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Dawn of a new and mature age

Patrick Gallagher, CEO, FLAG Telecom, takes a look at the recent evolution of the wholesale communications market, and provides a blueprint for the future.

The wrong race
In the 1990s, a potent combination of increasing liberalisation in the market place, an unprecedented outpouring of new technology and strong capital markets created an environment destined to revolutionise the world of telecommunications. A hitherto dreary utility industry looked set to be cast aside in favour of a new, dynamic and fast growing technology sector. The age of the Internet was born bringing a worldwide desire for ubiquitous connectivity and the prospect of untold riches. Entrepreneurs and investors were encouraged to enter the market to take on the sleepy incumbent operators in their previously unassailable monopolistic fortresses.

With hindsight it’s easy to see the mistakes that were made. Competitors chasing after the pot of gold all made one fundamental error of judgement – this was not to be a 100-metre dash to the winning post but a steeplechase with many ups, downs and tight corners. Between mid-2000 and mid-2001, the oxygen of capital needed to sustain the multitude of new and established competitors began to evaporate as investors realised that, despite the strong growth in demand, there was simply not enough business to go around. In 2001, the pressures of over-supply, collapsing revenues and structural problems within the industry finally brought about the biggest downturn in telecommunications history, wiping hundreds of billions of dollars off the market capitalisation of technology companies worldwide.

The 100-metre dash was an illusion, but it was neither the technology nor the basic lack of demand for telecommunications equipment and services that brought competitors to their knees, it was the associated hype and over-optimism that made a sprint unsustainable. The overall global economic downturn may have dampened the telecommunications market in the short-term, but has had little long-term effect on the underlying growth in demand that sectors such as the Internet, broadband and wireless are driving. The financial and organisational restructuring of those competitors fit enough to continue has now equipped many of them for the marathon ahead. Major prizes remain to be won for meeting the hastening customer demand for expanding telecommunications services, and for harnessing the technologies and liberalisation that are making it possible.

Whilst a focus on the boom and spectacular bust has grabbed the headlines over recent years, the basic need to communicate and share information has obviously not gone away. Indeed within the global village that communications has helped create, this need has grown exponentially. The sustainability of the global economy is now heavily dependent on the world’s telecommunications infrastructure. International commerce would effectively cease without it. What use is information if it can’t be shared and distributed?

Following such a traumatic period there remains an inevitable sense of anxiety in the industry and investment community. As the industry seeks to recover, there are risks of destabilisation of the market through continued aggressive pricing from some operators desperate to generate cash to avoid bankruptcy. Others, like FLAG Telecom, have already successfully reduced their cost structure and emerged from financial restructuring processes free of much of their debt obligation. Key to their future sustainability is the fact that they have kept intact the network assets that provide the network foundations of many of the leading telecommunications operators and Internet Service Providers (ISPs). In its new dawn, FLAG has also introduced new management and skill sets to the company, which is likely to be a leading market differentiator in the years ahead.

The inside track
While oversupply, aggressive pricing and financial factors have served to create a graveyard full of bankrupt alternative carriers and ISPs it has also been a catalyst for continued growth in demand for services. Research shows that substantial growth in international IP traffic will be sustained over the next few years, fuelling even greater bandwidth demand.

In developed countries, demand is being fuelled by substantial growth in affordable broadband Internet access. South Korea, for example, has made broadband access the cornerstone of its economic development. By August 2003, more than 50% of Korean households enjoyed broadband Internet penetration compared with an average of less than 10% among the entire top 20 world economies – a clear indication of the untapped demand and scope for growth in the residential market going forward.

Higher penetration of broadband access technologies and competitive pricing, coupled with the ever increasing processing speeds of PCs, has finally delivered a platform for the delivery of next generation services and applications. Real and tangible evidence of a more pervasive and intensive use of bandwidth-hungry applications such as (real-time) video and audio streaming, online gaming and gambling, and content exchange via peer-to-peer (P2P) networks is emerging.

Web-based eCommerce applications are fundamentally reshaping the way individuals and communities such as corporations and governments communicate. eCommerce growth is now matching the many original projections for this technology. IDC, the analyst house, predict that by 2006 total eCommerce in Western Europe will exceed US$261bn.

Continuing international business expansion is resulting in greater deployment of distributed networked applications accessed remotely by employees, customers and suppliers. The increasing need for storage and business continuity solutions, coupled with improvements in storage technologies and lower bandwidth costs, is also encouraging corporations to move their storage capabilities over wide area networks (WANs). Analysys, for example, forecasts that global revenues from storage networking traffic and storage service provision carried over a WAN will reach US$19.3bn in 2005, up from US$500m in 2000. The ‘pay as you go’ approach embodied in metropolitan and global Ethernet services will play an increasing part in enabling this development.

