Transcript Regulation

Creating the 21st Century
Communications
Company
Global Executive Symposium
La Costa, California
September 28, 1998
Key issues facing executives
Technology
choices?
Non-traditional
challengers?
Cheaper,
better
operations?
Harder choices
larger stakes
Five sets of drivers

Customer demand


Technology


Degree of support from investors, lenders
Government policy


Progress on new technologies, standards
Capital markets


Propensity to use services, patronize providers
Impact of regulation, antitrust, taxation
Providers

Proficiency of incumbents, challengers
Four Sets of Scenarios
A. Incumbency Counts - hype evaporates
B. Mass Matters - megacarriers dominate
C. Pinpointing Prevails - specialists win
D. The Revolution comes
Incumbency Counts:
definition

Despite the hype, incumbents prove much
stronger than initially expected

Market share losses are small and manageable

No more big new entrants (e.g. WorldCom)

Former PTTs continue to dominate their home
markets and fail everywhere else

A few basic changes, e.g., convergence of
domestic-int’l in Japan, long distance-local in
U.S.
Incumbents win: why?

Customers: Prefer incumbents, don’t trust new
entrants. Demand growth is manageable.

Technology: New technologies slower to roll out than
expected; incumbents adapt faster

Government policy: Continues to protect incumbents

Capital: Markets’ support for challengers fades

Providers: Incumbents get fresh blood and become
more entrepreneurial. Challengers fall into same old
traps.
Incumbency Counts:
customer demand

Customers don’t want to switch, or require a high
premium (>25% discount) to do so -- trust
incumbents, or don’t really trust challengers

Demand for new services is unexpectedly low

Demand differs by country or territory, not so
much by market segment

Demand shift from voice to data slows

Overall demand grows fast but not so fast that
incumbents simply cannot handle it, e.g., shifts
from doubling every 4 months to doubling every
year
Incumbency Counts:
technology

New developments occur at a manageable pace

Some important new technologies help
incumbents leverage existing investments

xDSL

DWDM (maybe)

circuit -> packet conversion devices

Incumbents use their market power with
equipment makers to get cutting edge tech

New, more advanced technology appears, but the
incumbents are not left behind -- they have it, too

KEY: incumbents keep up with challengers
Incumbency Counts:
government policy

Governments prefer continuity; leery of
disruption

Worry about big job losses at incumbents

Big is bad: dubious about megacarriers

Strong anti-trust enforcement: less
concerned about jump-starting competition

Wary of foreign carriers: maintains national
domains dominated by incumbents
More on “big is bad”
The SBC-Ameritech deal is not good for what
we’re trying to get. I’m not sure bigger is going to
be better.
Ron Johnson, Chmn., Nebraska PUC
Incumbency Counts:
providers

HR: Incumbent management becomes flexible
(may hire outside innovators and entrepreneurs)

HR: Incumbents not hurt by brain drain

Incumbents are better lobbyists than challengers

Challengers have no compelling management
advantage. Flexibility fades as scale grows.

Capital markets support incumbents, and become
more wary of challengers. Huge funding for new
challengers starts to dry up.
Incumbency counts, they
say
A breakthrough in price or
performance is necessary
for the [revolutionary]
scenario. I am relatively
pessimistic about it. I don’t
see the shift from circuit
switching to IP as
providing a sufficient jump.
VP, new telecom venture
The bulk of traffic will migrate
from switched circuits over the
next 10 years, but this will be a
gradual process. The current
circuit-based networks will be
the cheapest and most
convenient for most customers
during that period.
SVP, European PTT
Conclusions: Why
Incumbency Counts

Incumbents are HUGE, with great brand presence

They control the critical link in the network, the
local loop

They are protected by governments, pampered by
equipment manufacturers, trusted by customers,
and massively wealthy

Their managements are getting smarter all the time
Mass Matters:
Era of Consolidation

Vertically-integrated

All segments, all services

Huge size: room for only 3 in a given market

PTTs not necessarily OK: megacarriers may invade
their turf

New household names possible in 2005

Geographic market is regional (N. America, Europe,
Asia)
Why the giants dominate

Customers: Brand is very important; size helps build
brands. Mass market services are fine.

