Is Telecom Prepared for the Rapidly Gathering Storm?

Make no mistake: A hurricane is brewing offshore, and real estate up and down the telecommunications coastline will be affected. This maelstrom is gathering momentum daily as three distinct forces—portalization, stickiness and convergence—come together to reshape the landscape.

Profitability in the telecommunications industry is always shifting, but now a profit tailwind is whipping up and moving the industry yet again—from infrastructures and desktop software to advertising, social net-working and content management. In essence, the industry is moving from pipes to portals.

Which companies will be affected, and to what extent, depends on how they prepare for the rapidly gathering storm. For starters, companies will need to look ruthlessly at the “beachfront property” they own and operate, and recognize opportunity amid the turmoil. The focus should be on developed and developing properties.

Developed properties, once the most exciting and attractive, will inevitably need to be consolidated, renovated or endure even more drastic measures. Developing properties, once a desolate expanse of figurative sun and sand, are now the most prized assets around. Google, for example, is a developing property that didn’t even exist a decade ago.

Regardless of location, no property is immune to change. Established firms might opt to renovate or reinvent their existing properties, while new and emerging companies might invade existing properties or invent new ones. Figure 1 illustrates our perspective on the four strategies that will define the future telecom, or perhaps more appropriately, the infocom, industry:

Renovation. Imagine established companies as existing and well-known properties on the beach at Waikiki. To be competitive with the upstarts moving onto the island—and establishing beachheads around the globe—they’re focused on renovating their existing brands. Consolidation, the pressing need for economies of scale, and the quest for greater market share are driving most of the activity here. The landscape is being reshaped by the incumbents, legacy businesses and private equity firms. Case in point is News Corporation’s acquisition of Dow Jones, the various AT&T mergers, and the privatization of the telephone company icons.

Reinvention. Envision Saint-Tropez, where established companies are reinventing their businesses and creating new uses for their assets. They are intent on updating their current business models. Motorola swaps stock for Symbol, eBay acquires Skype (a beachfront that turned out to be overpriced), News Corporation values Intermix Media, the owner of MySpace, at more than half a billion dollars, and Apple leverages its iPod connection to sell the iPhone and gain instant share of the mobile phone market.

Invasion. Take a flight to Miami’s South Beach, where emerging companies are shaking things up by moving in on the old guard’s turf. These entrants, like their established brethren, have cash to expand and prevent churn. But their motivation is different. They are in the passing lane and looking for new ways to grow the business and preempt other aggressive interlopers. Google’s acquisition of YouTube is a prime example. In the same space, a quad-play is taking place: The incumbent telcos are moving into Internet-based television, wireless firms are providing mobile video, and the cable companies are rolling out wireless service.

Invention. Finally, travel around the globe to Dubai, the castle in the desert. Here, companies are staking their claim where nothing existed before except virtual sun and sand. There is an abundance of low-cost capital and the focus is on innovation. Sprint Nextel is ramping up its bet on WiMAX (a new wireless infrastructure) through a global rollout. Sprint and Google are joining forces to provide new messaging and search services. Google and other nontraditional wireless operators are lobbying to bid for new frequency spectrum from the U.S. Federal Communications Commission. Google wants to enter the global wireless services business and press ahead with the prospective gPhone.

The Gathering Storm

Staying viable in the industry demands judicious attention to current events, an up-to-the-minute strategic perspective and a cautious eye toward the future. We expect three main industry forces—portalization, stickiness and convergence—to define telecom’s new landscape, creating unprecedented turmoil and igniting many new opportunities (see figure 2) . Let’s examine each industry force.

Portalization of the business. The telecommunications industry, initially built on proprietary, closed pipes and circuits, is fast becoming a portals-based business. AOL, Windows Live, Yahoo! and Google all offer customers a host of services, from secure web identity and the ability to make payments online to directory-based calling and personal storage spaces. In addition, customers get access to high-speed wireless Internet, television and telephone over a single broadband connection.

