The following article maybe a month old but still very interesting for those who haven't read it yet.
To Build or Not to Build -- Is That the
Question?
Steve Demetriou and Graham Mirabito
June 1998
The opportunities for telcos provided by global telecoms deregulation are vast.
Driven by the lure of new markets, many of the major operators worldwide are
in the midst of frantic infrastructure buildout. But the perennial dilemma faced
by traditional telcos as they take this opportunity to expand out of their home
markets and move overseas is whether to build or lease infrastructure. The
answer of course is not simple, but, Australian operator Telstra says, to begin
to make a choice we must look at the bigger picture.
The increasing interdependence between our industry and the world economy
has never been more apparent than now. At present, global trade is evenly
distributed between Europe (27 per cent), the Americas (24 per cent) and the
Asia-Pacific (25 per cent). Population profiles, however, are radically different.
Europe and the Americas are evenly split with some 35 per cent of the world's
population, whereas the Asia-Pacific is home to nearly two-thirds of the
planet's (potential) consumers.
When these statistics are considered together, it is plain that the mature, solid
economies in Europe and the Americas are generating around twice their value
per capita compared with the Asia-Pacific, which generates less than half its
value per capita. Clearly, with more than 3 billion people at present in the
region and globalisation accelerated by advancements in technology, transport
and market (de)regulation, the Asia-Pacific represents an enormous
opportunity for the world's business community.
The opportunities for telcos are also vast -- a fact borne out by the positive
correlation that can be demonstrated between teledensity and gross domestic
product per capita. Germany, France, Australia and the UK -- all with mature
consumer economies -- demonstrate teledensities of between 48 and 59 lines
per 100 inhabitants, compared with China, India and Indonesia (the worlds
largest populations) which have teledensities of 1-3 lines per hundred people.
The contrast is stark but the correlation clear.
Half the world has never made a phone call and we can see where most of
these people live -- clearly a need for infrastructure development which will
lead to increased GDP and development of nations which will consume more
sophisticated products and services in the future. In contrast, the Americas and
Europe are developed and require advanced applications that make life easier
and business more profitable. Nevertheless, there are definitely examples of
both opportunities being in place in some regions although these are few and
far between.
The `Must Build' Syndrome
For a telco, in the initial stages of gaining a foothold in the market, the answer
is often very simple and dictated by pure economics. Most new market
entrants do not have -- or would not wish to risk -- the capital outlay required
to develop significant infrastructure, so they are faced with Hobson's choice --
lease existing capacity or don't take part at all.
However, the answer to the question becomes less obvious as the business
becomes established, and the temptation to build gets stronger. At this stage,
many telcos succumb to the snapshot financials that can suggest that it would
be more cost-effective to join the crowd and start laying infrastructure.
In Europe this is exactly what is happening. Europe is currently undergoing a
programme of relentless buildout, yet predictions suggest that -- when all
programmes reach completion -- Europe will have three times the
infrastructure it requires to deliver the communications demanded by business
and consumers alike. Clearly, this level of development has to have some
serious applications to fill the infrastructure, but is the market growing or being
stimulated to grow with sustainable applications?
The UK, for example, has some seven national infrastructure providers digging
up streets and laying cables. What is apparent and of grave concern is the
practice of not sharing trenches and duct space, as this represents a clear
waste and false growth in the telecoms industry. Competition exists, prices
have fallen and network standards have risen. So do we really need to build?
The answer for Telstra, is `not likely!'. This is an answer founded on a mixture
of economic considerations and strategic vision -- but with a significant caveat.
And that caveat is in the question itself. Rather than `to build or not to build',
the question should be `where to build and where not to build.'
Too Much, Too Soon?
The economics are simple. In the UK (and Europe), competition is strong in
the backbone market because there is considerable overcapacity. At present
the UK alone seems to have projects that will provide 2-3 times its own
network requirement, and the market continues to grow at around only 11 per
cent per annum.
This has left a yawning gap between the capacity available and the market's
currently low demand to fill it. Clearly, this business scenario rapidly drives
prices down, and in the UK it has done exactly that. But what next? Who will
show us how to use this capacity to improve life or profitability?
A good example of the dangers of thinking too short-term exists in the UK.
Telstra in the UK was considering installing a switch in the north of the country
in order to take a significant amount of traffic from Scotland. The cost benefits
were immediately apparent. However, less than two years later, competition
has caused the interconnect rate to drop significantly so Telstra's decision not
to proceed with the installation proved a positive one from an investment
perspective.