Another big driver of corporate data growth going forward will be the outsourcing to developing countries – or “off-shoring” – of back-office functions of service companies. A recent study by Deloitte Consulting showed that by 2008, two million jobs in western financial institutions are expected to be moved overseas. McKinsey, which foresees a global market worth US$140bn for call centre services by 2008, has predicted that India’s share could be as much as US$9bn by 2004 and US$17bn by 2008, thus providing employment to as many as 1.1 million Indians. This will require growing amounts of high-speed connectivity between the location of the outsourced services and the ‘home’ country.

New growth economies experiencing continued expansion in Internet demand are also expecting the liberalisation of telecommunications markets in the Middle East and Asia over the coming years. This is likely to lead to Internet access price declines and an improving telecoms infrastructure. Connectivity demands in huge markets such as India and China remain largely unsatisfied.

Another major theme of future growth in both developed and developing markets is mobility. New wireless technologies, such as WiFi, 2.5G & 3G and bluetooth, alongside the high penetration of wireless capable devices, handsets and computers, will generate increased voice, data and Internet traffic volumes from users on the move.

The home straight
Recent industry experience has forced telecommunications companies to re-evaluate and restructure large segments of their organisations. Signs are that those who survive the marathon of the last few years are engendering the industry with a new sense of realism and greater maturity. The telecommunications company of tomorrow must re-focus its attention away from network build-out and back to customer needs and services. Importantly, performance will be monitored from a ‘capital efficiency’ perspective rather than the top-line growth philosophy of the pre-bust era.

Becoming a winner in the global wholesale services space will require the successful integration of a number of key elements. Financial discipline will be absolutely critical - driving optimisation of operational support costs and network efficiency, as well as a focus on customer profitability. Survivors will have to be able to retain a stable and loyal customer base by delivering services that they value, which are differentiated from competitive offerings. A focussed business strategy must address the needs of a targeted customer base, rather than attempting to be ‘all things to all men’. Finally, leading players will have the ability to deliver globally whilst maintaining and deepening strong relationships with local operators and influencers.

A case study of FLAG’s stated strategy and value proposition since restructuring in 2002 may act to underline this new world realism. FLAG serves the world’s major telecommunications companies, Internet operators, content providers and other organisations that need to transport large volumes of international traffic between key commercial centres around the world. The company has exceptional personal relationships with its customer base, with which it has formed strategic, creative partnerships. FLAG recognises that it is operating in a sophisticated service-oriented society, with extremely high expectations from customers requiring targeted, bespoke solutions.

As a global specialist, FLAG therefore has a unique insight into the opportunities, challenges, and the rewards of the wholesale services sector. FLAG proposes a model for success in the wholesale telecommunications sector based on several key criteria:

  • Financial diligence & cost effective delivery.
    FLAG owns and operates a fibre and MPLS-based IP network that connects four continents and fully encircles the globe. The focus is now on managing that network effectively, and upgrading network components when necessary based on an overriding business case and customer demand. Clear return on investment and time to cash are now the clear metrics for network deployment.
  • Service, not technology.
    Bandwidth may be considered a commodity by many, but service can never be similarly considered. Services include Account Management, fault management, industry beating performance guarantees, proactive reporting, fast and flexible provisioning, efficient billing and collections and many more. Customers are looking for the ability to create, not the ability to use. In a wholesale market, they require solutions that enable them to bespoke end-user applications that add real value. They no longer buy because your product says ‘MPLS’ on the box.
  • Commercial flexibility.
    No two customer requirements are alike so cookie cutter solutions do not work. Wholesale customers demand innovation and flexibility from their providers. Today they may require a long-term contract with maximum available discounts. Tomorrow they may need a contract on a week-by-week basis where they are only charged for the traffic volume they send. Next week’s content provider will want a large circuit for only a few hours, to manage delivery of a key sporting event. Wholesale providers must be able to anticipate these trends, react with workable solutions and implement the same day.
  • Differentiation.
    More than ever before, suppliers now need to differentiate their services. In a still overcrowded market, with continuous price erosion prevalent, the operators that survive will be those that can articulate and demonstrate clear and tangible differentiators. Local knowledge and industry expertise, opening up new markets in line with market demand, rapid provisioning, service innovation, flexibility on pricing terms, packaged offers and unrivalled network performance, are all clear areas of focus for the winners of the future.
  • Agility.
    Wholesale operators need to respond rapidly on both a micro and macro level. Organisations must be streamlined to remain competitive, but also work well within the company to react quickly both to specific customer requirements, and take advantage of a rapidly evolving market. Continued liberalisation, weakened competitors, broadband growth and many other factors all create opportunity for nimble and savvy service providers leading the re-emergence of the wholesale market.
  • Neutrality.
    A key benefit of focusing solely on serving the wholesale community is the neutrality it offers. Wholesale-only providers work in partnership with their clients and do not compete for the end-user business of their carrier and ISP customers, thus providing a clear, uncomplicated relationship and removing any barriers to business.

In summary, the industry may have shed the spikes of a sprinter and adjusted to marathon speed, but the potential rewards for those up with the pace, and for the customers they serve, are considerable. The rewards are also attainable with greater certainty than in the heady days of hype and illusion.

Events 2004

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