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Creating the 21st Century Communications Company. Global Executive Symposium La Costa, California September 28, 1998. Key issues facing executives. Regulatory changes?. Access to customers?. Technology choices?. Optimum size?. Non-traditional challengers?. Cheaper, better operations?.

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creating the 21st century communications company

Creating the 21st CenturyCommunications Company

Global Executive Symposium

La Costa, California

September 28, 1998

key issues facing executives
Key issues facing executives

Regulatory changes?

Access to customers?

Technology choices?

Optimum size?

Non-traditional challengers?

Cheaper, better operations?

Customer demand?

Retail-

wholesale

split?

One-stop shopping?

Harder choices

larger stakes

five sets of drivers
Five sets of drivers
  • Customer demand
    • Propensity to use services, patronize providers
  • Technology
    • Progress on new technologies, standards
  • Capital markets
    • Degree of support from investors, lenders
  • Government policy
    • Impact of regulation, antitrust, taxation
  • Providers
    • Proficiency of incumbents, challengers
four sets of scenarios
Four Sets of Scenarios

A. Incumbency Counts - hype evaporates

B. Mass Matters - megacarriers dominate

C. Pinpointing Prevails - specialists win

D. The Revolution comes

incumbency counts definition
Incumbency Counts: definition
  • Despite the hype, incumbents prove much stronger than initially expected
  • Market share losses are small and manageable
  • No more big new entrants (e.g. WorldCom)
  • Former PTTs continue to dominate their home markets and fail everywhere else
  • A few basic changes, e.g., convergence of domestic-int’l in Japan, long distance-local in U.S.
incumbents win why
Incumbents win: why?
  • Customers: Prefer incumbents, don’t trust new entrants. Demand growth is manageable.
  • Technology: New technologies slower to roll out than expected; incumbents adapt faster
  • Government policy: Continues to protect incumbents
  • Capital: Markets’ support for challengers fades
  • Providers: Incumbents get fresh blood and become more entrepreneurial. Challengers fall into same old traps.
incumbency counts customer demand
Incumbency Counts: customer demand
  • Customers don’t want to switch, or require a high premium (>25% discount) to do so -- trust incumbents, or don’t really trust challengers
  • Demand for new services is unexpectedly low
  • Demand differs by country or territory, not so much by market segment
  • Demand shift from voice to data slows
  • Overall demand grows fast but not so fastthat incumbents simply cannot handle it, e.g., shifts from doubling every 4 months to doubling every year
incumbency counts technology
Incumbency Counts: technology
  • New developments occur at a manageable pace
  • Some important new technologies help incumbents leverage existing investments
    • xDSL
    • DWDM (maybe)
    • circuit -> packet conversion devices
  • Incumbents use their market powerwith equipment makers to get cutting edge tech
  • New, more advanced technology appears, but the incumbents are not left behind -- they have it, too
  • KEY: incumbents keep upwith challengers
slide9

Incumbency Counts: government policy

  • Governments prefer continuity; leery of disruption
  • Worry aboutbig job lossesat incumbents
  • Big is bad: dubious about megacarriers
  • Strong anti-trust enforcement: less concerned about jump-starting competition
  • Wary of foreign carriers: maintains national domains dominated by incumbents
slide10

More on “big is bad”

The SBC-Ameritech deal is not good for what we’re trying to get. I’m not sure bigger is going to be better. Ron Johnson, Chmn., Nebraska PUC

slide11

Incumbency Counts: providers

  • HR: Incumbent management becomes flexible (may hire outside innovators and entrepreneurs)
  • HR: Incumbents not hurt by brain drain
  • Incumbents are better lobbyiststhan challengers
  • Challengers have no compelling management advantage. Flexibility fades as scale grows.
  • Capital markets support incumbents, and become more wary of challengers. Huge funding for new challengers starts to dry up.
slide12

A breakthrough in price or performance is necessary for the [revolutionary] scenario. I am relatively pessimistic about it. I don’t see the shift from circuit switching to IP as providing a sufficient jump.