Make Haste, Carefully
But the considerations cannot be purely financial. Traditional telcos were
originally established to deliver services to retail customers and many, as they
ventured overseas for the first time, have attempted to replicate their
home-grown strategy in foreign markets. But barriers to entry (though falling)
remain high. Infrastructure costs, interconnect rates and the incumbent's
marketing spend are just some of the factors that need to be overcome to
develop a comprehensive overall retail strategy, and that is no easy task.
As a result, in order to sustain growth and meet business targets, many new
entrants initially gave their revenues a boost by offering spare capacity to the
wholesale market. This seems like a reasonable short-term strategy, but
certainly not the significant differentiator required to take the business to the
next stage.
Progressive telcos have identified and developed their difference and this has
formed the cornerstone of their business development. In a world where
duplication happens in months not years, this difference is rarely technology
based in the long run. The choice to build and own infrastructure beyond, of
course, the minimum required to remain competitive in the market should be
based on sustainable differentiation or cost advantages.
What is undesirable is a world with lots of `plumbing' in search of applications.
Continuing this analogy, rather than be a plumber, Telstra would prefer to show
the different ways to use water -- to drink, for cleanliness, for leisure, for
power, as a transport medium and so on. Similarly we would prefer to spend
our time looking for ways to use telecoms to make life easier, in both the
business and residential sectors.
An example of the way Telstra looks to identify and meet such application
requirements is our international calling programme. Through extensive
research we had identified that no matter how little an international call costs,
consumers still worry about the amount of time they are on the phone when
calling abroad. To address this we introduced a A$ 20 (US$ 10) flat rate for
unlimited calling time from Australia to the UK. The results were phenomenal,
customers spoke for -- on average -- a call of A$ 28 (US$ 14), so they were
immediately A$ 8 (US$ 4) better off and we saw a 400 per cent increase in
traffic. A real win-win.
Looking at new uses of telecoms is also the key to winning in a developed
market. A prime example is when Telstra worked in partnership with Coke and
it was quickly recognised that there were significant costs incurred in servicing
vending machines and also lost revenue due to faults or machines running out
of stock. To address this issue, Telstra developed a modem application working
on fixed-line or mobile technology that dials up everyday and advises on the
status of the machine. This not only reduced costs, but provided considerable
benefit to the customer due to the increased availability of the product and
effective identification of faults. It is these types of applications that generate
new revenues for the industry, create long-term value and customer
confidence.
These applications are, in fact, crucial to effective use of bandwidth. If we
accept that telcos must increasingly focus on the requirements of the customer
rather than push technology for technology's sake, then we also accept that the
time spent facing the customer identifying his/her needs is critical. But if a
telco is committed to a programme of buildout, estimates suggest that roughly
30 per cent of its staff time is assigned to network planning, building,
commissioning, and so on. That is 30 per cent less time to be spent facing the
customer, talking, understanding their business and -- ultimately -- delivering
that killer application.
Telstra would rather lease high-quality services from a trusted partner and
concentrate on growing business further up the value chain. In this
environment it's a simple choice, build infrastructure or build customer
business.
Technology -- A Commodity
An added complication is that the technology itself can no longer be considered
a core differentiator (except perhaps for equipment manufacturers). Suppliers
are providing telcos with turnkey network solutions and next-generation
technologies are already being implemented -- the backbone is already there, it
works and its development is ongoing.
This, too, makes buildout an unattractive proposition for the new player
because by the time you have finished building, a competitor has already
focused on deliverables and used existing technology to develop a faster,
cheaper application that has lured away your market.
However, there are occasions when building is not only preferable, but
essential. Most of the Asia-Pacific, for example, continues to be woefully
under-serviced in terms of telecoms infrastructure, despite predictions that the
region will be responsible for one-third of world trade within five years. The
necessity to develop infrastructure in this region is therefore an economic
imperative and an investment decision that Telstra has embraced.
In every case, the common thread running through a decision-making process
is `what does the customer really need?' Is it infrastructure or applications?
The answer is dependent on where the telco is operating. There will, of course,
always be carriers' carriers, and they will rightly continue to build networks.
But for many of the traditional telcos to survive, the challenge will be to
transcend into the applications layer of the value chain.
Back to Basics
Any strategic business debate will, more often than not, eventually return to
economics. Most of the 50 per cent of the world's population who have never
made a telephone call live in the Asia-Pacific. If even a small proportion of
them can be networked into the global economy, operators will switch more
minutes than ever before, and investors will be smiling.
So when it comes to building infrastructure, it's a matter of `where, when and
for the benefit of whom'. The challenge is to deliver on the customers
expectations of an easier life through the innovative use of technology not the
delivery of technology. t
Steve Demetriou is senior vice president, Global Operations at Telstra
and Graham Mirabito is managing director of Telstra UK. |
