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
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
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
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:
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.
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