VP, new telecom venture

Incumbency counts, they say

The bulk of traffic will migrate from switched circuits over the next 10 years, but this will be a gradual process. The current circuit-based networks will be the cheapest and most convenient for most customers during that period.

SVP, European PTT

conclusions why incumbency counts
Conclusions: Why Incumbency Counts
  • Incumbents are HUGE, with great brand presence
  • They control the critical link in the network, the local loop
  • They are protected by governments, pampered by equipment manufacturers, trusted by customers, and massively wealthy
  • Their managements are getting smarter all the time
mass matters era of consolidation
Mass Matters:Era of Consolidation
  • Vertically-integrated
  • All segments, all services
  • Huge size: room for only 3 in a given market
  • PTTs not necessarily OK: megacarriers may invade their turf
  • New household names possible in 2005
  • Geographic market is regional (N. America, Europe, Asia)
why the giants dominate
Why the giants dominate
  • Customers:Brand is very important; size helps build brands. Mass market services are fine.
  • Technology: Economies of scale in developing and implementing new technologies (maybe with help from equipment manufacturers)
  • Government policy: Weak anti-trust
  • Capital markets:Size brings stock price advances
  • Providers: Vertically-integrated generalists achieve economies of scope and scale
senate testimony by sbc chairman ceo edward whitacre
Senate testimony by SBC chairman/CEO Edward Whitacre

In SBC’s view, this globalization will result in a half dozen or so integrated global competitors vying with a very large number of regional, niche, and local competitors.

more supporters
More supporters:

Customers are looking for single-source providers. They are looking for simplicity.

Senior RBOC exec.

We must commit to provide end-to-end service to customers, any place anywhere, any time.

Senior ATT exec

There will always be some niche players but, basically, the world is going to be three or four 300-pound gorillas. VP Canadian telco

worldcom coo john sidgmore mass really matters
WorldCom COO John Sidgmore: Mass Really Matters

Customers say they want bundled

working solutions, not just parts. They want

us to show them how to deploy these products within their existing fabric of networks.

We’ve combined the 4th-largest long distance company in the U.S. with the largest provider of local-access services -- outside of the RBOCs -- with the largest ISP in the world.

mass matters customer demand
Mass Matters:customer demand
  • Factors that advantage huge companies:
    • Customers are willing to try new providers and services
    • Limited demand for specialized offerings and personal treatment from telcos
    • Many customers (business and residential) prefer one-stop shopping
    • National and trans-national brands dominate: massive marketing expenses required
why customers like big providers
Why customers like big providers

SVP of large IXC/wireless carrier:

Our experiment in calling party pays (for wireless) entails the shared use of a 500 number for long distance and wireless (with a single bill). To deliver CPP, long distance must be provided. Can’t break out the two services.

Integrated communications carriers will be in the best position to satisfy customer demand for simplicity. Not just one-stop-shopping, but fully-integrated products. What we now see as different products will be integrated not just at the customer end but in the actual delivery so they can’t be pulled apart.

mass matters technology
Mass Matters: technology
  • Speed:New developments occur rapidly
  • Economics:Real economies in spreading new technology investments (including HR investments) over widest possible customer base
  • Money:Huge capital investments required
  • Integration:Technology developments foster integration
    • For example, wireless CPP is facilitated by integration with long distance services
more technology drivers for mass matters
More technology drivers for “Mass Matters”

Intelligence in the network is key. It enables simplicity and transparency. As customers sign up for more and more services -- and indeed as bundles of services become the only way of signing up -- the intelligence in the network becomes more and more applicable.

I call this “strong bundling” or integrated bundling” as opposed to “weak bundling” that simply stuffs various services into a single package.

