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Telephony: Technology and Business Models in Creative Destruction

Telephony: Technology and Business Models in Creative Destruction. Instituto Superior Tecnico Lisboa, Portugal March 14-15, 2003. Lee W. McKnight Associate Professor of Communications Syracuse University. Paul M. Vaaler Associate Professor of Int’l Bus.

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Telephony: Technology and Business Models in Creative Destruction

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  1. Telephony: Technology and Business Models in Creative Destruction Instituto Superior Tecnico Lisboa, Portugal March 14-15, 2003 Lee W. McKnight Associate Professor of Communications Syracuse University Paul M. Vaaler Associate Professor of Int’l Bus. Fletcher School of Law & Diplomacy Burkhard N. Schrage Post-Doctoral Fellow/Visiting Professor IST/Fletcher School/Syracuse

  2. Goodbye to the “Old Regime” of Telecoms in the US... 1.1 TRADITIONAL TELECOMMUNICATIONS INDUSTRY STRUCTURE Telecommunications Industry Structure Dominated by a Heavily- Local Carriers Long-Distance Regulated, “End-to-End” and Carriers RBOCs e.g., Bell Atlantic “Natural Monopoly” Becomes... AT&T Fringe Players MCI

  3. Goodbye to the “Old Regime” of Telecoms in the US... 1.2 POST “BREAK-UP” TELECOMMUNICATIONS INDUSTRY SEGMENTS Telecommunications Industry Cable System Operators Segments Separated: Local Carriers Time-Warner Long-Distance • By Regulation • By Selective Competitive Entry, • Which Then Becomes… Carriers MediaOne RBOCs e.g.Bell Atlantic AT&T Sprint Williams RCN MCI/ WorlCom Broadcasters Telco Equipment Suppliers Fox CBS Lucent Cisco ABC/ Disney NBC Motorola

  4. Hello to an Emerging “New Regime” for Telecoms in the US... 1.3 POST “BREAK-UP” TELECOMMUNICATIONS INDUSTRY SEGMENTS Telecommunications Industry Cable System Operators Segments Separated: Local Carriers Time-Warner Long-Distance • By Regulation • By Selective Competitive Entry Carriers MediaOne Bell Atlantic AT&T Sprint Williams RCN MCI/ WorlCom DIGISPACE Broadcasters Telco Equipment Suppliers Fox CBS Lucent CBS Excel Zephyr Cisco ABC/ MediaOne /AT&T Disney NBC Qwest Motorola Motorola Microsoft MCI Lucent World Com RCN Sprint ...A Single Super-Industry –Call It “Digispace”– With Few Intra- Industry Barriers to Entry, Cable, Wireless and Internet-Based Technologies Enabling Entry by Start-Ups, Industry Incumbents And Firms From Other IndustriesThought Previously to Be “Unrelated.” Level3 Cisco Bell Atlantic/GTE/Verizon ABC/ Williams Enron Disney Fox Time-Warner

  5. Local Carriers RBOCs e.g., Bell Atlantic Fringe Players And The “New Regime” for Telecoms in the US Means New Corporate Configurations... 1.4 TRADITIONAL TELECOMMUNICATIONS INDUSTRY STRUCTURE AT&T’s Vertically and Horizontally- Integrated Monopoly on the US Telecommunications Industry in The 1970’s Drew Legal (Anti-Trust) Challenge. How Would AT&T Compete After the Old Regime Was Destroyed? Local Carriers Long-Distance Carriers RBOCs e.g., Bell Atlantic AT&T MCI Sprint Fringe Players

  6. Local Carriers RBOCs e.g., Bell Atlantic Fringe Players DIGISPACE And The “New Regime” for Telecoms in the US Means New Corporate Configurations... 1.5 TRADITIONAL TELECOMMUNICATIONS INDUSTRY STRUCTURE AT&T’s Vertically and Horizontally- Integrated Monopoly on the US Telecommunications Industry in The 1970’s Drew Legal (Anti-Trust) Challenge. How Would AT&T Compete After the Old Regime Was Destroyed? Local Carriers Long-Distance Carriers RBOCs e.g., Bell Atlantic AT&T Fringe Players MCI Sprint • AT&T’s Corporate Acquisitions Since Break-Up: • National Cash Register (Computers, Equipment) • McCaw Cellular (Cellular Technology) • TCI (Cable Services) • Media-One (Cable Services) • New York Local Telephone Services (CLEC) • Tracking Stock for Wireless Group (Wireless) Digi-Platfirm AT&T