Armed with these services, upstarts are marching into the telcos’ traditional domains. Google, for example, is directly attacking the yellow pages, white pages and the premium numbers businesses by offering directory-based callback and location-based services, such as Google Earth and Maps. Over time, it will attack the telephone company space, too, because it can place names with numbers (even mobile numbers). Google will be able to anticipate and stimulate market demand and perhaps one day offer subscription-based services. Isn’t that a telco?

Answers to several questions will help illuminate the portal-pipe quandary: Will the telcos “value price” their Internet protocol-based networks in an effort to fuel more revenue growth? Are portals latent competitors—encouraging the telcos to spend more while they build out a surreptitious wireless network? Or are portals providing the long-awaited killer applications that will pay for the fiber buildout we’ve all been reading about for years?

Symbiosis will continue to reign. The portals need to get closer to being telephone companies by getting control of number ID and bearer information so they can enable click-to-call and dial around, and cherry-pick various telecom applications. They don’t want to worry about network utilization and filling the pipes with third-party traffic.

Meanwhile, the telephone companies want to become more like multi-access portals, but they lack the skills. They cannot aggregate content like a Yahoo! to help bundle their customers’ communications with personal tools and media information, and they can’t yet guarantee secure identity or online payments.

Stickiness gets stickier. Customer content and focus is moving directly onto the Web in the form of blogs, personal websites and collections of searches and transactions. Facebook, MySpace and Google’s social networking service, Orkut, are examples of personal networking, while LinkedIn applies to business networking.

At the same time, communication no longer requires a computer, which means the desktop is no longer the kingpin. Instead, mobility and open devices are key. Consider that the network operator 3 is launching Skype over Windows.

Internet users want privacy and simplicity, which gives portals the stickiness advantage as they keep the consumer’s utilization point in the same place. Add to that the increasing attractiveness of mobile devices such as the iPhone that offer access to video, Internet and telephone, and the portal’s stickiness gets stickier.

The crucible of convergence. All roads lead to convergence—the ultimate quad-play offering of seamless voice, video, Internet and wireless. It’s driving the gathering storm closer to the shore every day. All companies have something at stake and something to lose:

Cable companies (cablecos) have the advantage of a daily on-screen portal (the home television) that they can parlay into on-demand everything, while adding telephony and MVNO. ¹ They also have other advantages, including local brand recognition, experience with subscription-based commerce, the ability to bundle services, and the capacity for broadband upgrades.

Telcos, on the other hand, have limited experience in local marketing and entertainment issues. Subscription-based communications models and partnerships with nontraditional groups such as Hollywood and Silicon Valley are foreign territory. The telcos’ twin advantages of years of trust and customer history need to be harnessed more intensely for them to become the communications portal of choice.

Portals have what the pipes crave: stickiness, secure user identity, brand strength, profile management capabilities, and something-for-everyone user communities. To achieve dominance, they’ll need to generate ad-based revenues that more than offset their hefty costs.

What’s Next?

Whose sand castles will remain? We can venture some guesses. Wall Street will continue to fund the Waikiki-style renovation and privatization of big iron pipes, telcos, cablecos, system integrators and others. Venture capitalists will continue to mine the world for the next Dubai-style market invention. It might be peer-to-peer networking 2.0 or maybe 5G, a fifth generation of communications technology. What might the future hold? Google will become a virtual, global wireless service provider as Apple becomes a home portal. Cisco will design and sell its own handsets, while News Corporation owns 80 percent of the world’s eyeballs. Motorola, EDS, Nortel, Yahoo!, Sprint Nextel and AOL will cease to exist as independent companies. We can guess who buys them.

Anything can happen where the surf and sand meet. At the beachfront, you always have to stay ahead of the next wave.

Consulting Authors

Alex Liu is a partner in the firm’s communications and high-tech practice,and is based in the San Francisco office.

Augusto Morais is a principal in the firm’s communications and high-tech practice, and is based in the Atlanta office.

Sai Tunuguntla is a consultant in the firm’s communications and high-tech practice, and is based in the Dallas office.

For more information, please contact our team.

¹ MVNO is an acronym for mobile virtual network operator.