This may be an extreme position but a fundamental part of the telecommunications industry appears to be doomed.
The culprit is Internet-based technology, otherwise known as IP, used to send bits of information along high-speed networks.
While IP technology will provide new and innovative services to residential and business customers, it will also increase competition dramatically and make it hard for carriers and cable companies to grow sales and profits.
This is a harsh take on an industry looking to get back on its feet again, but the impending signs of disaster are becoming more evident. Last week, for example, the U.S. Federal Communications Commission approved rules that will let electrical utilities offer high-speed Internet services. The decision means carriers and cable companies will see more competition at a time when the competitive boundaries between carriers and cablecos are blurring.
If the utilities become serious about providing IP services, it could easily lead to a nasty battle as carriers and cablecos defend their turf while they try to expand into new areas themselves.
The environment is already intense as cablecos such as Rogers Communications Inc. look to get into the telephony market, while carriers move into the digital television business.
Meanwhile, companies such as Vonage Holdings Corp. are capitalizing on the growing popularity of high-speed access to offer services such as Internet telephony, video-on-demand, software-on-demand and streaming music. Many of the new service providers do not need alliances or joint ventures to reach consumers. All they require is a healthy marketing budget and consumers with a high-speed connection to the Net.
If IP and high-speed networks continue to become more pervasive, consumers and businesses will have many ways to access services. If you don't want traditional telephone service from Bell Canada; Vonage or Primus Telecommunications Canada Inc. will be happy to provide an Internet-based alternative. If you are unhappy with Rogers Cable Inc. or Shaw Communications Inc., Bell and Telus Corp. will have a digital television service. Down the road, you may be able to get these services through a large utility, such as Toronto Hydro.
With more competition and ability to pick and choose IP-based services from hundreds of suppliers, prices are bound to tumble. Look what is happening in the Internet telephony market where Vonage recently dropped its prices again — offering more evidence Internet telephony is destined to become a cheap, commodity based business with razor-thin or no profit margins.
For carriers and cablecos that have to maintain and upgrade high-speed networks, lower prices are a troubling development. If sales and profits are not growing, will anyone have the resources or the incentive to spend money to improve networks?
If carriers and cablecos pull back on network spending, this could be a nightmare for equipment makers such as Nortel Networks Corp. because there will be less demand for new technology. As Duncan Stewart wrote in this space last week, consolidation among equipment makers seems unavoidable.
It may be that network operators will have to reinvent themselves into “big pipe” operators, and let smaller, more flexible rivals provide many of the next-generation services. This may be an extreme scenario but there are markets such as long-distance where the business fundamentals are quickly eroding.
The competitive dynamics of the telecom industry could force many carriers and cablecos to make bold strategic moves to remain competitive and viable. A good example is Bell Canada's $200-million bid to win the telecom contract for the 2010 Winter and Paralympics Games in Vancouver. Bell's desire to capture the high-profile contact was highlighted by its eye-popping offer of $90-million in cash to the Vancouver Organizing Committee — nearly twice the $50-million proposed by rival Telus.
Michael Sabia, BCE Inc.'s CEO, made it abundantly clear a key part of Bell's decision is based on the idea that as technology makes it easier for suppliers to deliver telecom services, brand will become a more important tool to keep customers.
“What will differentiate us will be brand, and under brand will be service,” he said. “That brand power can increase customer demand for our products and, two, make customers more loyal to our products. Given the importance of churn in the economics of this business, anything to enhance customer loyalty is very powerful.”
At the end of the day, the emergence of IP and high-speed networks will be wonderful for residential and corporate consumers: more choice and lower prices.
But for carriers and cablecos, the future does not look good. There will be so much competition for business, it is difficult to believe anyone who is not lean, mean, flexible and lucky will survive.