The Financial Times

Making good on telecom convergence

What does this prize of convergence look like—and how will telcos claim it?

Par Ron Kermisch and Paul Smith

First published on janvier 21, 2005
min


Like a guest showing up years late for his own party, the long-awaited merger of voice and data networks is finally arriving without fanfare. What's more, the unopened presents are still on the table: convergence offers telecommunications providers and their customers huge potential reductions in both cost and complexity, as well as a platform for substantial new growth. Having survived near-death experiences, the industry's onetime biggest players, such as AT&T and MCI, are among the first to plunge ahead toward the switchover. They have good reason. Our research indicates they'll save anywhere between 20 per cent and 50 per cent of their total operating costs by reducing the number of networks they support and thereby eliminating redundant switches, devices, people and buildings. MCI, for example, said that it would migrate 25 per cent of its domestic long-distance traffic to its core IP network in 2003 and plans to achieve 100 per cent migration this year. Bain estimates this could be worth up to $430m in total savings. So many costs will be taken out that the effort will fund itself. Telecom Italia, Europe's fourth-largest telco, has already hacked 30 per cent off its operational expenses through "packet voice migration," and aims to achieve a stunning 60 per cent cost reduction overall in 2005. Along the way, it will cut network connections from more than 1,100 to 24, and improve network performance in the bargain. Countless others, including AT&T, Bell Canada and France Telecom, are at minimum talking and in some cases beginning to invest in converged networks. So what does this prize of convergence look like—and how will telcos claim it? Carriers today support a myriad of networks. Each network has separate billing systems, unique provisioning systems, distinct product development groups, different physical equipment and locations, and so on. In many cases, carriers have multiple versions of the same network technology inherited from acquisitions, adding complexity. MCI, for example, has several hundred individual IT systems supporting its operations. Convergence will eliminate all these disparate networks by bringing them all on to one common, packet-based network. As a result, carriers can eliminate multiple vendors, support staffs, devices and systems with dramatic cost savings. Carriers will also be able to reduce their extensive real estate holdings as they consolidate facilities and reduce access payments to other carriers. While the savings are substantial, the benefits of convergence for carriers go beyond reduced costs. Convergence will enable carriers to effectively compete for the network services market-worth $70bn in the US alone—a critical emerging opportunity for telcos. Revenue declines will accelerate for carriers in their core business as distinctions between local and long distance evaporate and price declines accelerate with more efficient networks and intermodal competition. This is especially true for the long-distance carriers, who find themselves with fewer products and services to offer than the RBOCs (regional Bell operating companies) as regulatory barriers fall between local and long-distance. What the long-distance players do have, however, is a better understanding of the complex communications needs of enterprises, and distribution networks (their enterprise salesforces) that vastly "out-reach" the sales arms of the RBOCs. Preserving revenue will be the critical challenge for service providers, and their best opportunity to accomplish this is a new breed of managed service offerings targeted at enterprises-secure, integrated phone and e-mail service, for instance, that travels with an employee around the country. In this market, carriers will provide enterprises with a broad range of services ranging from system design to actively managing and ensuring network security, as well as managing the customer's overall portfolio of telecom services. However, converged networks require significant investment—and expose telcos to new risks. Customers may defect in the transition to the converged network. Also, the convergence of voice and data networks and applications means that premium priced voice services become just another packet stream—opening the carriers' traditional stronghold outside the firewall to competition from powerful systems integrators like IBM and Electronic Data Systems who also have a stake in this large and emerging market. To win, carriers will need to figure out how much to invest and when. The answers will depend on each carrier's competitive position. The newer competitors—Global Crossing, Level 3 Communications—are already converged. They offer a full suite of services on an integrated IP network. They clearly face other challenges to winning in this space, such as the lack of an enterprise customer base, but they do not have to bear the investment of network convergence over the next few years. For RBOCs, convergence probably involves arriving well back in the pack. They need to carefully manage the consumer voice-based revenues they have won over the past few years and defend against local access line substitution. To stay in the race, they could begin mild experimentation, as Verizon has started to do with equipment-maker Nortel. But as the RBOCs work out their strategies, they need to remember that the business advantage in convergence is not in having fewer networks—it's in having only one. The IXCs (interexchange carriers, or largely long-distance carriers such as AT&T and MCI) will, out of necessity, be the most aggressive in going after this opportunity. They have the customer base where convergence is most relevant—enterprises—and they are in the most difficult financial condition. Convergence also provides them with the foundation to go after the local market if they so choose. As the capabilities of today's personal computer, internet, and telephone morph into a single utility, duplication, complexity, and expense will vanish. There's no question about that-nor is there any doubt that new forms of network integration and new services will emerge. What remains to be seen is which companies effectively converge their networks and operations to deliver better value for customers, and which companies get converged right out of existence. Ron Kermisch is a partner with Bain Company. Paul Smith is a Bain partner and leader of Bain's North American telecommunications practice. Both are based in Boston.