IXC/Wireless VP

mass matters government policy
Mass Matters:government policy
  • Weak antitrust vision and enforcement -- 3 dominant players per market is OK
  • Megacarriers allowed into monopoly markets to challenge incumbents
  • Governments don’t worry too much about protecting incumbents
  • Governments disinclined to protect incumbents from foreign predators
mass matters providers capital markets
Mass Matters:providers, capital markets
  • Real economies of scope and scale. These favor extremely large, integrated entities
  • (Some) management teams assemble and then run vast enterprises successfully
  • Big companies successfully leveragebusiness infrastructure across many diverse businesses
  • Capital markets favor large, “portfolio” entities (but not necessarily incumbents). Mergers generate increased stock values.
slide25

Where the growth rate and the change rate

are so high, acquisition is often the superior

approach, even though there are these issues,

because you get there so much faster.

WorldCom COO Sidgmore sees acquisitions as core competency...

Acquisitions are essential

We know how to make them work

MFS, UUNet, and WorldCom are all acquisitive companies. Together we’ve acquired 65 companies in the past 4 to 5 years. We’ve developed a significant expertise in integrating cultures and putting manage-ment teams together that balance the organizations’ cultures. It’s a core competency of WorldCom’s.

mass really really matters

It’s the same story we’ve seen in U.S. industry for 100 years. Big companies are not as agile as smaller ones, and there are always big opportunities for smart people everywhere. But continent-wide or even global operations require a company with appropriate scale to handle that size of operations. That means a very large company. VP, major wireless carrier

You can’t even imagine what dealing

with 70 million customers involves.

VP, TCG (now part of AT&T)

Mass really really matters
pinpointing prevails
Pinpointing Prevails

Focus

is

Everything

pinpointing prevails definition
Pinpointing Prevails: definition
  • Focused, specialized carriers have an advantage:
    • Efficiency and profitability
    • Flexible and responsive to differentiated market requirements
    • All things to all people means mediocre performance for all customers
  • Today’s megamergers are the last gasp of the dinosaurs resisting the new reality
  • Strategy: Focus
market segment focus
Market Segment Focus
  • Customer requirements differ -- sometimes significantly
    • Products and services
    • Level of service and customization
    • Economic viability
  • Organizational requirements / focus differ
    • Service strategy
    • Support platforms
    • Alliance relationships
  • Examples:
    • Business v. consumer
    • Global Alliances - Concert, World Partners, Unisource = MNC
    • Affinity groups - AARP, church groups
    • RMTS - GE Rescom, US Online
value chain focus examples
Value chain focus: examples
  • Infrastructure focus
    • Qwest, Level 3, NextWave
    • Attraction to migrate down value chain, get higher margins
  • Retail/customer interface focus
    • ArbiNet, Excel, CLECs, LD resellers
    • Viability a function of excess capacity or regulatory rules on access pricing
why pinpointing prevails
Why pinpointing prevails
  • Incumbents and megacarriers collapse under their own weight. Size brings inflexibility, bureaucracy, stagnation
    • Wrong strategy for the market, not execution failure
  • Focus creates opportunities for real efficiencies, cutting costs
  • Customers want customized service bundles, and personal treatment
    • Some want high-quality, high-touch service
    • Others want economy class to save money
megacarriers collapse of their own weight
Megacarriers collapse of their own weight

If you have an under-depreciated, over-regulated,

attacked, monopoly phone company, why double

the size of that?

President, RBOC subsidiary

The colossus mergers, seeking economies of scale and

geographic coverage, are solving all the problems of yesterday.

You have to ask a fundamental question -- “What got better

from a customer’s point of view “?

President, wireless carrier

focused competitors
Focused competitors

Ameritech’s wholesale business has increased from $150m to more than $1bn in 2 years. The wholesale retail split is aready here.

RBOC VP

Disintermediation and the collapse of the valuechain is occurring in every industry affected by IT.

VP Strategy, equipment manufacturer

is owning the network necessary no
Is owning the network necessary? No

Network ownership will be less and less important as time goes on. Today it is reasonably important. Twenty years from now it won’t be important at all. President, wireless carrier

We already have contracts to buy long distance minutes at an 80-90% discount from retail. Why do I need to own the network?

