To Build or Not to Build -- Is
That the Question?
Steve Demetriou and Graham Mirabito
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. |
