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Telecommunications Industry Brief

Telecommunications Industry Brief. How to keep up with the pace of change?. Strategic Challenge. High uncertainty about future No time to make decisions Difficult to catch-up as pace increases Tough competition penalizes mistakes. Planning is limited Reacting is insufficient

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Telecommunications Industry Brief

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  1. Telecommunications Industry Brief

  2. How to keep up with the pace of change? Strategic Challenge High uncertainty about future No time to make decisions Difficult to catch-up as pace increases Tough competition penalizes mistakes Planning is limited Reacting is insufficient Traditional strategies of “build and defend a position” are inadequate

  3. Intel could try to defend its fortress… Fortresses No Longer Exist …but chooses not to • Superior technical capabilities • Substantial capital barriers to entry • Dominant market share • “Only the paranoid survive” • Advantage is assumed temporary • Strategy is complicated and surprising • Price cutting in NICs • Innovation into MMX technology • $500 million investment in over 50 media, Internet and graphics companies • Downmarket microprocessors for under $1,000 PCs • Expanded product line • Laptop-specific microprocessor • New, “cheap” chips • New “express bus” chips

  4. Common experience Time Pacing Myths Best practice • Need for change is not anticipated • Initiating change takes too long • Change frequently loses momentum • Best solution is to react to events as quickly as possible (event triggered) • Drive change with internal metronome (clock driven change) • Monitor own processes and the market for rhythms • Set the pace • Choreograph transitions * Footnote Source: Sources

  5. Company Time Pacing Examples Activity Pacing Addition of new manufacturing capacity Builds new facility every 9 months Opening of new retail outlet Opens 300 stores each year to hit target of 2,000 by year 2000 Launch of new products 40% of sales from products launched in last 5 years (in 1997 achieved 49%) Jack Welch’s calendar Like seasons of the year, Welch manages through a rhythm of regular, seasonal activities

  6. Improvisation Myths Best practice Common experience • Innovative ideas suffer from poor execution • Company aspires to lead, but always seems to follow industry • “Analysis-paralysis” • Successful companies are run by a braintrust of a few, smart senior executives • Success is driven by an army of revolutionaries • Successful companies • Operate on the fly • Limit information • Eliminate conflict • A few rules, neither bureaucracy nor chaos • Structure key outcomes with responsibilities • Structure key activities with priorities • Success is driven by more information (real time), not less and fact-based debate

  7. Company Improvisation – Semi-Structure Examples Limited set of rules • Strict product development priorities • Products released in three stages – internal, beta, full launch • Priorities managed, not projects – spontaneous content encouraged • “We live on the edge” • Clear ranking of which types of molecules are research priorities • Maximum number of molecule types pursued at any one time • Projects “killed” according to step charts • Movies must • Center on a basic human condition and a flawed, but sympathetic character • Have a clear beginning, middle, and end • Disciplined financing (50% more efficient than industry standard) F I L M S (The Crying Game Pulp Fiction The English Patient Chasing Amy Cinema Paradiso)

  8. Probing Common experience Myths Best practice • Annual strategic plans are created, then filed and ignored • Strategic plans are often wrong in hindsight • Short-term performance pressure takes priority over future thinking • Planning predicts the future • Planning is a waste of time, it is better just to react • Build vision of business, not industry • Probe the future • Wide variety (time and content) of low-cost probes to create insight • Constant, thin attention • Hypotheses and evaluation metrics tied to probes • 5-week schedule, 5-month plan, 15-month intuition

  9. Company Probing Examples Examples • “You’ve got to experiment…strategy is about buying options…then picking the best ones to pursue” – John Browne, CEO • Drilling experiments on Andrew oil field led to revolutionary horizontal drilling technique • Used limited JV with Safeway to experiment with integrated food and fuel convenience stores • Schwab’s approach is to use market to fine-tune new products; as a result, they “release products at a blistering rate, some hit and some wither, but the flood keeps coming” – Forbes • Develop experimental products/services in-house • Futures trading • Market Buzz • AdvisorSource • Uses alliances for further experiments • IPOs with Goldman Sachs • Direct life insurance with Great West Life • Gates calls probes “feelers” • “You’ve got to make sure you have feelers out to see when things are about to achieve critical mass” • Currently limited backing of three different video compression technologies • Creates probes with internal projects, alliances, and acquisitions • Both shorter term probes and “Blue Sky” projects