RBOC VP

A successful carrier of the future doesn’t necessarily own networks. It controls and operates networks, but it may not own them.

President, equipment manufacturer

value in telecoms 2005
Value in telecoms: 2005

Of the value created (in the telecom process), 45% will go to the content provider, 45% will go to those that actually work with the customer, and bill and innovate with the customer, and 10% will go to the infrastructure provider. President and CEO, LEC

W(h)ither the incumbents in this case….?

pinpointing prevails customer demand
Pinpointing Prevails: customer demand
  • Both business and residential customers want customized services, not mass offerings
  • Falling prices and new services create major market growth, where specialists have an advantage
  • Differences in customer requirements help to define appropriate scale for geographic focus
a few comments
A few comments….

Customer service wins us customers

every day. We expect to get 80%

of the GTE’s business in our town

within 3 years CLEC COO

WinStar will deliver a level of personal service that will amaze businesses. Customer care will be a primary focus for WinStar."

Bill Rouhana, Winstar CEO

pinpointing prevails technology
Pinpointing Prevails: technology
  • Technology creates excess network capacity, helping resellers, e.g. DWDM
  • Open standards and open software enable 3rd party applications development
  • Fast change devalues legacy systems
  • Network intelligence migrates to customer interface or to customer’s access equipment, away from legacy switches
  • Gateway and intelligent agent softwareallow aggregators to create differentiated, value-added services, and customer self-provisioning
pinpointing prevails government policy
Pinpointing Prevails: government policy
  • Policymakers support new entrants
  • Wholesale pricing policies (resale discounts and unbundled elements) make resellers viable
  • Pro-change constituencies are strong
  • Policy retains “hidden” subsidies, helping specialists
  • Policymakers let incumbents suffer, shrink, or even be acquired and broken up

“If regulators set the rules for the marketplace, any structure is sustainable because the rules keep it in place.”President, wireless carrier

pinpointing prevails providers capital markets
Pinpointing Prevails: providers, capital markets
  • The costs of operating integrated, centralized organizations and systems prove higher than economies of scale; the latter are elusive
  • Operational strategies and supporting IT systems are so varied that integrated companies have no significant scale economies in the back office
  • Focused competitors steal enough high margin market share to undermine large organizations
  • Capital markets reward focused competitors over “portfolio” companies, i.e., incumbents worth more broken up than whole
revolutionary change
Revolutionary Change

Price/performance ratios shift by at least one order of magnitude, within

5-7 years

revolutionary scenarios
Revolutionary scenarios
  • Data Dominates
  • Cable Connects
  • Wireless Wins

Unlike evolutionary scenarios, these scenarios are not mutually exclusive

long shot scenarios
Long-shot scenarios
  • Voice/data over electric power lines
  • Satellite delivery systems (LEOs)
  • Content convergence
data dominates1
Data Dominates
  • Data traffic doubling every 4 months
  • PS networks clearly superior for handling data
  • Data could be 95% of traffic by 2005
  • “Voice will be a pimple of the side of data”

Voice infrastructure is a handicap; at a minimum, new data-centric market entrants have big cost advantages

data dominates2
Data Dominates
  • Incumbents
    • Can’t move to PS fast enough
    • Cultural shift too severe
    • Rapid loss of dominance
  • Challengers
    • PS-centered
    • New business models based on data
    • Voice just another datastream
data dominates3
Data Dominates

Our business model

calls for 50% revenues

from data within 5 years.

VP European PTT

Intelligent networks are

useless in the age of data.

Stupid networks win every time

former AT&T exec

  • BT is spending $12bn over the next 5 years to build a world-class data network. The main issue is migration.
  • Dir. Strategy, European PTT
data dominates4
Data Dominates

Scale will come from a focus on data,

not voice, and from a willingness to be

a growth company, not a safe cash cow

for investors. IP has some advantages

over CS, but scale is the key.

