The Telecoms Industry Never Forgets, But Never Learns

By Kenneth Neil Cukier

Introductory Remarks, World Communications Awards

London, November 9, 2006

Good evening. It is terrific to see so many familiar faces and friends tonight. In telecoms, you all fight so hard commercially that it is nice to have one evening a year where we can come together as an industry -- check our firearms at the entrance -- and dine together as friends. It is a credit to David Molony and the entire team at TotalTelecom, for creating this community.

I am aware that this is where the fellowship ends: this is an awards ceremony, after all. But before the awards, it may be useful to put the current state of the industry in perspective. When I look at what is new about 2006, I am struck by what is actually very old: the classic, double-headed hydra of telecoms, convergence and regulation. The telecom industry is like what they said of the Hapsburgs: they never forget, but they never learn.

Convergence

Convergence is actually a very old idea in telecoms. In the 1920s, AT&T used to sell a service for people to call and listen to live musical concerts. It didn’t do very well. But that legacy has not stopped the industry from pursuing such visions in our day.

AT&T is now experimenting with interactive television. Telecom Italia wants to fashion itself as a media company and reached out to News Corp. Disney's ESPN MVNO did poorly and its plug was pulled this year. Telecoms is closer to media and IT than ever before.

As for new media companies, they are moving into telecoms. Consider Google. It bought YouTube this year for $1.6 billion. It is building a WiFi network in San Francisco. It is an investor in Current Communications, a broadband over powerline company. They are emblematic of a world in which the value of communications is not going to the network owner but to the service or media company that sits on top of the network. (And it raises questions like who pays whom how much -- opening up the “network neutrality” debate.)

In past, the telecom industry’s rivals looked like telcos, such as Skype. It offered telephone service, albeit so much more besides. But today, new competitors come from other sectors, such as Apple in the computer sector or Google, in the -- well, we don’t really know from what sector they belong; from the “Internet cloud.” Or Amazon.com, with its drive for IT grid-computing services.

We’ve even seen convergence in the very networks themselves, from BT Fusion and other fixed-mobile converged products. And there’s also Sprint’s decision to build a WiMax network, which is convergence in another way, of high-speed broadband and wireless. Consolidation in the industry is driving this ethos of convergence.

Regulation

Meanwhile, there is regulation. It too is as old as the telecoms industry itself. The International Telecommunication Union, for example, was founded in 1865 and is the oldest intergovernmental organization.

Regulators have been especially active this year. We’ve seen big issues like mobile roaming rates; the EU's telecom review; spectrum reform and harmonization; structural separation; the EU Television Without Frontiers directive. The key issue of the year was Deutsche Telekom and the Commission facing-off over building fiber-to-the-home next-generation networks, and whether a “regulatory holiday” might be in order.

It raises the broader issue of line-sharing new high-speed networks and the question of network neutrality, which I suspect will come to Europe and be the big issue of 2007. To hear the telecom industry tell it, the future is converged service on a next-generation network. It is where money is, but it requires billions of capital expenditure.

Yet this issue points to an area where David Molony and I see things very differently. David used his remarks earlier tonight to identify two potential evils of modern telecoms: the entrance of private equity investors and the re-assertiveness of regulators. Please allow me to take a moment and refute his remarks. Not simply because these are important issues -- they are -- but because he spoke first and can’t reply to my arguments.

Private Equity

David bemoaned the entrance of private equity players. It is a common refrain. A German government official last year called them “locusts.” But another name for them might be: “owner.”

The issue of course is one of long-term versus short-term ownership, and I am sensitive to the concern that the interests are sometimes different, and that a solid business needs committed investors, management, employees and customers.

But private equity funds can play a beneficial role. On one hand, many incumbents sold their directories businesses to private equity as a way to unlock value, at a time when they needed to raise capital most.

On the other hand, the role of an outsider in the telecoms business might be a good thing. Let me pose an uncomfortable question: where do you think the next big idea in telecoms will come from -- from within the industry, or outside of it?

Well, a scientist would examine the evidence. Let’s consider some of the biggest trends recently: Skype; YouTube; MySpace; iTunes. Over half of all Internet traffic is from P2P networks, of which one, called BitTorrent, was written by an 18 year old a few years ago. People like Niklas Zennstrom, the co-founder of Skype, don’t go to events like this. In fact, we recently sat next to each other on a flight down to Barcelona -- the thing that impressed me the most was that his seat was next to mine: in coach class!

As an industry, the telecoms world is good at some things and not at others. What it is good at is “efficiency” -- that is, doing what we already know how to do, but doing it better. But what the telecoms industry is less good at is something else entirely. It is “innovation” -- that is, doing something that has never been done before, doing something new.

Private equity and the financial incentives of a new class of investor in telecoms might be the spur to bring in outside ideas, and make telecoms a more vibrant, innovative place. So the next time you’re not sure what to call these private equity players in telecoms, perhaps try this: “boss.”

Regulatory Leeway

The second concern David raised was that the huge cost of building next-generation networks meant that “regulatory leeway” might be in order. And it seems sensible. At The Economist we like markets. The problem is that incumbents don’t. Sometimes you need regulation to let the market to work.

For example, consider the case of the United States. In terms of broadband deployment, in 2001, the US was second in the world. Today, the country has fallen to 16th place, according to the OECD. One of the reasons why is the lack of line-sharing. This and market concentration has raised the issue of network neutrality. It is not much of a concern in Europe due to regulation -- because there is competition at the service layer on top of the infrastructure layer.

So what David calls “demonstrable,” I call “monstorous.” And where he poses the question whether regulators have put too big a roadblock on industry’s way, I would rather ask whether the roadblocks are big enough!

The Awards

Ultimately, we both can agree that these are hard questions. But harder still has been the task of evaluating the entries for this year’s World Communications Awards. As Chairman of the Jury, I would like to stress just how difficult the judging process was, with tight voting, especially on the big awards like Best Global Carrier. It is almost unfair to pick a winner! But of course we did.

Let me thank the judges for their hard work -- and all the companies who contributed to the strength of the industry, who offer tremendous benefits to customers (if meager returns to your investors).

So after criticizing you, alarming you, praising you and hopefully provoking you, it remains only for me to introduce our host tonight.

She has interviewed many key figures in the world of politics, show business and sport. She can charm you in a handful of languages. She currently presents both Newsnight and News 24, the BBC's breaking news channel. Ladies and Gentlemen please give a big welcome to Emily Maitlis….

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