Technology: Economies of scale in developing and
implementing new technologies (maybe with help
from equipment manufacturers)

Government policy: Weak anti-trust

Capital markets: Size brings stock price advances

Providers: Vertically-integrated generalists achieve
economies of scope and scale
Senate testimony by SBC
chairman/CEO Edward Whitacre
In SBC’s view, this globalization
will result in a half dozen or so
integrated global competitors
vying with a very large number
of regional, niche, and local
competitors.
More supporters:
Customers are looking for
single-source providers. They
are looking for simplicity.
Senior RBOC exec.
There will always be some
niche players but, basically,
the world is going to be three
or four 300-pound gorillas.
VP Canadian telco
We must commit
to provide end-toend service to
customers, any
place anywhere,
any time.
Senior ATT exec
WorldCom COO John
Sidgmore: Mass Really Matters
Customers say they want bundled
working solutions, not just parts. They want
us to show them how to deploy these products
within their existing fabric of networks.
We’ve combined the 4th-largest long distance
company in the U.S. with the largest provider of
local-access services -- outside of the RBOCs - with the largest ISP in the world.
Mass Matters:
customer demand

Factors that advantage huge companies:

Customers are willing to try new providers and
services

Limited demand for specialized offerings and
personal treatment from telcos

Many customers (business and residential)
prefer one-stop shopping

National and trans-national brands dominate:
massive marketing expenses required
Why customers like big
providers
SVP of large IXC/wireless carrier:
Integrated communications
carriers will be in the best
position to satisfy customer
demand for simplicity. Not just
one-stop-shopping, but fullyintegrated products. What we
now see as different products will
be integrated not just at the
customer end but in the actual
delivery so they can’t be pulled
apart.
Our experiment in
calling party pays
(for wireless) entails
the shared use of a
500 number for long
distance and wireless
(with a single bill). To
deliver CPP, long
distance must be
provided. Can’t break
out the two services.
Mass Matters: technology

Speed: New developments occur rapidly

Economics: Real economies in spreading new
technology investments (including HR
investments) over widest possible customer base

Money: Huge capital investments required

Integration: Technology developments foster
integration

For example, wireless CPP is facilitated by
integration with long distance services
More technology drivers
for “Mass Matters”
Intelligence in the network is key. It enables
simplicity and transparency. As customers sign up
for more and more services -- and indeed as
bundles of services become the only way of
signing up -- the intelligence in the network
becomes more and more applicable.
IXC/Wireless VP
I call this “strong bundling” or integrated
bundling” as opposed to “weak
bundling” that simply stuffs various
services into a single package.
Mass Matters:
government policy

Weak antitrust vision and enforcement -- 3
dominant players per market is OK

Megacarriers allowed into monopoly markets
to challenge incumbents

Governments don’t worry too much about
protecting incumbents

Governments disinclined to protect
incumbents from foreign predators
Mass Matters:
providers, capital markets

Real economies of scope and scale. These favor
extremely large, integrated entities

(Some) management teams assemble and then run
vast enterprises successfully

Big companies successfully leverage business
infrastructure across many diverse businesses

Capital markets favor large, “portfolio” entities
(but not necessarily incumbents). Mergers
generate increased stock values.
WorldCom COO Sidgmore sees
acquisitions as core competency...
Acquisitions are essential
Where the growth rate and the change rate
are so high, acquisition is often the superior
approach, even though there are these issues,
because you get there so much faster.
We know how to make them work
MFS, UUNet, and WorldCom are all acquisitive
companies. Together we’ve acquired 65 companies in
the past 4 to 5 years. We’ve developed a significant
expertise in integrating cultures and putting management teams together that balance the organizations’
cultures. It’s a core competency of WorldCom’s.
Mass really really matters
It’s the same story we’ve seen in U.S. industry for 100
years. Big companies are not as agile as smaller ones,
and there are always big opportunities for smart people
everywhere. But continent-wide or even global operations
require a company with appropriate scale to handle that
size of operations. That means a very large company.
VP, major wireless carrier
You can’t even imagine what dealing
with 70 million customers involves.
VP, TCG (now part of AT&T)
Pinpointing Prevails
Focus
is
Everything
Pinpointing Prevails:
definition

Focused, specialized carriers have an advantage:

