The impending decline of telecommunications 0 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
Think back to 2000 during the peak of the dot-com boom when analysts were hyping about the convergence of the holy triumvirate in the New Economy: telcos, Internet and content. All companies related to these industries were bid to the skies: in the brave new world, telco service providers would be providers of the infrastructure and pipelines, Internet companies would provide the software services and business operating models, content providers would hold the key to the creative content that could be delivered over the enhanced pipelines and draw the masses. In particular, telcos jockeyed for positioning in the projected future growth sectors, bidding 3G licences to the skies (billions of dollars in profits to governments granting these licences) and building miles of new fibre optics cables in anticipation of future broadband demand.

Developments since then have brought about a slow but sure decay of the fortunes of the telecommunications industry, first fixed-line providers but probably spreading to mobile service providers soon.

Voice services has always been the bread-and-butter service for telcos, and this is under serious threat from the emergence of digitisation of voice which enables transmission over the Internet --- the now well-known VoIP or Voice-over-IP, of which Mediaring is a key player. In the same way that budget airlines have brought regional airfares, a traditional money-spinner for the incumbent airlines, into a downward spiral, so these VoIP service providers have brought international calls, a top income generator for telcos, into commodity-like pricing and squeezed all the juice out of their operating models. What had been a near-monopoly/oligopoly situation has become one where the savvy user can use VoIP software like Skype, easily accessible over the Internet, to call friends in other countries virtually for free (and with new VoIP phones, one need not be too Internet-savvy). What is needed is an Internet connection in both countries, and with high and rising Internet penetration rates in Western countries and in Asia, a critical mass for VoIP has already been reached long ago.

The big players have started providing VoIP services: Google, Microsoft, AT&T, eBay, AOL, British Telecom: note the last few are telcos which have had to succumb to market demand at the risk of cannibalisation of existing revenue: a case of damned if you do, damned if you don't. But there is a trend which threatens to make Internet calls even more ubiquitous and hence commoditise voice calls: retailers getting in on the act. In the UK, the top supermarket Tesco and the largest electronics retailer Dixons are offering VoIP services to their customers as well. If everyone who can provide Internet services can offer phone services, the leverage that telcos used to enjoy will be dissipated. And that includes mobile phone operators, not just fixed line operators. Already, European phone companies, both fixed line and mobile, have announced profit warnings recently and are projecting grim futures (France Telecom, Deutsche Telekom, Vodafone).

People have talked about Asian emerging economies skipping a generation of telecom evolution and going straight to mobile phones; this will be true but at the same time, it is very likely that these mobile phones will not be operating voice calls per se, but through disruptive mobile VoIP technology platforms like Wi-Fi (although these would still probably be operated by the existing telcos).

On the data services side, the Internet services that telcos can provide (eg. Singtel's Magix) through their fixed line infrastructure still faces stiff competition from other broadband service providers, most obviously cable broadband in Singapore's context (Starhub) but also satellite, third-party leasors of their fixed-line infrastructure (eg. Pacific Internet) and wireless broadband (Starhub, but limited to hotspots currently). And what about the land-based and undersea fibre optic networks that were built during the dot-com boom, which now provide an alternative (and cheaply-bought) network in competition with the incumbent infrastructure?

Given the ease of entry (in both voice calls and data services), numerous substitutes and emerging new players, the telecommunications industry would probably score an F on Michael Porter's Five Forces industry evaluation model. Add to that one final element: the liberalisation trend of the telecommunication industry, a move to stimulate competition and innovation and requiring incumbent telcos to lease out their infrastructure to new players at regulated rates. This liberalisation policy in Singapore is what has forced Singtel to diversify externally in search of other growth drivers (eg. Optus), given that new players freed to emerge in the fixed-line voice calls and fixed-line Internet broadband market leasing its fixed-line infrastructure would eventually crimp the market and its margins.


References:
(1) Newsweek 6 Feb 06 article: The Call's on the House
(2) Telco Encyclopedia