: voice calls. But they'll be sent over the
Internet. The technology has been under development for a decade but is
finally coming into its own. Instead of using fixed circuits, as has been
the case since the phone network was invented more than a century ago, voice
traffic can be chopped up into digital chunks and shipped around in much the
way e-mail messages are. In Japan, the emergence of ultracheap Net telephony
services will shrink revenues from traditional voice calling by up to half
over the next few years, predicts Tadashi Onodera, president of No. 2
Japanese carrier KDDI Corp. Voice-over-DSL service, meanwhile, will be worth
$4.7 billion worldwide by 2007, predicts researcher Allied Business
Intelligence.

The move to Internet telephony is essential for the simple reason that it
holds the key to lowering costs. But DSL takes care of only the outermost
edge of the phone network -- the last few hundred meters to the customer's
home. To remain cost-competitive, carriers also have to reengineer the very
heart of their systems, the trunk lines that carry traffic over long
distances. The reason: New Internet-type equipment costs as little as
one-tenth as much as the older-style gear now used in the network. Equally
important, it's only half as expensive to operate. This transition will be
the dominant technological issue facing the world's phone companies over the
next decade. When it's finished, carriers will be able to offer customers a
unified communication channel that handles voice, data, and video. "Every
carrier is following the same road map," says Mark de Simone, vice-president
for technology solutions at Cisco Systems Inc. in Feltham, England. "The
only difference is their timetable."

Some brave operators are already moving toward this futuristic model, with
startling results. The most advanced is Telecom Italia (TI ), which has
completely rebuilt the core of its nationwide network around Internet
equipment. Telecom Italia expects to reduce its operating costs by 60% when
the technology has been fine-tuned in a year or so. That should help it hold
operating margins steady at an industry-leading 44% even as fixed-line
revenues drift down over the next few years, predicts Merrill Lynch & Co.

This transformation won't happen overnight. And it's going to cost a bundle.
Gartner figures carriers will shell out $44.7 billion from 2003 to 2007 on
Internet-type equipment for their networks, while spending on traditional
phone gear will fall 12.5% annually over the same period, totaling $41.9
billion. "We're trying to replace one of the most sophisticated and evolved
infrastructures in the world," cautions Tal Simchony, chief executive of
Veraz Networks Inc. in San Jose, Calif., a seller of equipment for sending
voice calls over the Net.

Carriers no doubt wish that technology change were their only challenge. But
while reinventing the future, they also have to deal with a troubled
present. The most immediate problem: holding on to customers. Thanks to
deregulation, established carriers are losing market share to competing
local service providers. Most fixed-line European telcos, for instance,
still own and operate 90% to 100% of the phone lines in their home markets.
But rivals are walking off with 30% to 50% of the minutes spent talking over
those lines, as customers can now choose alternative carriers for calls,
according to telecom market watcher Pyramid Research LLC in London. In
Germany, giant Deutsche Telekom carried just 68% of the voice minutes in
2002, down from 74% two years earlier. Fixed-line revenues at France Télécom
fell 2.1% in this year's first half, to $12.5 billion, while at Japan's
giant NTT, fixed-line revenues dropped 9%, to $28.2 billion, in the year
ended last March.

Newcomers are profiting from the change. Europe's No. 1 competitive carrier,
Stockholm's Tele2, has 20 million customers in 23 countries, vs. 10 million
three years ago, and posted first-half 2003 revenues of $2.3 billion, up
18.2% from a year ago. Smaller companies, such as Germany's 3U Telecom Inc.,
which offers cut-rate fixed-line service in seven European countries and the
U.S., are gaining even faster. And in Russia, the country's No. 1
alternative provider, Golden Telecom Inc., more than doubled its revenues in
this year's first quarter, to $78 million, by concentrating on business
Internet and data services.

It's not all smooth sailing for upstarts, however. The 2001 telecom crash
wiped out dozens of newcomers and reduced pressure on industry giants. For
the past three years, their share of international long-distance traffic has
held steady at 69%, notes analyst Stephan Beckert at market researcher
TeleGeography Inc. in Washington, D.C. "We have seen the empire strike
back," he says. Established carriers are fighting especially hard against
opening up their networks to competitive access. Tele2 CEO Lars-Johan
Jarnheimer says they use every available avenue -- legal, technical, and
administrative -- to slow down rivals. One telling statistic: According to
the European Competitive Telecommunications Assn., a Brussels trade group,
old-guard carriers on the Continent have made fewer than 7% of their local
phone lines available for resale by rivals. "Regulators could be acting much
more strongly," says Jarnheimer.

Many telecom giants own both wireless and wired networks, so they're not
staring at the abyss. Indeed, to boost their stake in wireless, some have
bought into cellular operations in developing countries to keep growing.
Deutsche Telekom owns a share of three wireless operators in Eastern Europe,
Spain's Telefónica has investments throughout Latin America, and Singapore's
SingTel has minority stakes in mobile companies in the Philippines,
Indonesia, and Thailand. But some carriers -- including BT and AT&T (T ) -- 
have spun off their wireless units in recent years. That explains such
tactics as BT's move to resell wireless from another company.

Yet even those that own both wired and wireless divisions are struggling
with the shift. The biggest problem is figuring out how not to lose
customers in the process. Sonera has chosen to keep subscribers in the fold
by encouraging their migration from one part of the business to another. But
Deutsche Telekom is letting the market decide. It's pitting its huge T-Com
fixed unit against the T-Mobile wireless group and vice-versa. "They are
going to compete on voice," says CEO Kai-Uwe Ricke of DT. The problem with
such internal rivalries is that they can distract companies from the real
threat, says Katja Ruud, a telecom analyst at Gartner. "Instead of beating
external competition, they're expending resources fighting themselves," she
says.

A decade ago, Massachusetts Institute of Technology pundit Nicholas
Negroponte observed that it was an accident of technology history that phone
calls are made mostly over wires while more complex television broadcasts
travel over the air. The rise of wireless phones and cable TV has borne out
Negroponte's prediction that the situation would flip-flop. But along the
way, the emergence of the Internet has thrown all the rules out the window.
"People have written off the big telcos many times before, but they always
bounce back," says Mike Quigley, the president for fixed-line communication
at French equipment-maker Alcatel. Today's turmoil will someday produce a
new telecom system, with voice calls sent through the air and wired
broadband available in much of the world. And the old wireline telecom firms
will still be there -- battered, transformed, but mostly intact.

By Andy Reinhardt
With Jack Ewing in Frankfurt, Irene M. Kunii in Tokyo, and bureau reports

http://businessweek.com:/print/magazine/content/03_42/b3854601.htm?mz

------------------------ Yahoo! Groups Sponsor ---------------------~-->
Buy Ink Cartridges or Refill Kits for your HP, Epson, Canon or Lexmark
Printer at MyInks.com. Free s/h on orders $50 or more to the US & Canada.
http://www.c1tracking.com/l.asp?cid=5511
http://us.click.yahoo.com/mOAaAA/3exGAA/qnsNAA/61FxlB/TM
---------------------------------------------------------------------~->

Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/