  10. Making Probing Happen Future focused meetings 5 years Acquisitions 3 years • Design a probe portfolio • Range of time frames • Range of technologies • Range of probe types • Always low cost • More random probes when more uncertainty • Measure results • At some point, accelerate investment in direction of probe or eliminate it Futurists Scenario planning 2 years 18 months 6 months Market research Alliances/ JVs Pilot markets Experimental products and services

  11. Common experience Regeneration Myths Best practice • New business opportunities suffocate in shadow of legacy ones • New businesses thrive while traditional businesses languish • Roadblocks on previously successful growth paths • New businesses succeed only when isolated from traditional ones • Diversification is successful when managers build and extend a tightly woven set of competencies • Drive successful diversified growth when • Traditional businesses are combined with new approaches • Multiple growth paths are traveled • 3 Rs: rearchitecture, recombination, and refresh are used • Thinking is modular • Existing businesses are culled

  12. Company Regeneration Examples Examples • Recognized modularity of brewery, wholesale business, and retailing/hospitality skills • Diversified into resort hotels, restaurants, nursing homes, and health clubs based on retailing/hospitality skills • Divested smaller, less profitable brewery operations • Diversified into high-volume, low-cost, in-store banking outlets with supermarket-style service sales force • Newly trained salesforce used to re-vitalize traditional branch network • Entry into luxury market with Lexus, built on • Discarded, experimental, midsize, Asian market product platform • New dealerships, brand images, styling, technology • Rearchitected selected engineering features • Refreshed lower priced name plates with Lexus technology • Sophisticated combination of varied mutations, recombinations, and refreshers • Combined camera skills (optics technology, management of dealers, high-volume assembly) and new copier product • Combined print engines from copiers with new laser printers product and OEM channel into print engine business • Refreshed copier business with sophisticated control technology from laser printers • Recombined dealer management, high-volume assembly, copier and laser printer technology to launch fax machines business

  13. Agenda • Local Services and Strategies • Long Distance Service and Strategies • Integrated Carrier Strategies • Voice over Whatever

  14. Local Market Dynamics • Large, slow growth market • Competition really just beginning • Lots of M&A activity • SBC/Pac Bell/ SNET/ Ameritech • Bell Atlantic/ NYNEX/ GTE • WorldCom/MFS/Brooks • AT&T/ TCG/ TCI

  15. ILEC Local Market Revenues$98.6 Billion, 1997 Revenues for ILECs only, excludes non-telecom revenues

  16. Dial tone Local P/L 70.1% 3.3% Features 9.2% Termination/ connections 13.3% Pay phone 3.9% other 0.2% ILEC Local Services Market$51.1 Billion, 1997 Residential - 54% Business - 42%

  17. What Defines the CLECs? • The Telecom Act of 1996 transformed CAPs into CLECs and created the rise of an integrated carrier approach. It also sparked the entrance of other “new” competitive local exchange carriers- both start-ups and existing carriers. • CLECs are among the fastest growing , and are clearly the first wave of Integrated Carriers because they were able to leverage existing infrastructure to offer a broader portfolio of services. • CLECs are diverse; different target markets, service mixes and technology solutions. • Competition is driving carriers to unprecedented levels of business, service and infrastructure complexity

  18. CLEC Revenue Mix1997 & 2000 1997- $3.1B 2000- $9B Domestic Revenues Only

  19. CLEC Profiles Geographic service area Key Customer Focus Sales Organization Intermediate • East Coast emphasis with extended Frame Relay to the West Coast and Texas • Nationwide Frame Relay servicethrough the UNISPAN consortium • The target market for Intermedia isbusinesses with between 50 and 500lines that can ultimately be servedon-net. • Also targeting larger accounts with its inter-city data services andinternet services • 365 Intermedia sales peopleand a total of 617 salespeople when Shared Tech.,LDS, and national Tel areadded • 102 Sales Offices located throughout the US ICG • Regional carrier • Focuses on clusters in OhioValley, Texas SouthernCalifornia; Colorado;North Carolina; Alabama;and Tennessee. • New network in Atlanta for 1998 and no additionalnetworks planned • Primarily focuses on Tier Iand Tier II. • Sells to small and medium-sizedbusinesses of 5 to 100 lines with astrong emphasis on accounts with15 to 50 lines. • Utility agreements will bring onMultiple-dwelling units as a target market • ICG is trying to leverage its existing client relationships to sell bundledsolutions. • Sales force is estimated at roughly 300+. • Also leverages itsrelationship with utilities toexpand into residential andbusiness markets. TCG • Nationwide footprint covering 28 of the 30 largest MSAs. • BizTel footprint-206 areasincluding 96 of the top 100 MSAs. • Focus on Tier I cities someemphasis on Tier II andTier III cities. • New emphasis on regional corridors. • Target larger businesses (550 linesor more) in certain verticals such asFinancial Services, Healthcare,Education, Gov’t and Mediacompanies. • Other Key market is on-netsmall/medium businesses (500 linesor less.) • Very limited residential play. • Sales channels include bothdirect sales force (689+ salesrepresentatives) and agentsand resellers (approx. 2000.)