Efficiency and profitability

Flexible and responsive to differentiated market
requirements

All things to all people means mediocre performance
for all customers

Today’s megamergers are the last gasp of the
dinosaurs resisting the new reality

Strategy: Focus
Market Segment Focus

Customer requirements differ -- sometimes
significantly




Organizational requirements / focus differ




Products and services
Level of service and customization
Economic viability
Service strategy
Support platforms
Alliance relationships
Examples:




Business v. consumer
Global Alliances - Concert, World Partners, Unisource = MNC
Affinity groups - AARP, church groups
RMTS - GE Rescom, US Online
Value chain focus:
examples

Infrastructure focus
 Qwest, Level 3, NextWave
 Attraction to migrate down value chain, get
higher margins

Retail/customer interface focus
 ArbiNet, Excel, CLECs, LD resellers
 Viability a function of excess capacity or
regulatory rules on access pricing
Why pinpointing prevails

Incumbents and megacarriers collapse
under their own weight. Size brings
inflexibility, bureaucracy, stagnation

Wrong strategy for the market, not execution
failure

Focus creates opportunities for real
efficiencies, cutting costs

Customers want customized service
bundles, and personal treatment

Some want high-quality, high-touch service

Others want economy class to save money
Megacarriers collapse of their
own weight
“
If you have an under-depreciated, over-regulated,
attacked, monopoly phone company, why double
the size of that?
President, RBOC subsidiary
The colossus mergers, seeking economies of scale and
geographic coverage, are solving all the problems of yesterday.
You have to ask a fundamental question -- “What got better
from a customer’s point of view “?
President, wireless carrier
Focused competitors
Ameritech’s wholesale business has increased
from $150m to more than $1bn in 2 years. The
wholesale retail split is aready here.
RBOC VP
Disintermediation and the collapse of the value
chain is occurring in every industry affected by IT.
VP Strategy, equipment manufacturer
Is owning the network
necessary? No
Network ownership will be less and less important as time goes on.
Today it is reasonably important. Twenty years from now it won’t
be important at all.
President, wireless carrier
We already have contracts to buy long distance minutes at an 8090% discount from retail. Why do I need to own the network?
RBOC VP
A successful carrier of the future doesn’t necessarily own networks.
It controls and operates networks, but it may not own them.
President, equipment manufacturer
Value in telecoms: 2005
Of the value created (in the telecom process),
45% will go to the content provider, 45% will go
to those that actually work with the customer,
and bill and innovate with the customer, and
10% will go to the infrastructure provider.
President and CEO, LEC
W(h)ither the incumbents in this case….?
Pinpointing Prevails:
customer demand

Both business and residential customers
want customized services, not mass
offerings

Falling prices and new services create
major market growth, where specialists
have an advantage

Differences in customer requirements help
to define appropriate scale for geographic
focus
A few comments….
Customer service wins us customers
every day. We expect to get 80%
of the GTE’s business in our town
within 3 years
CLEC COO
WinStar will deliver a level of personal service that
will amaze businesses. Customer care will be a
primary focus for WinStar."
Bill Rouhana, Winstar CEO
Pinpointing Prevails:
technology

Technology creates excess network capacity,
helping resellers, e.g. DWDM

Open standards and open software enable 3rd
party applications development

Fast change devalues legacy systems

Network intelligence migrates to customer
interface or to customer’s access equipment,
away from legacy switches

Gateway and intelligent agent software allow
aggregators to create differentiated, value-added
services, and customer self-provisioning
Pinpointing Prevails:
government policy

Policymakers support new entrants

Wholesale pricing policies (resale discounts and
unbundled elements) make resellers viable

Pro-change constituencies are strong

Policy retains “hidden” subsidies, helping
specialists

Policymakers let incumbents suffer, shrink, or
even be acquired and broken up
“If regulators set the rules for the marketplace,
any structure is sustainable because the rules
keep it in place.”
President, wireless carrier
Pinpointing Prevails:
providers, capital markets

The costs of operating integrated, centralized
organizations and systems prove higher than
economies of scale; the latter are elusive

Operational strategies and supporting IT systems
are so varied that integrated companies have no
significant scale economies in the back office

Focused competitors steal enough high margin
market share to undermine large organizations

Capital markets reward focused competitors over
“portfolio” companies, i.e., incumbents worth
more broken up than whole
Revolutionary Change
Price/performance ratios
shift by at least one order of
magnitude, within
5-7 years
Revolutionary scenarios