Like a guest showing up years late for his own party, the long-awaited merger of voice and data networks is finally arriving without fanfare. What's more, the unopened presents are still on the table: convergence offers telecommunications providers and their customers huge potential reductions in both cost and complexity, as well as a platform for substantial new growth.

Having survived near-death experiences, the industry's onetime biggest players, such as AT&T and MCI, are among the first to plunge ahead toward the switchover. They have good reason. Our research indicates they'll save anywhere between 20 per cent and 50 per cent of their total operating costs by reducing the number of networks they support and thereby eliminating redundant switches, devices, people and buildings.

MCI, for example, said that it would migrate 25 per cent of its domestic long-distance traffic to its core IP network in 2003 and plans to achieve 100 per cent migration this year. Bain estimates this could be worth up to $430m in total savings. So many costs will be taken out that the effort will fund itself.

Telecom Italia, Europe's fourth-largest telco, has already hacked 30 per cent off its operational expenses through "packet voice migration," and aims to achieve a stunning 60 per cent cost reduction overall in 2005. Along the way, it will cut network connections from more than 1,100 to 24, and improve network performance in the bargain. Countless others, including AT&T, Bell Canada and France Telecom, are at minimum talking and in some cases beginning to invest in converged networks.

So what does this prize of convergence look like—and how will telcos claim it?

Carriers today support a myriad of networks. Each network has separate billing systems, unique provisioning systems, distinct product development groups, different physical equipment and locations, and so on. In many cases, carriers have multiple versions of the same network technology inherited from acquisitions, adding complexity. MCI, for example, has several hundred individual IT systems supporting its operations. Convergence will eliminate all these disparate networks by bringing them all on to one common, packet-based network. As a result, carriers can eliminate multiple vendors, support staffs, devices and systems with dramatic cost savings. Carriers will also be able to reduce their extensive real estate holdings as they consolidate facilities and reduce access payments to other carriers.

While the savings are substantial, the benefits of convergence for carriers go beyond reduced costs. Convergence will enable carriers to effectively compete for the network services market-worth $70bn in the US alone—a critical emerging opportunity for telcos. Revenue declines will accelerate for carriers in their core business as distinctions between local and long distance evaporate and price declines accelerate with more efficient networks and intermodal competition. This is especially true for the long-distance carriers, who find themselves with fewer products and services to offer than the RBOCs (regional Bell operating companies) as regulatory barriers fall between local and long-distance.

What the long-distance players do have, however, is a better understanding of the complex communications needs of enterprises, and distribution networks (their enterprise salesforces) that vastly "out-reach" the sales arms of the RBOCs. Preserving revenue will be the critical challenge for service providers, and their best opportunity to accomplish this is a new breed of managed service offerings targeted at enterprises-secure, integrated phone and e-mail service, for instance, that travels with an employee around the country. In this market, carriers will provide enterprises with a broad range of services ranging from system design to actively managing and ensuring network security, as well as managing the customer's overall portfolio of telecom services.

However, converged networks require significant investment—and expose telcos to new risks. Customers may defect in the transition to the converged network. Also, the convergence of voice and data networks and applications means that premium priced voice services become just another packet stream—opening the carriers' traditional stronghold outside the firewall to competition from powerful systems integrators like IBM and Electronic Data Systems who also have a stake in this large and emerging market.

To win, carriers will need to figure out how much to invest and when. The answers will depend on each carrier's competitive position.

The newer competitors—Global Crossing, Level 3 Communications—are already converged. They offer a full suite of services on an integrated IP network. They clearly face other challenges to winning in this space, such as the lack of an enterprise customer base, but they do not have to bear the investment of network convergence over the next few years.

For RBOCs, convergence probably involves arriving well back in the pack. They need to carefully manage the consumer voice-based revenues they have won over the past few years and defend against local access line substitution. To stay in the race, they could begin mild experimentation, as Verizon has started to do with equipment-maker Nortel. But as the RBOCs work out their strategies, they need to remember that the business advantage in convergence is not in having fewer networks—it's in having only one.

The IXCs (interexchange carriers, or largely long-distance carriers such as AT&T and MCI) will, out of necessity, be the most aggressive in going after this opportunity. They have the customer base where convergence is most relevant—enterprises—and they are in the most difficult financial condition. Convergence also provides them with the foundation to go after the local market if they so choose.

As the capabilities of today's personal computer, internet, and telephone morph into a single utility, duplication, complexity, and expense will vanish. There's no question about that-nor is there any doubt that new forms of network integration and new services will emerge. What remains to be seen is which companies effectively converge their networks and operations to deliver better value for customers, and which companies get converged right out of existence.

Ron Kermisch is a partner with Bain Company. Paul Smith is a Bain partner and leader of Bain's North American telecommunications practice. Both are based in Boston.