Senior exec, Microsoft

data dominates customer demand
Data Dominates:customer demand
  • Internet demand continues to grow fast
  • Mass market for video applications --videoconference, streaming video
  • Interactive high bandwidth apps (IP- voicemail, video email)
  • Telecommuting
  • Fax and voice apps move to IP
data dominates technology
Data Dominates:technology
  • IP solves QOS issues -- priority routing, etc.
  • Bandwidth availability expands rapidly, especially in the local loop
  • Scalability problems resolved -- terabit routers and beyond
  • Reliability reaches CS levels
  • Capacity crunch resolved -- more bandwidth, IP multicasting, premium IP networks, etc.
data dominates government policy
Data Dominates:government policy
  • Privacy/encryption issues resolved
  • New entrants encouraged
  • Access charges/taxes held off for 2-3 years
  • E-commerce encouraged
  • Intellectual property issues resolved

None of these is mission critical

data dominates providers capital markets
Data Dominates:providers, capital markets
  • Incumbents remain slow-moving and bureaucratic
  • Incumbent dividends remain untouchable
  • Series of key assumptions retained by incumbents:
    • Cannot cannibalize voice markets
    • Cannot get ahead of the data pricing curve
    • Switched networks are more reliable
    • Smart networks with central intelligence are the future
  • New entrants unencumbered by legacy networks, apps, business models, cultures
show stoppers
Show-stoppers
  • Capacity crunch dries up effective demand
  • Pricing models fluctuate or fail, limiting investment
  • Incumbents move faster than expected to IP
  • Reliability, scalability issues unresolved
  • Bandwidth glut crashes data market
  • Last mile problems unresolved
data dominates naysayers
Data Dominates - Naysayers
  • Price differences between CS and PS are
  • based more on regulation than reality.
  • VP Networks, global ISP

The existing network is a critical source

of competitive advantage. the issue is

how to take advantage of it.

VP, RBOC wholesale group

Ameritech is going to

replace its CS network

with a state of the art

packet switched design.

Richard Notebaert, Ameritech

cable connects1
Cable Connects
  • MSOs upgrade to 750Mhz or better to meet challenge from DBS
  • Internet access offers substantial revenue stream, at limited marginal cost
  • With 2-way communications established, cable telephony over IP becomes option for additional service at less than $300/pop
  • Cable moves to “Free voice in U.S.” as part of bundle
cable connects2
Cable Connects
  • Cheap bandwidth for the last mile
  • Stable technology
  • Video services pay for infrastructure
  • ROW in place in many countries
  • IP really makes the difference
  • Monopoly pricing possibilities to subsidize voice investments
  • Rolling in cash right now (stocks flying)
cable connects3

We plan to offer voice

everywhere by 2003

Strategy VP, major MSO

You have T1 speeds inbound and half T1

speeds outbound all for $35 a month.

Nothing else is practical or affordable.

Technology director, major university

Cable Connects

Cable operators will have 2-way plant running to 40-50m homes by the end of 1999, and will be offering high speed data to 20-30m subscribers.

Tele.com article

cable connects customer demand
Cable Connects:customer demand
  • Cable overcomes traditional lousy image
  • Customers care more about price than quality
  • Customers buy video/Internet/telephony bundles
  • Customers don’t worry much about security or reliability
  • Customers don’t worry about cable’s inflexibility, e.g., single ISP policy, vertical integration with content
cable connects technology
Cable Connects:technology
  • Traditional problems with two-way cable mostly resolved now, rest will be soon
  • IP problems resolved (such as QOS)
  • Powering issues resolved
cable connects government policy
Cable Connects:government policy
  • No more price caps
  • No early application of universal service/access charges
  • “Must carry” and other universal service questions resolved favorably
  • Cross-subsidies permitted (bundling)
  • Economies of scale permitted (permissive anti-trust enforcement)
cable connects providers
Cable Connects:providers
  • HR: Cable MSO’s add weight and planning capacity to HQ staffs; find thousands of data and telephony technicians
  • Customer care becomes central to culture, with matching investments
  • MSOs become more entrepreneurial (currently, more monopolistic than the ILECs)
showstoppers
Showstoppers
  • Wall St. financing for upgrades dries up
  • IP issues unresolved
  • Weak customer demand for telephony from cable customers
  • Universal service/access charges
  • HR: cable operators cannot retool and add technicians fast enough
  • Management misses the window of opportunity on voice over IP
naysayers
Naysayers

Cable telephony faces all the problems of voice over IP, plus another layer of cable problems.

