Telecom: Time to Lose the Bunker Mentality?

By Alex Liu
Partner and lead for the Americas Communications and High Tech practice
March 2010

"When there is blood in the streets, buy real estate.”  This old adage has certainly played out in the past few months amid the widespread financial panic. But it is largely taking place minus a major industry player—telecom. Few telecommunications companies appear bold enough or well-positioned enough to take advantage of the current investment opportunities—even if they could get the funding.  This bunker mentality can’t prevail forever, however, and when the strongest competitors finally peek out from the rubble and consider their options, investment and otherwise, what will the landscape look like? Allow me to offer a few predictions:

Here today, gone tomorrow
We will see four or five significant wireless deals in North America alone this year. Every sector is still in play, and continued hyper-competition will push a few lapsed transactions past the tipping point. In the prepaid segment, the recent entry of heavyweights AT&T and Verizon will compel MetroPCS and Leap to finally forge a more formal agreement. The same consolidation will occur in the push-to-talk segment. In Canada, regulators will begin to look more kindly on a longer-term combination of Telus and a Bell Canada spinoff, as Rogers and other cable companies continue to add services and new carriers expand.

Another industry consolidation story will play out in sub-sectors of global networking: Cisco, IBM and Dell will vie for the technology solutions sector, while BT Global, AT&T and Equant will compete in telecom networking. Accenture, IBM and CapGemini will battle for professional services work and Infosys, Wipro and TechMahindra will wrestle for the Indian outsourcing market. We are now even seeing some cross-sector deals, such as HP and EDS last year. Overall, I predict at least five more major deals this year.

Knock, knock, knocking at the door
The timing is ripe for a power play on North America. Look for well-financed and visionary players such as Mexican billionaire Carlos Slim, Deutsche Telekom or Korea’s SK Telecom to make a move on well-respected but troubled brand icons such as Sprint, Motorola, Yahoo, AOL, Alcatel or Nortel. Some mergers among the U.S. players are also likely, but these deals will be initially triggered by a spoiler, such as Microsoft, Google, a private equity firm, Carl Icahn, or one of the newer foreign interlopers.

A handset for every hand
With more than 1.2 billion handsets shipped last year alone, the world of personal communications is being redefined, and it’s in the palm of our hands. When Apple introduced its iconic iPhone in 2007, it sparked an innovation war that is still in its early days. Nokia, Google, Samsung, RIM and Sony are all coming after the iGiant with their multimedia guns blazing. And, with up-sell cycles in emerging markets moving faster than in G-8 countries, there’s an industry tsunami in the making—recession or not.

Back to the future
The economic crisis is quickly exposing the soft spots in telecom strategies. The game has shifted from product and service bundles to high-speed, functionality and “all-you-can-eat” pricing. Competitive advantage goes to companies such as Verizon that target specific local markets and up-sell higher access speeds.  As the cable battle reaches Def Con 4, the visionaries are drawing up spin-off plans for their wireless businesses.

No neutrality for net neutrality
The net neutrality debate has been burning up the blogosphere, and if you haven’t heard about it yet, it’s only a matter of time. Essentially, the battle is about the speed with which content─music, videos, films─is transferred over the Internet. Currently, all content is treated the same and transfers at the same rate. Some propose, however, to create a tiered “pay-to-play” system in which a fee ensures speedier downloads. Does this threaten free speech? Does it limit competition? Does it improve overall service? It’s all a matter of impassioned perspective.

Jockeying for position in the debate has generated some high political drama—and with a new administration in Washington, fireworks are likely. We can expect service providers to manage bandwidth aggressively to limit their capital expenditures and squeeze out more revenues. Content providers will keep deploying even more interesting, bandwidth-hungry applications. As the line in the sand gets deeper, the lobbyists will have another field day--or possibly a field year.

What happens now?
Telecom has to commit to excellence in execution on evergreen priorities while at the same time, keep an eye on the horizon—discerning the fundamental issues and opportunities. This year poses structural and urgent challenges for us all, but it’s also a year of much-needed house-cleaning that will make room for more productive capital and improved market share in the longer term.

Alex Liu is a partner at A.T. Kearney and leads its Communications and High-Tech practice in the Americas.

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The views expressed in this paper are those of the author(s) and do not necessarily represent the views of A.T. Kearney or the Global Business Policy Council. The views are not meant to suggest specific inducement to make a particular investment or follow a particular strategy, but only as an expression of opinion.