PA Consulting suggests in a recent study that Internet Protocol (IP), the interconnection rules underlying the public Internet, represents a threat to the long-term growth of today's leading telecommunications companies. Its argument is that IP seems certain to be the technology of choice for tomorrow's high capacity communications networks. New operators, it says, taking advantage of the opportunities afforded by market liberalisation, are betting heavily that this will be the case.
'Incumbent telecoms operators, burdened with legacy infrastructure, have been slow to embrace IP fully,' it goes on, concluding: 'Every aspect of the telecoms operators' business is under fire'.
In business voice telephony, it notes, IP continues to make in-roads while conventional data services such as frame relay and asynchronous transfer mode (ATM) will face increasing pressure from IP. Even Yellow Pages is under threat: 'This franchise used not to face any serious competition. Today, the entire Web is one big Yellow Pages. The quality of on-line local search and access to them continues to broaden'.
These are not new observations, but they provide a basis and explanation for the new willingness of former monopoly operators to move into IP. AT&T of the US and British Telecommunications, for example, are collaborating to build a global, IP-based, data network which they intend to open to other operators. Deutsche Telekom and France Telecom have similar plans. Cisco Systems, the US-based world leader in the manufacture of the data communications equipment that underpins IP, is building a national IP network for Telia, the Swedish national operator, a move which marks the first move into national-scale network project management for the US company.
Just as significant, the deal is structured as a sale-and-leaseback arrangement which will help Telia to finance its move into tomorrow's networking world while - and crucially - freeing it from the need to make increasingly difficult technological choices as the network develops. What is becoming rapidly apparent, however, is that even sophisticated new operators are being caught by the speed of technological progress. Consider, for example, Colt Telecoms, a UK-based operator established in 1992 which provides services to governmental and corporate customers in Europe's leading business centres.
It has been building fibre optic rings around these centres, enabling it to connect directly to its customers and avoid the cost and inconvenience of connecting through BT's local loop. Its stratospherically high share price reflects the value the market attaches to this capability. It is also an extremely well-run company. The advanced technology in its networks gives it a powerful cost advantage over traditional operators.
Last month, however, it made an unexpected call for Pounds 500m in new capital to fund, among other activities, the development of IP technology connections between its metropolitan networks - what some call the 'egg and string' approach. The logic is that ownership of the networking assets confers benefits of low cost and quality control denied those who merely lease infrastructure.
But even in the few short years in which Colt has been operating, the market fundamentals have changed. Newer entrants with even newer technology than Colt are threatening to undermine its business model. Among these are GTS, the US group which owns Hermes, the pan-European carriers' carrier, and Level 3, a new US carrier.
According to Paul Sharma and Chris Godsmark, telecoms analysts at brokers Henderson Crosthwaite, Level 3 should prove a formidable competitor for Colt. They point out that it is designing its network to be purely IP-based. It will have an aggressive pricing policy, intending to reduce prices of leased circuits by 50 per cent or more.
Its approach to technology bears careful analysis, however. It intends to replace the electronics in its network every three years with a depreciation policy to match. It expects to replace the fibre in its conduits with new glass every five years.
Level 3 may be the first of the new operators fully to leverage the economics of the new telecoms.
The lessons are clear. If an astute operator such as Colt can be overtaken by events, so can anyone. The strategy must therefore be technologically to renew the company every three to five years along the Level 3 model or leave the risk-taking to a third party - as Telia seems to be doing in its ground-breaking venture with Cisco.
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