Data Dominates

Cable Connects

Wireless Wins
Unlike evolutionary scenarios, these
scenarios are not mutually exclusive
Long-shot scenarios

Voice/data over electric
power lines

Satellite delivery systems
(LEOs)

Content convergence
Data Dominates
Industry evolution
4000
3500
3000
2500
2000
1500
1000
500
0
1998
1999
2000
Voice: ILECs
2001
2002
Voice: CLECs/Cable
2003
2004
Data
Mobile
2005
Data Dominates

Data traffic doubling every 4 months

PS networks clearly superior for handling data

Data could be 95% of traffic by 2005

“Voice will be a pimple of the side of data”
Voice infrastructure is a handicap; at a minimum, new
data-centric market entrants have big cost advantages
Data Dominates

Incumbents
 Can’t move to PS fast enough
 Cultural shift too severe
 Rapid loss of dominance

Challengers
 PS-centered
 New business models based on data
 Voice just another datastream
Data Dominates
Our business model
calls for 50% revenues
from data within 5 years.
VP European PTT
Intelligent networks are
useless in the age of data.
Stupid networks win every time
former AT&T exec
BT is spending $12bn over the next 5 years to build a worldclass data network. The main issue is migration.
Dir. Strategy, European PTT
Data Dominates
Scale will come from a focus on data,
not voice, and from a willingness to be
a growth company, not a safe cash cow
for investors. IP has some advantages
over CS, but scale is the key.
Senior exec, Microsoft
Data Dominates:
customer demand

Internet demand continues to grow fast

Mass market for video applications -videoconference, streaming video

Interactive high bandwidth apps (IPvoicemail, video email)

Telecommuting

Fax and voice apps move to IP
Data Dominates:
technology

IP solves QOS issues -- priority routing, etc.

Bandwidth availability expands rapidly,
especially in the local loop

Scalability problems resolved -- terabit
routers and beyond

Reliability reaches CS levels

Capacity crunch resolved -- more bandwidth,
IP multicasting, premium IP networks, etc.
Data Dominates:
government policy

Privacy/encryption issues resolved

New entrants encouraged

Access charges/taxes held off for 2-3 years

E-commerce encouraged

Intellectual property issues resolved
None of these is mission critical
Data Dominates:
providers, capital markets

Incumbents remain slow-moving and bureaucratic

Incumbent dividends remain untouchable

Series of key assumptions retained by incumbents:
 Cannot cannibalize voice markets
 Cannot get ahead of the data pricing curve
 Switched networks are more reliable
 Smart networks with central intelligence are the
future

New entrants unencumbered by legacy networks,
apps, business models, cultures
Show-stoppers

Capacity crunch dries up effective demand

Pricing models fluctuate or fail, limiting investment

Incumbents move faster than expected to IP

Reliability, scalability issues unresolved

Bandwidth glut crashes data market

Last mile problems unresolved
Data Dominates - Naysayers
Price differences between CS and PS are
based more on regulation than reality.
VP Networks, global ISP
The existing network is a critical source
of competitive advantage. the issue is
how to take advantage of it.
VP, RBOC wholesale group
Ameritech is going to
replace its CS network
with a state of the art
packet switched design.
Richard Notebaert, Ameritech
Cable Connects
Cable connections
40
35
30
Percent
25
20
15
10
5
0
1998
1999
2000
2001
Households sw itching to cable telephony
2002
2003
2004
2005
Households sw itching to cable Internet
Cable Connects

MSOs upgrade to 750Mhz or better to meet
challenge from DBS

Internet access offers substantial revenue stream,
at limited marginal cost

With 2-way communications established, cable
telephony over IP becomes option for additional
service at less than $300/pop

Cable moves to “Free voice in U.S.” as part of
bundle
Cable Connects

Cheap bandwidth for the last mile

Stable technology

Video services pay for infrastructure

ROW in place in many countries

IP really makes the difference

Monopoly pricing possibilities to subsidize
voice investments

Rolling in cash right now (stocks flying)
Cable Connects
Cable operators will have 2-way plant
running to 40-50m homes by the end
of 1999, and will be offering high
speed data to 20-30m subscribers.
Tele.com article
We plan to offer voice
everywhere by 2003
Strategy VP, major MSO
You have T1 speeds inbound and half T1
speeds outbound all for $35 a month.
Nothing else is practical or affordable.
Technology director, major university
Cable Connects:
customer demand

