THE THREE Cs
This is the text of a background paper prepared for the Connect Forum
held at the Britannia Hotel, Coventry on 20-21 June 2006
Telecommunications is an incredibly fast-changing and immensely complex marketplace. It can be hard to keep track of what is happening and to make sense of the developments. This short paper has been prepared as background to a discussion at the Connect Forum and seeks to provide a set of prisms to look at the industry in a sensible and structured way that shows the inter-relationships between three special factors.
The single most powerful driver in the telecommunications industry is – and always has been – technology. This simple fact is often overlooked in the plethora of reports on company developments and pricing deals. For many years, we talked of convergence; now is is a ubiquitous reality.
As Bill Gates put it in 1999 in his book “Business @ The Speed of Thought”:
“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”
Everything is going digital. Fixed and mobile networks are already digital; television is already 70% digital and will be wholly so by 2012; digital radio is growing (now more than 3M sets). More and more content is digital too, even including people's photographs and video film. These developments make it easier for networks to converge and for the same content to be provided over multiple networks and through multiple platforms.
Increasingly digital networks are using the Internet Protocol (IP) which is of course at the heart of the Internet itself. We already have Voice over Internet Protocol (VoIP) services. A more recent, but important, development is IP TV which is available on a PC or PDA as easily as a television set.
Throughout the world, Next Generation Networks will use IP and here in Britain BT's version of NGN is called the 21st Century Network (21CN). The migration of UK customer lines to 21CN is expected to begin during in November 2006 with around 350,000 customer lines in the South Wales area.
The most visible act of convergence is currently between fixed and mobile services. BT Fusion offers handsets that operate on mobile rates over the Vodafone network when outside and on BT fixed lines when at home. Vodafone itself is now looking to provide fixed line access. O2 is working on a converged service and already operates one in Germany called Genion. The cable company ntl wants to use its acquisition of Virgin Mobile to offer converged fixed and mobile services next year.
Another form of convergence is between telcos – fixed and mobile or both – and Internet service providers. This form of convergence is behind the current fashion for so-called 'free' broadband (actually cross-subsidized from other services). The most dramatic example of this is Carphone Warehouse's offer of free broadband access to customers signing up for a fixed line telephone TalkTalk contract for at least 18 months. However, mobile operator Orange has now merged with ISP Wanadoo and just announced an offer of free broadband access to customers signing up for a package of mobile calls. This summer, BSkyB is expected to offer 'free' broadband to satellite customers via its Easynet acquisition.
We already have so-called triple play options, such as telephony, television and Internet access from ntl and Telewest. Later this year, Orange is plans to introduce a television service over its broadband service. On the horizon is what Virgin boss Richard Branson has called “foreplay”: fixed telephony, mobile telephony, broadband, and television. For a time, this will be the 'unique selling point' (USP) pf the new Virgin Mobile company.
Fundamentally it is this technological convergence that is driving other changes in the industry including consolidation.
Over, in the United States, AT&T and Bell South – who already jointly own the mobile company Cingular - have announced a full-scale merger. The intention is that the new company will provide benefits to customers by combining the Cingular, Bell South and AT&T networks into a single fully integrated wireless and fixed line Internet Protocol (IP) network offering a full range of advanced solutions. In Europe, Nokia and Seimens have announced a full-scale merger designed to save costs and provide quadruple play.
Back here in the UK, from a merger & acquisition point of view, four main trends can be identified in today's telecommunications industry:
The Cauldwell Group – which includes telco Caudwell Communications and mobile phone retailer Phones4U – has been up for sale for some months and now Cable & Wireless – in yet another change of direction - is to stop marketing its loss-making residential broadband business Bulldog, so this will obviously be up for sale now.
However, the main impetus to further consolidation is the decision by American communications giant AOL to put its UK Internet service provider operation up for sale. AOL is doing the same thing with its French and German Internet operations. AOL UK is Britain's third largest Internet provider – after BT and the combined ntl/Telewest –with 2.2M customers so there will be a lot of interest in an acquisition. BT and BSkyB are emerging as favourites to buy the operations.
BT could be involved in further deals. It is unlikely itself to be the subject of a take-over bid, given its considerable size and relative success. However, some sort of alliance is not out of the question. In the past, BT has attempted link-ups with Cable & Wireless, MCI and AT&T, all of which came to nothing. Any future alliance is more likely to be with a content provider.
As long ago as 1995, Nicholas Negroponte, director the Media Laboratory at the Massachusetts Institute of Technology, asserted in his seminal book “Being Digital”:
“If the management of a telecommunications company limits its long-term strategy to carrying bits, it will not be acting in its shareholders’ best interest. Owning the bits or rights to the bits, or adding significant value to the bits, must be a part of the equation”.Put another way: content is still king.
Fierce competition in the fixed line market, together with developments like local loop unbundling (LLU) and Voice over IP (VoIP), have dramatically reduced the margin on fixed calls. In the mobile market, pressure from the European Commission has led all the UK mobile operators to cut the cost of international roaming which has accounted for some 80% of revenues.. So there is not a lot of money to be paid from carriage of calls. Equally, in the digital television market, Freeserve (and Freesat) have reduced the cost of acquiring a 'basic' multi-channel service.
What customers are prepared to pay more for is more content of the right kind in the right format. All operators are therefore looking for new or exclusive content or the opportunity to repackage 'old' content.. This is why Sky (with BT) and ITV have been battling it out over television rights to football matches. This is why BT is planning to launch BT Vision in the autumn. This is why mobile operators are pushing 2.5G and 3G services involving access to information and video clips. This is why the television companies and the mobile operators are working together to launch mobile TV services.
The BT Vision service will be available to broadband customers. Using a set top box, it will offer Freeview channels, pay-per-view services, and entry to the video vault of Video Productions which has access to some 900 record labels.
This speed and complexity of change provides major challenges for everyone concerned with the industry.
How does a trade union like Connect organise in companies which are constantly cutting costs and staff and engaged in new disposals, acquisitions, and mergers? How does Ofcom respond when the heavily regulated broadcasting industry collides with the virtually unregulated Internet industry? How do analysts and investors decide who to back when competition is so fierce, technology is so rapid, and customers are so promiscuous?
Last modified 20 June 2006