  7. Local Carriers RBOCs e.g., Bell Atlantic Fringe Players DIGISPACE Digi-Contentcorp AOL/ Time-Warner And The “New Regime” for Telecoms in the US Means New Corporate Configurations... 1.6 TRADITIONAL TELECOMMUNICATIONS INDUSTRY STRUCTURE AT&T’s Vertically and Horizontally- Integrated Monopoly on the US Telecommunications Industry in The 1970’s Drew Legal (Anti-Trust) Challenge. How Would AT&T Compete After the Old Regime Was Destroyed? Local Carriers Long-Distance Carriers RBOCs e.g., Bell Atlantic AT&T Fringe Players MCI Sprint But AT&T is Not Alone.. • AT&T’s Corporate Acquisitions Since Break-Up: • National Cash Register (Computers, Equipment) • McCaw Cellular (Cellular Technology) • TCI (Cable Services) • Media-One (Cable/Internet Services) • New York Local Telephone Services (CLEC) • Tracking Stock for Wireless Group (Wireless) • Spin-Off of Broadband Services to Comcast Digi-Platfirm AT&T

  8. Local Carriers RBOCs e.g., Bell Atlantic Fringe Players DIGISPACE Digi-Contentcorp Digi-Platfirm2 AOL/ Time-Warner Verizon And The “New Regime” for Telecoms in the US Means New Corporate Configurations... 1.7 TRADITIONAL TELECOMMUNICATIONS INDUSTRY STRUCTURE AT&T’s Vertically and Horizontally- Integrated Monopoly on the US Telecommunications Industry in The 1970’s Drew Legal (Anti-Trust) Challenge. How Would AT&T Compete After the Old Regime Was Destroyed? Local Carriers Long-Distance Carriers RBOCs e.g., Bell Atlantic AT&T Fringe Players MCI Sprint But AT&T is Not Alone.. • AT&T’s Corporate Acquisitions Since Break-Up: • National Cash Register (Computers, Equipment) • McCaw Cellular (Cellular Technology) • TCI (Cable Services) • Media-One (Cable/Internet Services) • New York Local Telephone Services (CLEC) • Tracking Stock for Wireless Group (Wireless) Digi-Platfirm1 AT&T

  9. Local Carriers RBOCs e.g., Bell Atlantic Fringe Players And The “New Regime” for Telecoms in the US Means Disruptive Technologies, Rivals and Economics... 1.8 TRADITIONAL TELECOMMUNICATIONS INDUSTRY STRUCTURE RBOCs Became “Baby Bells” With De Jure and De Facto Protection From Would-Be Rivals What Happened to These Babies? Local Carriers Long-Distance Carriers RBOCs e.g., Bell Atlantic AT&T Fringe Players MCI Sprint

  10. Local Carriers RBOCs e.g., Bell Atlantic Fringe Players DIGISPACE Digi-Platfirm2 Verizon And The “New Regime” for Telecoms in the US Means Disruptive Technologies, Rivals and Economics... 1.9 TRADITIONAL TELECOMMUNICATIONS INDUSTRY STRUCTURE RBOCs Became “Baby Bells” With De Jure and De Facto Protection From Would-Be Rivals What Happened to These Babies? Local Carriers Long-Distance Carriers RBOCs e.g., Bell Atlantic AT&T Fringe Players MCI Sprint • Verizon’s Story Is Illustrative: • Mergers & Acquisitions (e.g., Bell Atlantic, NYNEX, GTE), But…

  11. Local Carriers RBOCs e.g., Bell Atlantic Fringe Players DIGISPACE Digi-Platfirm2 Verizon And The “New Regime” for Telecoms in the US Means Disruptive Technologies, Rivals and Economics... 1.10 TRADITIONAL TELECOMMUNICATIONS INDUSTRY STRUCTURE • RBOCs Became “Baby Bells” With • De Jure and De Facto Protection From • Would-Be Rivals • What Happened to These Babies? • COMPETITION: • First Small (e.g., Zephyr) • Then Large (AT&T, Comcast) Local Carriers Long-Distance Carriers RBOCs e.g., Bell Atlantic AT&T Fringe Players MCI Sprint Zephyr Communications (Niche Internet Telephony For USBusines: 1/9 Verizon’s Unit Operating Costs • Verizon’s Story Is Illustrative: • Mergers & Acquisitions (e.g., Bell Atlantic, NYNEX, GTE), But… • Still Reliant on “Legacy” Telco Technology • Not “Next Generation” Internet, Wireless Firms • Forced by 1996 Act to Allow/Encourage Entry • Will LDS Market Liberalization Save Verizon? Smaller, More Efficient Rivals

  12. And the “Ancien Regime” of Telecoms in Europe... 1.11 EVEN MORE STAID, AND STATE-DOMINATED THAN IN THE US In the 1980’s, Several Telecoms Were Still Organized Like Political Agencies/Ministries; Some Had Become Corporatized SOEs; A Few Had Been Privatized; None Faced Real Competition. 20 Years On… Germany France Deustche Telekom Spain France Telecom Telefonica Italy Britain Telecom Italia British Telecom Mercury