  20. CLEC Profiles Geographic service area Key Customer Focus Sales Organization GST • Regional player-mostly West andSouthwest U.S. and Hawaii. • Not looking to go national. • Mostly Tier II and Tier III cities. • Target SMBs business-between2 to 200 access lines. • Continue to serve wholesale and retail businesses. • Sales force approx. 290 • Focus on customer care and“holding-the-hand” of the customer. E-spire • Southeast and Southwest U.S. • Tier II and III cities. • Accelerating roll out in 98. • Targeting small to mediumbusinesses spending. • Targets firms in professional services,health care, gov’t, and financialservices. • No interest in residential. • Sales and Marketing staff grewfrom 56 people in 1996 to 277 people in 1997. USN • Regional focus - Midwest, New England, and Mid Atlantic. • All TRS based. • Target businesses with 2-10 businesslines. • Focus on providing full bundles andsuperior customer service. • Direct Sales focus. • Sales force grew from 206in 1996 to 426 in 1997.

  21. Key Market Trends and Influences Affecting the CLEC Market • Wall Street • Deregulation • Mergers and Acquisitions • Alliances and Partnerships • Integrating the product portfolio • Network Build-out • Growth- Can they sustain their current growth and will they be able to manage and survive their growth

  22. Wall Street and Deregulation • Wall Street • Pressure to show profit- EBIDTA positive • None of the CLECs EBIDTA positive except for TCG • Wall Street looking for a return on investments • Push towards deployment of success-based capital • Deregulation • Telecom Reform Act of 1996 • Required the RBOCs to open the local markets via resale, UNE and facilities based • Competition in the business market. Cherry-picking the profitable customers. Residential markets have seen very little to any competition.

  23. Deregulation (Continued) • 8th Circuit court interconnection rulings • Removed the ILECs burden of recombining UNEs and placed that burden on the competing carrier. Ruling now under consideration by the Supreme Court. • Interconnection pricing in the hands of the state regulatory commissions. Leaves competition fragmented and makes a national TSR or UNE local entry strategy difficult. • RBOCs into Long Distance • RBOCs need to meet 14 point checklist to gain entry into in-region Long Distance, • FCC vs. SBC granted RBOCs the ability to immediately enter in-region. Overturned on appeal. • RBOCS plannin ressive attack of the in-region long distance market. Expecting to take most market share in the small and medium business market and the consumer market.

  24. Mergers / Acquisitions and Alliances / Partnerships • CLECs are positioning themselves both to be acquired or to acquire. Are the CLECs looking for an exit strategy? • Acquisitions, alliances, and partnerships have allowed for quick, lower-cost entry into new markets • Large IXCs continue to look to the “CAPs turned CLECs” as an access alternative to the ILECs • Internet’s demand for dedicated access, the call for alternatives to the PSTN, and the lure of the ISP retail business have driven many CLECs to acquire ISPs • ICG/Netcom, Intermedia/Digex, MFS/UUNET, TCG/Cerfnet, RCN/ UltraNEt and Erols • Challenge is integrating acquisitions. Importance of a seamless entity to customers

  25. Network Build-out: Expansion Today; Growth Tomorrow • Still in the Build Out Stage for Most CLECs; • Many Are Expanding Into New Cities, Others Are Consolidating their existing networks to Ensure Seamless Regional corridors • Third Tier Cities Now the Focus of New CLEC Opportunities (i.e., Cities With 750,000 Population or Less); Tier 1 and many Tier 2 cities saturated • Move into Switched Services & Long Distance helping to achieve profitability and positive cash flow while traditional CAP segment faces threat from IXC acquisitions

