Wall Street Journal

Telecom's other 'merger'

Telecom's other 'merger'

What does the prize of convergence look like—and how will the new breed of telcos claim it?

  • min read


Telecom's other 'merger'

In all the clamor over the telecom industry's recent deals—with $100 billion committed so far—few have paid note to a more fundamental sort of telecom merger: the long-anticipated convergence of voice and data networks. Quietly going on in the background for years, this technological union has enormous bearing on when the mega-mergers pay off, promising big reductions in cost and complexity, and creating a platform for new growth.

It should come as no surprise that the industry's onetime biggest players like AT&T and MCI were among the furthest along in the convergence process. Their progress toward combined voice and data networks made them even more attractive to their respective acquirers, SBC and Verizon. Our research indicates they were on target to save between 20% and 50% of their total operating costs by reducing the number of networks, thereby eliminating redundant switches, devices, people and buildings.

MCI, for example, had migrated 25% of its domestic long-distance traffic to its core IP network in 2003, and had planned to hit 100% by mid-2005, generating savings that we estimate will reach more than $400 million. Indeed, so many costs are being taken out that the effort was able to fund itself. Countless others, including Bell Canada and France Telecom, are not just talking about a move to converged networks, but taking concrete steps toward making this "real."

So what does this prize of convergence look like—and how will the new breed of 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 geographic locations, sometimes with redundancies inherited from acquisitions. MCI, for example, has several hundred individual IT systems supporting its operations. Convergence will simplify all of this by unifying operations onto one common, packet-based infrastructure, dramatically reducing the number of systems, people, and facilities required to support the networks.

The benefits go way beyond reduced costs. Convergence provides an "escape route" from falling revenues, as distinctions between local and long distance evaporate and price declines accelerate with more efficient networks and intermodal competition. Long-distance carriers are especially vulnerable, lacking the physical connection to customers that the Regional Bell Operating Companies (RBOCs) control. The simplified infrastructure of convergence gives carriers a platform to build new services, enabling them to compete for the emerging $70 billion network-services market.

No one appreciates that advantage more than Verizon and SBC, the new owners of MCI and AT&T, respectively. The acquired long-distance players have a head start in building converged networks and a sound understanding of enterprises' complex communications needs, as well as sales forces skilled at positioning the value of new services to enterprise decision-makers.

All this comes with new risks, however. Convergence is expensive for carriers and will require significant investment. Customers may decide to defect during service disruptions in the changeover to converged systems. What's more, the convergence of voice and data networks and applications means that premium-priced voice services become just another packet stream. That opens up the telcos to competition from powerful systems integrators like IBM and Electronic Data Systems, which 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, such as the lack of an enterprise customer base, but they do not have to bear new investment.

By necessity, the classic long-distance carriers have been most aggressive. Their customer base is increasingly concentrated in enterprises, where convergence is most relevant. The carriers are also most financially strapped, with the greatest need for revenue growth and cost reduction.

For the new behemoths, Verizon and SBC, convergence probably arrives sooner now that they have acquired MCI and AT&T, whose planning and investments put them ahead. Even so, like the remaining RBOC's, Verizon and SBC stand to lose the most as their current profits rely disproportionately on the consumer segment and voice-based products. Instead of hesitating, however, they need to jump since convergence opens this profit pool to competitors as never before.

Messrs. Kermisch and Smith are partners with Bain & Company's telecommunications practice in Boston.


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