x

The Big Problem

While the carnivorous press (yes, that’s us) continues to feed on the meaty scandals of tumbling telecom companies, a far greater concern is brewing: The telecom industry still hasn’t recognized the Big Problem.

The Big Problem is that despite a boom in networking technology and a boost of overall capacity, carriers still haven’t figured out how to sell and market new data services. They’re all still dependent on voice minutes... the same stuff that made the telecom market tick before the Internet arrived.

According to recent data from the Federal Communications Commission (FCC), more than 70 percent of industry revenues in the U.S. come from voice. This is thoroughly disappointing, considering that we just completed nearly a decade of explosive investment and growth associated with data applications and services.

Now, the Net-heads will yell that voice may still account for the bulk of revenues, but Internet traffic continues to grow and now surpasses that of voice traffic. To which I say: Exactly. If data traffic is growing but revenues aren’t, no wonder the entire industry looks to be restructuring in bankruptcy.

In phase one of the Internet boom, everybody was fixated on technology – and how optical networking was going to transform the Internet, bring about the convergence of telecom and television, and usher in a new world economy.

In phase two, we suddenly woke up to the fact that service providers need to make money – and that they can’t make a profit out of plain vanilla Internet services. As a result, the independent CLECs and ISPs have been dying out, and incumbent carriers have been declared the winners, even though they are largely subsidizing their Internet data services with voice revenues.

Now we start phase three, the hangover, where the incumbent carriers’ profits from voice services are getting squeezed by massive competition. The focus is shifting to the one remaining big money spinner: corporate data services. All the buzz is about offering IP VPN services – alternatives to the private line and frame relay offerings, which could be offered to smaller enterprises as well as big business and could make a sizeable profit.

Now here’s the scary part: Despite this situation, the RBOCs and incumbents are already crowing that they’ve won – before they’ve successfully deployed these cutting-edge data services. And instead of acting like data-services Révolutionaires, they’re falling back into the habits of the Ancien Régime, defending their monopolistic fiefdoms by ratcheting up the political pressure to lock up the local loop.

Their cluelessness – well established over the years – comes down to the fact that the only survivors in the telecom world are the ones that have made most of their money selling voice minutes.

To illustrate my point, here’s an example of how Qwest Communications International Inc. (NYSE: Q) trolls for new business, in the form of a note we received at Light Reading:
    Light Reading Team, I would like to learn more about your company to determine if Qwest can be beneficial to your company's success and future growth. Specifically, I would like to learn more about your IP Strategy, Voice, Hosting Environment, ASP Environment and upcoming technological projects. Additionally, I would like to tell your more about Qwest's focus and success in the industry. Exploring Qwest in detail will open up many unique opportunities for your firm. Our core competency is helping our customers use technology to drive the success of their business. I respectfully request 15 minutes of your time through a face to face meeting to elaborate more on this knowledge. If you would like to meet, I can be reached at...


And blah blah blah...

We decided to inquire about these “unique opportunities.” One of our technology managers, located at a branch office in the US West area of Qwest, replied to the salesperson with a detailed memo outlining the type of data services and pricing we really needed. He responded to our inquiries by insisting instead on a face-to-face meeting. After some back-and-forth scheduling, the salesperson eventually went away and the meeting never happened. We never figured out exactly what it was he was selling. Then about two months later, we once again received the same memo from the same salesperson. Talk about a local loop!

Keep in mind that this exchange happened with Qwest, one of the RBOCs that’s supposed to get the Internet. Unfortunately, this is the type of dysfunctional sales activity that is at the heart of the industry’s problems.

Hybrid experiments in combining the resources of RBOCs with the technology and data expertise of competitive carriers and ISPs – the most prominent of which is Qwest – have largely failed. That’s because management has been incapable of blending the RBOC and Internet cultures in a productive fashion.

The only way the current dysfunction can be rendered functional is to start data service businesses that can stand by themselves, without leaning on the ancient voice business models for support.

In the last week, there have been signs that, despite the gross mismanagement by many of the carriers, some outsiders, such as Warren Buffett, are beginning to interest themselves in the increasingly depressed data-network assets (see Buffett Boosts Level 3). Let's assume that what brought these greenfield data carriers down was a combination of a bad economy, debt, the bubble, and bad management. Now let's assume that the economy can get better, and the bubble and debt will be cleared out by bankruptcy restructurings. Then, let's say that the old management is tossed out and a new generation of managers – with a true interest in building businesses and increasing the value of the assets – works to clean up some of the data carriers' shops.

If one makes these assumptions, the RBOCs have limited time to play their hands as data carriers. Attempting to lock up the local loop is a temporary solution, at best. Reborn insurgent carriers will find workarounds. And imagine if the Warren Buffetts of the world are able to wrest control of formerly mismanaged fiber assets and whip them into shape – the same way that old carpet factories are bought, cleaned up, and sold at a profit.

As the incumbent telecom mafia crows that they’ve won, their sense of security is temporary at best. The RBOCs should be worried. They’re still faced with the same basic problem as everybody else: declining voice profitability and low data services revenues. They need to figure out how to deploy new technology and sell data services to support that technology. It’s time to get data smart – and they've got to do it quickly.