Cable overcomes traditional lousy image

Customers care more about price than quality

Customers buy video/Internet/telephony bundles

Customers don’t worry much about security or
reliability

Customers don’t worry about cable’s inflexibility,
e.g., single ISP policy, vertical integration with
content
Cable Connects:
technology

Traditional problems with two-way
cable mostly resolved now, rest will
be soon

IP problems resolved (such as QOS)

Powering issues resolved
Cable Connects:
government policy

No more price caps

No early application of universal
service/access charges

“Must carry” and other universal
service questions resolved favorably

Cross-subsidies permitted (bundling)

Economies of scale permitted
(permissive anti-trust enforcement)
Cable Connects:
providers

HR: Cable MSO’s add weight and
planning capacity to HQ staffs; find
thousands of data and telephony
technicians

Customer care becomes central to
culture, with matching investments

MSOs become more entrepreneurial
(currently, more monopolistic than the
ILECs)
Showstoppers

Wall St. financing for upgrades dries up

IP issues unresolved

Weak customer demand for telephony from
cable customers

Universal service/access charges

HR: cable operators cannot retool and add
technicians fast enough

Management misses the window of opportunity
on voice over IP
Naysayers
Cable telephony faces all
the problems of voice over
IP, plus another layer of
cable problems.
Research analyst
Cable has huge problems in
setting up effective back office
and customer service systems
for Internet access, let alone
Internet telephony.
Research analyst
Seven years is not long enough to
change consumer behavior.
Cable assoc. exec
Wireless Wins:
definition

Mobile substitutes for landlines

Fixed-mobile integration comes fast

WLL gains volume in 3rd world, then 1st

Broadband fixed wireless outcompetes
other delivery technologies:
FTTH, FTTC, HFC, xDSL, LEOs….
Wireless Wins
In Europe, wireless revenues are
already about 20% the size of the
revenues of fixed network voice traffic
. …Mobile services could deliver 50%
of fixed service revenues by 2001.
Tele.com
Worldwide, the number of fixed
wireless subscribers will grow
from 4m in 1997 to more than 45m
in 2001. NBI
Independent wireless companies are
already cost competitive with BT’s
landline rates in some cases.
Dir. Strategy, European wireless co.
Why wireless world is different:
problems for incumbents

Already a competitive environment


For incumbents, means moving from
monopoly to competition immediately
Offers some serious disadvantages
for incumbents, such as:


Being blocked from entry in some
markets (Telecom Italia)
Limited resources (e.g. spectrum)
Wireless Wins:
customer demand

Price falls to compete with landline
(happening now) and customers respond

Mobile becomes first phone of choice
(happening now in some countries)

Either customers do not insist on
FMC/bundling, or all wireless carriers
integrate to provide it. No advantage to
incumbents or megacarriers.
Wireless Wins:
technology

QOS continues to improve

FMC comes on stream smoothly

3G wireless isn’t too late (a huge
uncertainty) and fulfills its promises
(another huge uncertainty)

Broadband delivers as promised
Wireless Wins:
government policy

Regulators do not attack wireless profit
margins through re-regulation

Not too many players in each market (3
max in most places)

Regulators approve unlicensed spread
spectrum technologies

Rights of way available (legislation)
Wireless Wins:
providers, capital markets

New entrants scale effectively

New entrants do not crash the market by
cutting prices to generate more business
than the infrastructure can handle

Market funds extensive build-out by new
entrants
Show-stoppers

Market gluts from oversupply?

3G technologies badly delayed

Continuing standards fights (U.S. and
global)

Regulators attack margins

Prices stop falling
Wireless- Naysayers
38 GHz wireless is great in theory, but it
still has a lot of technical problems to solve
Senior exec, new entrant
Landline will always have
a significant price advantage
Industry analyst
Combination scenario

In each of the four sets of scenarios,
drivers align to produce a single future

But more complex scenarios are also
possible:
Meltdown for incumbents?

Mobile takes all growth in voice markets

New entrants steal best customers for voice and
data

Cable companies offer unbeatable “free voice”

VOIP erodes premium voice services (e.g. int’l)

Data revenues go first to hungry challengers

Legacy networks, legacy ideas, and legacy
regulators hold incumbents back
Vicious circle
Stock declines
Incumbents’
position weakens
Investments slip
Managers and
customers leave