  26. Network Build-out: Expansion Today; Growth Tomorrow (Continued) • Yankee Group Forecasts More MFS-Style Exit Strategies for facilities-based CLECs. Network build-out is expensive and it is less expensive to buy the networks • Move towards 3rd generation CLECs- dropping in switches and leasing the fiber between the switches. Allows for a faster turn-up time and generation of positive cash flow. CLECs to look for in this category include: US LEC; Allegiance; and Focal

  27. 600 600 520 500 410 400 320 Installed Base, 300 Number of Switches 210 Switches 200 100 100 0 1995 1996 1997 1998 1999 2000 Network Expansion: Growing CLEC Switch Deployment

  28. Can the CLECs Survive Growth? • Managing Growth • Customer Growth- can they meet customer expectations and demand • Market Growth- Are they going too fast too quickly? Do they have the resources to maintain their current pace or are they trying to be everything to everyone? Example being US ONE which crashed and burned • Ensuring Quality while Maintaining Growth • Leased Networks • Manage unbundled elements- need to own the customer end-to-end and control the customer’s entire experience • Talent: Finite number of talented people in the industry

  29. Local Exchange Market - 2000$44 billion ILECs CLECs 88.9% 3.6% IXCs 7.4% CLEC revenues EXCLUDES MFS & MCImetro (MFS and MCImetro included in IXCs); revenues for dial tone ONLY,EULC, taxes, and toll are not included

  30. CLEC Market Dynamics 36 to 48 Months • Multiple facilities-based CLECs in major Tier 1 and 2 cities • Tier 3 cities offer some growth opportunity • UNEs widely available • RBOCs have gained In-region LD relief • Technology increases bandwidth • Potential for oversupply of inventory • Bandwidth & Exchange prices fall • CLECs Employing Exit Strategies • Increased IXC / ILEC Partnerships

  31. Long Distance Market

  32. Inbound Other Data 15% 1% Outbound 4% 9% Carrier Services 5% Wholesale Private Line 6% 10% VPN 4% Residential 46% 1997 Long Distance: The $86.7 Billion Market Business= 54% Residential= 46%

  33. Outbound 16% Inbound Private Line 29% 18% Other VPN 2% 7% Data 8% Wholesale Carrier 11% Services 9% 1997 Business Long Distance: $46.7 billion Grew approx. 10.9% from 1996

  34. Key Segment Growth (1996-97)

  35. Business Long-Distance Market Shares (1996) The Big 2 = ~85%

  36. AT&T: Consolidations and Acquisitions, in defense of the core business • Divesting non- core assets and businesses • AT&T Universal Card to Citibank • AT&T Solutions customer care to Cincinnati Bell • Termination of Direct TV marketing agreement • Acquires TCG and Defines Local Business Entry Strategy • Paid $ 11.3 billion in stock • Time to market a key factor in influencing the acquisition decision • AT&T gains Cost efficiencies, Local network coverage, and Local market experience • TCG gains scale, access to the AT&T brand, and easier access to capital and other resources

  37. Sprint: Looking for Partners? • With MCIWorldCom merger, Sprint falls further behind • Existing Local properties not all that attractive • However, with its LD brand, Wireless assets, and local presence, it is well positioned to partner or merge with: • LECs with national ambitions • Foreign PTTs that are seeking a US presence • WorldCom acquires MCI to become the leading integrated carrier • MCI spurns GTE and leaves BT standing at the altar • Overnight, MCIWorldCom becomes: • the second largest LD carrier with 25% share • the largest CLEC, with 56% share • the leading global ISP • Fourth largest international telco

  38. WorldCom and MCI– A comparison Assets WorldCom MCI Long Distance • $7 Billion Annual revenue (1997) • former Wiltel wholesale LD • $16.5 billion annual revenue (1996) • $7.06 billion in consumer revenue • 9.4 million households Local • Estimated 1996 CLEC revenues of $1.9 bn • 52 MFS Metros • 34 Brooks Metros • 23 markets under development • 7500 on-net buildings (est) • 75 Class 5 switches • 25% of all competitive access lines • CLEC (Metro) Revenue of $450 million • Presence in 36 cities • Local switched service in 32 cities • 30 Class 5 switches