— R. Scott Raynovich, US Editor, Light Reading
http://www.lightreading.com
Page 1 / 22   >   >>
FlimFlam 12/4/2012 | 10:08:10 PM
re: The Big Problem What is it?
Scott Raynovich 12/4/2012 | 10:08:09 PM
re: The Big Problem I have some ideas. Check them out:

* Shareholders fire the managers of poorly performing companies (wow, how novel!)

* Government creates a "Telecom Death Lord" whose job is to acclerate the shakeout. The Death Lord puts ping-pong balls representing all of the existing public telecom company into a air-bubble. He draws out half of the balls. Those companies survive. The remaining companies are imediately place into foreclosure and their assets are auctioned off and returned to the bondholders and/or remaining shareholders.

* A newly created company called "Pa Bell", ownec by the U.S. Government, forecloses on Gary Winnicks mansion in Beverly Hills and sells it to fund its initial operations.

* "Pa Bell" is capitalized with federal bonds. The "Death Lord" immediately assigns a moderate, nominal value of all the copper wiring in the local loop. Becaue these assets have already largely been depreciated, the value is nominal($10B, tops?). "Pa Bell" then uses the bonds to buy these assets from the the RBOCs, and the cash is distributed to RBOC shareholders. Then, "Pa Bell," owned by the American public, owns the local loop. It's like a National Park. Anybody that wants it can gain access. You can plug your optical mux in at the corner sidewalk.



melao 12/4/2012 | 10:08:09 PM
re: The Big Problem "What is it?"

I guess whoever has a direct answer to this will get a Nobel Prize.
But seriously, my guess is to stick with a slow growth industry type of business.

broadbandboy 12/4/2012 | 10:08:08 PM
re: The Big Problem "The remaining companies are imediately place into foreclosure and their assets are auctioned off and returned to the bondholders and/or remaining shareholders."

Thank you comrade Stalin. Who says communism is dead?

Expropriate the expropriators! Return all private property to "the people!"

Yours in solidarity,

BBboy
LightSwitch 12/4/2012 | 10:08:07 PM
re: The Big Problem Scott,

I believe that those companies which have well-grounded and experienced management teams fully understand the problem, and thus have realized the solution. Unfortunately, the solution is out of our (their) hands. What is happening is a basic market correction, adjustment to supply/demand curve, and a convergence to standardized applications (or find the killer app).

These companies realize that if they can last through the winter, that they will emerge to become stronger than ever before. The 'shakeout' is happening at a snailspace and is very painful for many of us. We just need to hang in there a little longer. I predict only 3 to 4 companies from each market space will have the goods to survive when the dust settles.

As for the killer app, could be smell-a-vision for all I know.
gea 12/4/2012 | 10:08:03 PM
re: The Big Problem Well, the article basically said it. There will probably remain a small number of data-centric carriers that have learned to minimize their costs. Then, there will probably be whole host of smaller carriers that sell data services, the most obvious of which is real VPNs.

But my question here (not actually meant to be rhetorical), is how much of a demand right now is trhere for data services? How many companies actually need VPN capabilities? ANd other services, such as some kind of ASP tunneling (ie, an ASP delivers application services over bandwidth that the ASP has bought)? Right now, it would seem to me that the only things that are really needed are voice and internet access. Everything else is still in its infancy. But then again, perhaps "if you build it they will come", but that sounds like the 90s bubble again and the dot-bombs.

Is this wrong? I hope so! In the distant future I can see these kinds of services actually becoming prevalent, but right now there doesn't seem to be the right environment yet. But I would be happy if someone straightened me out on this! Has telecom become boring again?

gea 12/4/2012 | 10:08:03 PM
re: The Big Problem Well, the article basically said it. There will probably remain a small number of data-centric carriers that have learned to minimize their costs. Then, there will probably be whole host of smaller carriers that sell data services, the most obvious of which is real VPNs.

gea 12/4/2012 | 10:08:03 PM
re: The Big Problem Well, the article basically said it. There will probably remain a small number of data-centric carriers that have learned to minimize their costs. Then, there will probably be whole host of smaller carriers that sell data services, the most obvious of which is real VPNs.

willywilson 12/4/2012 | 10:08:01 PM
re: The Big Problem What is it?

------

Jail and punitive fines.
MP_UK 12/4/2012 | 10:07:56 PM
re: The Big Problem
What is it?

-----------

An opportunity for LR to do a follow-up on to this column.

We readers get so many articles on how Ethernet Frame Relay, MPLS, or some amazing new optical component is going to save telecom, but as interesting as some of it is, I don't believe it's that simple. How about a report on what is going to make people want to use more telecom services? Try and find a few potential killer app's and report on them, it has to be more entertaining than more about how another new arrangement of protocol headers is going to rescue the industry. Go on LR - you know you wanna!
Page 1 / 22   >   >>
HOME
Sign In
SEARCH
CLOSE
MORE
CLOSE