August 2001

Telecommunications: Rout or Restructuring?

In the past few months, telecommunications companies - first operators, then suppliers - have suffered a reversal of fortunes that is as sudden as it has been dramatic. Blue chip suppliers such as Marconi and Lucent have seen catastrophic falls in their share prices - in Marconi's case by as much as 90% - and thousands of employees have been laid off.

The economic picture

Of course, there are broader factors at work, such as the slowdown in the American economy, and the fallout that has affected the whole technology sector following the collapse of the boom. But this does not explain why telecommunications in particular has been singled out for such a battering. It is happening at a time when telecommunications is undeniably becoming more, not less important to the day-to-day operations of every business worldwide.

The data business

One reason is that a quiet revolution has been taking place: the ousting of voice by data as the primary source of telecommunications traffic. Once, data was a profitable sideline; now, many wired networks carry more data than voice traffic.

With the ousting of voice has gone the voice telephony business model, perhaps the main reason why telecommunications has always been seen as a licence to print money. Charging on the basis of "voice minutes" makes perfect sense to users, but in fact bears little relationship to the actual costs of setting up and (especially) operating a telecommunications network.

The investment in setting up a network is massive; but ever since manual operators were replaced by automatic exchanges, the actual operating cost of each phone call has been very low. Meanwhile, technical advances have increased capacity and pushed down operating costs still further. Since prices have not fallen to match, telecommunications became a very profitable business.

A new environment

But telecommunications today is different. Digital technology has had many effects, but one is to bring charging models much more closely into line with the real costs of telecomms operation, while driving a coach and horses through the barriers to competition. Prompted by events such as the third generation mobile licence contest, investors and markets have finally woken up to the fact that telecommunications is no longer an automatic licence to print money: it is a competitive and aggressive global business.

Realising that in this new environment it is actually conceivable that national carriers could fail, or at least be taken over, investors have forced operators to scale back their investment plans. This in turn has hit telecommunications suppliers.


Adding it all up, the telecommunications industry is undergoing a revolution as profound as any in its history. But despite the pain being felt by some of the biggest names in the sector, this does not feel like an industry in its death throes. Rather it is a case of restructuring to meet a new set of challenges, and a fundamentally new set of uses for what telecommunications provides.

The real fear of investors is that, as we move beyond the voice era, telecommunications could become a low margin, commodity business, with a dozen different suppliers competing to offer the lowest price for transporting bits from A to B.

New applications

What the telecommunications industry desperately needs is new applications: new and valuable services that, like voice, can be charged on the basis of their value to users, rather than the cost of transporting the bits. The revival in telecommunications fortunes, when it comes, will be applications led.

Will new applications emerge? We think that they will. Interestingly, they are likely to develop first in the mobile sector, where new business models are starting to make their presence felt. What is also becoming clear is that in order to develop these new applications, operators need to partner with other organisations who have complementary skills.

Whether the winners to emerge from this process will be the names we are used to, or an entirely new set, remains to be seen. The longer term future (as one UK operator continues to remind us) is bright, whatever colour it turns out to be. The bad news is that for those most directly involved, things may still get worse before they get better.


©2001 Mediation Technology