Research analyst

Cable has huge problems in setting up effective back office and customer service systems for Internet access, let alone Internet telephony.

Research analyst

Seven years is not long enough to change consumer behavior. Cable assoc. exec

wireless wins definition
Wireless Wins:definition
  • Mobile substitutes for landlines
  • Fixed-mobile integration comes fast
  • WLL gains volume in 3rd world, then 1st
  • Broadband fixed wireless outcompetes other delivery technologies: FTTH, FTTC, HFC, xDSL, LEOs….
wireless wins
Wireless Wins

In Europe, wireless revenues are

already about 20% the size of the

revenues of fixed network voice traffic

. …Mobile services could deliver 50%

of fixed service revenues by 2001.

Tele.com

Worldwide, the number of fixed wireless subscribers will grow from 4m in 1997 to more than 45m in 2001. NBI

Independent wireless companies are

already cost competitive with BT’s

landline rates in some cases.

Dir. Strategy, European wireless co.

why wireless world is different problems for incumbents
Why wireless world is different: problems for incumbents
  • Already a competitive environment
    • For incumbents, means moving from monopoly to competition immediately
  • Offers some serious disadvantages for incumbents, such as:
    • Being blocked from entry in some markets (Telecom Italia)
    • Limited resources (e.g. spectrum)
wireless wins customer demand
Wireless Wins:customer demand
  • Price falls to compete with landline (happening now) and customers respond
  • Mobile becomes first phone of choice (happening now in some countries)
  • Either customers do not insist on FMC/bundling, or all wireless carriers integrate to provide it. No advantage to incumbents or megacarriers.
wireless wins technology
Wireless Wins:technology
  • QOS continues to improve
  • FMC comes on stream smoothly
  • 3G wireless isn’t too late (a huge uncertainty) and fulfills its promises (another huge uncertainty)
  • Broadband delivers as promised
wireless wins government policy
Wireless Wins:government policy
  • Regulators do not attack wireless profit margins through re-regulation
  • Not too many players in each market (3 max in most places)
  • Regulators approve unlicensed spread spectrum technologies
  • Rights of way available (legislation)
wireless wins providers capital markets
Wireless Wins:providers, capital markets
  • New entrants scale effectively
  • New entrants do not crash the market by cutting prices to generate more business than the infrastructure can handle
  • Market funds extensive build-out by new entrants
show stoppers1
Show-stoppers
  • Market gluts from oversupply?
  • 3G technologies badly delayed
  • Continuing standards fights (U.S. and global)
  • Regulators attack margins
  • Prices stop falling
wireless naysayers

38 GHz wireless is great in theory, but it

still has a lot of technical problems to solve

Senior exec, new entrant

Landline will always have

a significant price advantage

Industry analyst

Wireless- Naysayers
combination scenario
Combination scenario
  • In each of the four sets of scenarios, drivers align to produce a single future
  • But more complex scenarios are also possible:
meltdown for incumbents
Meltdown for incumbents?
  • Mobile takes all growth in voice markets
  • New entrants steal best customers for voice and data
  • Cable companies offer unbeatable “free voice”
  • VOIP erodes premium voice services (e.g. int’l)
  • Data revenues go first to hungry challengers
  • Legacy networks, legacy ideas, and legacy regulators hold incumbents back
vicious circle
Vicious circle

Stock declines

Incumbents’ position weakens

Investments slip

Managers and customers leave