FT Telecoms January 2002 - News & views
High risks in the great digital divide
The US, South Korea and France are using bold initiatives in broadband deployment to invigorate their e-commerce and online entertainment sectors, but the technology's adoption in most other countries remains weak and patchy | Read
3G and GPRS - West European licensing process is winding down
Auctions in the Czech Republic, however, set the 3G ball rolling in Eastern Europe | Read
Advanced handsets are still in short supply
Manx Telecom sets the pace in European race to launch third-generation services | Read
View from the top - Bill Esrey of Sprint
The company's long-standing chief has a vision for the future of the industry which differs from those of his main rivals, | Read
News in brief - Mobile roaming set to rise
Rivals to GSM mobile operators, such as UK-based Cognito, are taking the view "if you can't beat them, roam with them" | Read
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Global visionaries put plans on hold as industry
nurses hangover from the party
By Richard Waters
Published: January 22 2002 11:25GMT | Last Updated: January 22 2002 16:20GMT
Not so long ago, the world's big national telecommunications companies shared an almost identical strategy, says Jean-Louis Vinciguerra, executive vice president of France Telecom. Summed up simply, it was: go global and do everything.
"For the past three years, the position was clear," he says. "The major incumbents were expanding into wireless, internet, broadband. It was a time for worldwide expansion. We had the feeling that it was expansion forever."
That era is over. The same big telecoms companies are now struggling to find a strategy that will save them from the mess created during the over-ambitious boom years of the late 1990s. Many companies in the sector are trailing failed merger attempts and abandoned international alliances behind them and suffering under the weight of massive debt loads.
After a capital spending boom that produced a wave of investment in new infrastructure, many are also struggling to regain some semblance of pricing power in their main markets. The bust that followed that spending boom, meanwhile, has devastated the telecoms equipment business, dragging down companies such as the UK's Marconi - which last week announced a further 4,000 job cuts - and Lucent Technologies in the US.
The one-size-fits-all strategy has been replaced by a wide range of different business plans in the telecoms services business, says Mr Vinciguerra. Big companies that once planned to go global have instead turned back to regional strategies, or are splitting themselves up. Most suppliers are focusing on a narrower range of customers or services, rather than trying to be all things to all people. Survival is the order of the day.
If that was the theme of 2001, then it will also be the theme for 2002. The next 12 months will be "a pretty slow year in terms of globalisation", predicts Joe Nacchio, chief executive of Qwest Communications. "I don't think we're going to see any big cross-border mergers."
For now, at least, most telecoms executives are looking more inward. Says Mr Nacchio: "The big news about the industry is: let's concentrated on the basics, let's concentrate on balance sheets."
Consolidation will almost certainly return to the top of the agenda eventually. As Jack McMaster, head of KPNQwest, the European joint venture, says: "Niche telecoms players don't work - this business is still about huge fixed costs and scale."
The prospect of trying to build global businesses capable of serving global multinational companies also still attracts the visionaries, despite the disastrous failure of international ventures such as Concert and Global One.
But these may not become industry priorities again until 2003. In the meantime, rationalisation, rather than consolidation, is likely to be the name of the game.
Some of that rationalisation is already well advanced. The list of major bankruptcies in the North American and European telecoms industries grows longer almost by the week. In North America, it has extended from alternative local carriers, such as Winstar and Teligent, and internet service providers, such as PSINet, to embrace companies with global ambitions, such as 360Networks.
Other internationally-minded carriers, such as Global Crossing and Level 3 Communications, have had to scale back their ambitions and hunt for a new business model.
In Europe, the casualty list includes upstarts such as Viatel and GTS. It is headed by struggling national carriers including KPN and BT, which over-extended themselves during the boom years, particularly in pursuit of third-generation wireless licences.
Amid these financial stresses, the overhaul of some of the big incumbent carriers is proceeding apace. Having pulled off two of the biggest mergers ever seen to assemble a cable TV business, AT&T last month agreed to sell these networks and to return to its roots. After the balance sheet pressure caused by its earlier strategy, this looks like a return to a far more solid financial foundation.
"Compare an airline company's balance sheet to ours, or its cashflow to ours, and we look good," says Dave Dorman, president of AT&T.
Not long ago it would have been unthinkable for an executive of a once-mighty company such as AT&T to even mention his company in the same breath as an airline. But, as with the airline business, deregulation and over-leverage have taken a big toll. AT&T has at least come out the other side, though it must still deal with its shrinking long-distance voice business.
For many companies, though, there is still a long way to go to work off the excesses of recent years. The telecoms party of the late-1990s has left a $100bn hangover in Europe alone, according to Axel Majert, co-head of European telecoms investment banking at Deutsche Bank. Of that, $75bn is in the form of excess debt, while the rest represents an overhang of stock that was issued to fund acquisitions, he adds.
Yet it is difficult to find many telecoms executives who would willingly turn back the clock. "It's better to have debt, than to have no debt and no strategy," says Mr Vinciguerra at France Telecom. That is just as well, considering that France Telecom's own debt mountain is the largest in Europe.
The question the big telecoms carriers now face is whether, faced with financial pressures such as these, they can hold on to some semblance of their former strategies, or whether they are faced to break themselves apart, such as AT&T.
Most industry executives, such as Mr Vinciguerra, maintain that there is still a point to building a full-service communications company, capable of selling everything from wireline and wireless service to internet access and high-speed data. Selling bundles of services and submitting a single bill to customers is still the goal of most big telecoms companies - even though few have proved very successful at this.
"Telecom companies, in terms of horizontal integration, are amongst the furthest behind," says Mike Hill, head of the telecoms industry group at IBM.
While banks and industrial companies have made big strides in integrating their operations to improve dealings with their customers or suppliers, telecoms companies never had much incentive, he adds: "The fundamental service was voice - but now they need to go much further. The rate of introduction of new services is archaic."
While trying to learn how to cross-sell services and manage their customer relations better, the big telecoms companies will also be struggling this year to deal with slowing of growth in demand for their services. This is both cyclical and secular. On the cyclical front, a US-led economic slowdown has come at a difficult moment, putting a strain on cashflow at a time when heavily indebted carriers can least withstand it.
Alongside this has come an inevitable slowdown in the once stratospheric growth rates for data transport. And the collapse of the dotcom sector has removed a source of demand that will not recur, particularly in the US, says Jose Collazo, chairman of Infonet. "The growth rate of the past couple of years was unnatural," he adds.
When the dust settles and economic growth returns, there should still be plenty of scope for growth - albeit not at the sort of rates that some had once predicted.
Once the economic uncertainties clear, underlying demand for telecoms equipment should grow at an annual rate of 10 to 12 per cent again, predicts Henry Schacht, chairman of Lucent. "This will still be a $200bn market, even if it is down from $260bn," he says. "That still leaves plenty of room for people like us to make our way."
"If pricing power can be regained, you can see growth rates of 20 per cent and up" in the long-haul data market, adds Mr Collazo.
For now, that remains a big "if". With supply outstripping demand and big customers unwilling to take on long-term commitments for extra capacity, there has been no pricing rebound yet - though the price declines appear at least to have stabilised.
"The question is, will there be a return to sanity in pricing?" asks Mark Bruneau, a telecoms consultant at Adventis in the US. "Airlines go under if they engage in price wars for too long."
Like the deregulated airline industry before it, the deregulated telecoms world will have to live with the consequences of this for some time to come.
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