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Improving operator performance

By Ewan Sutherland, Executive Director, International Telecommunications Users Group (INTUG)

The global picture is one of operators that deliver some of what users ask, but leave a lot missing. Sometimes they listen to users and sometimes there are none so deaf as those that will not hear. The explanations for both responses are short-term commercial considerations, which, even if understandable, can be very frustrating.

Finance 101
We have learned a lot in the last two years about advanced financial engineering and how to conduct stress tests. The intricacies of bankruptcy law, of what can be written-off and of when, have been brought home to users.

For the average telecommunications manager there have been two simple financial questions. Firstly, which firms can he or she reasonably put on a short list, those to be asked to provide future services. At one point this became something like Russian roulette, involving the CFO and the audit Committee. Secondly, which operators are taking water, listing or are sinking and require the preparation or indeed the activation of plans to abandon ship. Users have had to think of shorter contracts and contingency plans that are far from theoretical, in anticipation of the failure of operators.

A balance sheet can be read by any MBA, but it seems the financial status of operators can only be truly understood by a handful of experts. We have seen the Securities and Exchange Commission (SEC) struggle with the advanced financial reporting of telecommunications operators.

We have not yet seen the light at the end of the tunnel. There has been too little attention paid by the analysts to the likely effects of IP telephony, driving down the revenues of both fixed and mobile telephone companies. The TelCos can run, but they cannot hide from that.

The aftershocks of the crash of the dot com bubble are not yet finished. The rush of venture capital into Wi-Fi is an example. It has since been shown this is a boring business best left to very large fixed broadband operators.

We see third generation balance sheets without any real of confidence in what the numbers might mean.

Third Generation
Three words on 3G: games, gambling and girls. Some people prefer greed, gullibility and grief. Perhaps the biblical quotation on the sins of the fathers is most apposite, that the sins of the fathers shall be visited unto the third and the fourth generation. The sins being greed, sloth and gluttony.

2G is characterised by long-running market abuses. There is a dominant oligopoly (i.e. a cartel) running international mobile roaming charges and SMS. These people think that forwarding a call to my mobile phone when I am in the USA is worth 1.60 per minute. That is a price we have not paid for trans-Atlantic calls since before the introduction of competition.

Individually, the operators have benefited from cheap call termination on the networks of the fixed operators, while pushing up the price of termination on their own networks. They make a quarter of their revenue by leveraging their market power from their own call termination market into domestic and foreign call origination markets.

The Federal Communications Commission (FCC) last year issued a customer alert, warning against calling cellphones in most European and some Latin American countries. This was not surprising given that the "surcharge" to call a mobile phone can be 15 to 20 cents per minute. The mobile operators would have us believe this is added value. In contrast, I maintain it is a breach of competition law.

These abuses need to be and will be regulated over the coming months. The financial analysts have grasped that and have written down the share prices accordingly. However, it has been a long and bitter war. It is now a rearguard action, with the lawyers seeking to delay the inevitable in order to protect whatever revenue the operators can.

2.5G or mobile data is proving to be frighteningly expensive when used in one country. A tariff in your home country is around 1.4 to 2.0 per megabyte, a unit in which none of use expects to buy access to an always-on service. The cost when roaming abroad ranges from 7 to 70 per megabyte. The response of business has been uniform and simple, that the operators have made some sort of mistake, that they should check their sums and reduce the prices by an order of magnitude.

GPRS may yet prove to be a bigger disaster than WAP. Mobile data, both 2.5G and 3G, looks as if it will be like ISDN, something which the manufacturers thought was terribly clever, but which could take a decade to find even a niche market.

We know that regulation (if not competition) is driving down revenue from mobile voice. However, we can see no corresponding rise in revenue from data. This should be a major concern for financial analysts and ultimately for users, since the financial model of the mobile operators may have passed its sell-by date. Insolvent carriers with inappropriate business models do nobody any good.

Despite globalisation and the single European market, companies have to buy mobile voice services country by country in Europe and around the world. There are no pan-European or trans-Atlantic services. The best you can buy are home country plus some flattish rate roaming.

It is a depressing picture of reliance on cartels, the avoidance of competition, strict national markets and a failure to grasp the opportunities of mobile data. It is not hard to see why Europe has lost its leadership in mobile telecommunications to South Korea. If it is to be regained, it will take time and new leadership.

The great scheme was to introduce competition in telecommunications. To shelter the incumbent operator for an initial period, then open up to full competition and everything would be fine. Sadly, it has not worked out.

The operators first tried international joint ventures but these failed, then they tried to be new entrants in each other's markets and that failed. They have recently been retreating and retrenching to their domestic markets. Their market shares at home are disturbingly high, especially in the important and growing broadband market.

The extent of competition in Europe will be documented this year in a series of assessments of markets undertaken by the national regulators. It does not paint a happy picture. There will be only a few players in each market; there will be high levels of market concentration, dominance by the supposedly former incumbent operators. Consequently, there is a need to continue regulation.

The story in local loop unbundling has been bitterly disappointing. The PTTs have thrown their considerable creative energies to thwart the competition in broadband. There have been Olympic gold medal performances or perhaps Oscars for obstructiveness and playing the man, not the ball. In some countries, the incumbents are successfully resisting the introduction of broadband, notably Greece and Ireland. On the other side of the world, Australia has allowed country after country to slip past it. In comparison, Hong Kong and Japan, where we have seen Local Loop Unbundling flourish, with cheap, ubiquitous broadband at speeds of 6, 8 or 12Mbit/s for US$ 20 per month.

The operators have struggled to come to terms with competition. It was something very new for them and was a radical change from their past. Some still believe that they can avoid or predetermine competition through influence on legislation and regulation. They prefer a monopoly and work hard to exclude or sideline competitors.

The geography of telecommunications is still very much one of national fiefdoms. The idea of a European single market now goes back many years. Yet today, we find telecommunications is an obstacle to the single market, because the operators know only how to operate in national markets. You simply cannot buy pan-European services for mobile (voice or data) nor for customer care lines (freephone or local rate numbers). There are the beginnings of a market for broadband for homeworkers and teleworkers.

INTUG still believes in competition and that in the long run it will work. First regulators must eliminate the market abuses and make the operators compete fairly.

For more information, please contact:
Ewan Sutherland: ewan@intug.net
Or visit: http://www.intug.net

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