  39. WorldCom and MCI– A Comparison WorldCom MCI Internet • UUNet, largest global ISP • 50,000 business customers (access andhosting) • Compuserve Network Services • ANS ISP • Provides transport to America Online,Earthlink, Microsoft Network • $500 million in Internet Revenue • 400,000 dial-up customers • Private wholesale services to 25-35% of all ISPs. • $200 million estimated revenue • Sold to C&W as part of EU approval International • 60 settlement agreements globally • $470 million in revenues • Metro infrastructure in 12 cities • UUNet’s European backbone in 10 cities • 200 settlement agreements globally • Licenses in UK, Germany • Top bid on Embratel Wireless • Choicecom • Few of its other LD or CLEC acquisitionshave major wireless play • Holds on wireless licenses • Nationwide Cellular Services (a reseller) • Operates in 15-20 markets • 400,000 subscribers • Paging reseller (through PagNet),over 600k subs.

  40. RBOCs into Long Distance

  41. Telecom Act of 1996New Competitive Telecom Services Market • “An act to promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies” • IXCs, Cable and CAPs Allowed to Enter Local Exchange • IXCs with more than 5% of the nations presubscribed lines is not able to joint market local and long distance services until RBOCs are granted in-region relief • Mandated LEC Resale at Fair and Reasonable Prices • RBOCs Enter Out-of-Region Long Distance immediately • RBOCs Open Local Markets in Exchange for In-Region Long Distance • Pressure of New Integrated Telecom MarketBeyond Resale/Bundling to Service Innovation

  42. RBOC Entry into Long Distance Offering Services Approved Services WholesaleSupplier In-regionLaunch Ameritech • Announced it will begin offering long distance in Missouri; • Marketing Alliance with Qwest (in-region) • 45 States • WorldCom • 1999 Bell Atlantic /NYNEX • 34 States • 34 States and plans to file in Minnesota and Oklahoma • Sprint • 1998? Bell South ----- • 39 states and applications pending in Vermont and Alaska • AT&T • 1999 SBC / PacTel • 5 States • Sprint • 1999 • 5 States US WEST • NONE • Marketing Alliance with Qwest (in-region) • 34 States • FrontierCard • Williams? • Qwest? • 1999 Leveraging Established Customer Relationshipsto Provide New Services

  43. Biggest Hurdle for the RBOCsOSS Access and Interconnection • Required under the Act • ILEC must provide access to its OSSs on terms that are just reasonable, and non discriminatory • RBOCs have been frustrated in their 271 applications by OSS issues: • Not able to show flow through of orders and service transactions from CLECs • Push for National Gateway in some quarters, but who pays the bill? • Call for Standards by many parties (NARUC, ATIS, etc.) • Manual processes pre te

  44. Conclusions • Nice try but too early. Not likely to make first-round approval based on Track A (of two tracks) benchmarks • Lack of ‘competing providers to residential and business subscribers’ by companies that ‘offer services predominantly over their own telephone service facilities’ • Competition and interconnect deals are with competitors that are focused on business • AT&T, has stopped marketing to residential customers in the six markets where it resells ILEC services to the residential market • the Yankee Group believes that the first approval for RBOC entry into in-region LD will be around 4Q98 or early 99. BANY is most likely to succeed

  45. Integrated Carrier Strategies & Large Business Market Issues

  46. Do Large Biz Customers Care About Service Integration? • If Given A Choice: • 70% of Businesses Say They Would Use One Company for All Their Communication Needs • Key Reasons: • Less Effort to Manage the Network 68% • One Stop Shopping 62% • Lower Costs 59% source: YC100 1996

  47. …but Price isn’t Everything How important to the purchasing decision are the following factors? 5= very important 1 = not important Source: YG WSTA Survey 1996

  48. Long Distance Integrated Carriers Brand Local Internet Wireless Enhanced Telephony Video

  49. Wholesale Services

  50. Wholesale • All facilities based LD carriers, whether they are national or regional in nature wholesale LD services to each other, to smaller carriers and to resellers • Over time, the four largest LD carriers have increased their revenue contribution from the wholesale channels • Frontier’s agreement to sell capacity to Level 3 is an example of the renewed focus on wholesale by smaller LD carriers such as C&W and LCI

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