  13. Italy Britain Telecom Italia British Telecom Mercury Has Been Replaced by Telecoms Industry Revolutions... 1.12 MORE VARIED EXPERIMENTATION, MORE PROFOUND RATE OF STRUCTURAL CHANGE COMPARED TO US Attempted Alliances • In the 1980’s, Several Telecoms • Were Still Organized Like Political • Agencies/Ministries; Some Had • Become Corporatized SOEs; A Few • Had Been Privatized; None Faced • Real Competition. 20 Years On… • Meaningful Privatization, Liberalization • Profitability Focus • Assertive Corporate Governance • Corporate Reorganization, Spin-Off • Organizational, Technological • Experimentation (Alliances, WAP, • GSM) Germany France Deustche Telekom Spain France Telecom Telefonica Attempted Mergers Smaller National Wireless Firms Larger Regional Wireless Firms

  14. Brazil Argentina Telebras South Korea Telecom Argentina South Korea Telecom Turkey Singapore Turk Telekom Singtel And the Retreat from the “Commanding Telecom Heights” in Emerging Markets... 1.13 AND THE RETREAT FROM THE “COMMANDING HEIGHTS” IN EMERGING MARKETS… • In the 1990’s, Emerging-Market • Telecoms Began a (Sometimes • Forced) Transformation from • Political Agency (and Often • Dominant Political Tool) to: • Corporatized State Enterprise • (e.g., Turk Telekom) • Privatized Company • (e.g., South Korea Telecom) • Foreign-Owned and Globally- • Integrated Telecom • (e.g., Telecom Argentina)

  15. Creative Destruction or Just Destruction in the US... 1.14 DIGISPACE BOOM AND BUST Unprecedented Expansion Followed By Contraction Gave Policy-Makers Pause: CBS Excel Zephyr MediaOne Qwest Motorola Microsoft MCI-Worldcom Lucent RCN AT&T Sprint Enron /AT&T Level3 Cisco Enron Williams Bell Atlantic/GTE/Verizon Disney Fox AOL-Time-Warner

  16. Creative Destruction or Just Destruction in the US... 1.15 From Highly Profitable Telecoms Equipment Provider to Firm Struggling for Survival: Stock Price Down 96.9% Since March 2000. Former Baby Bell Lost 93.7% in Stock Value Since March 2000 DIGISPACE BOOM AND BUST Unprecedented Expansion Followed By Contraction Gave Policy-Makers Pause: CBS Excel Zephyr MediaOne Qwest Motorola Microsoft MCI-Worldcom Lucent RCN AT&T Sprint Enron /AT&T Level3 Cisco Enron Williams Bell Atlantic/GTE/Verizon Disney Fox AOL-Time-Warner “New Economy” Media/Internet Merger Has Lost 80.7% in Stock ValueSince 2000.

  17. Creative Destruction or Just Destruction in the US... 1.16 From Highly Profitable Telecoms Equipment Provider to Firm Struggling for Survival: Stock Price Down 96.9% Since March 2000. Former Baby Bell Lost 93.7% in Stock Value Since March 2000 DIGISPACE BOOM AND BUST Unprecedented Expansion Followed By Contraction Gave Policy-Makers Pause: CBS Excel Zephyr MediaOne Qwest Motorola Microsoft MCI-Worldcom Lucent RCN AT&T Sprint Enron /AT&T Level3 Cisco Enron Williams Bell Atlantic/GTE/Verizon Disney Fox AOL-Time-Warner From Highly Profitable, Global Voice-Data Backbone and Retailer, to Bankrupt Firm, Top Executives Under Criminal Indictment. “New Economy” Media/Internet Merger Has Lost 80.7% in Stock ValueSince 2000. From Highly Profitable, Innovative Bandwidth Trader, to Bankrupt Firm, Top Executives Under Criminal Indictment.

  18. Creative Destruction or Just Destruction in the US... 1.17 From Highly Profitable Telecoms Equipment Provider to Firm Struggling for Survival: Stock Price Down 96.9% Since March 2000. Former Baby Bell Lost 93.7% in Stock Value Since March 2000 DIGISPACE BOOM AND BUST Unprecedented Expansion Followed By Contraction Gave Policy-Makers Pause: CBS Excel Zephyr MediaOne Qwest • Post 1996 Telecom Act Bubble: • How Did “Good” Policy Go Bad? • Why Did the Bubble Burst? • How Long Will the Bust Last? Motorola Microsoft MCI-Worldcom Lucent RCN AT&T Sprint Enron /AT&T Level3 Cisco Enron Williams Bell Atlantic/GTE/Verizon Disney Fox AOL-Time-Warner From Highly Profitable, Global Voice-Data Backbone and Retailer, to Bankrupt Firm, Top Executives Under Criminal Indictment. “New Economy” Media/Internet Merger Has Lost 80.7% in Stock ValueSince 2000. From Highly Profitable, Innovative Bandwidth Trader, to Bankrupt Firm, Top Executives Under Criminal Indictment.

  19. Creative Destruction or Just Destruction in the US... 1.18 From Highly Profitable Telecoms Equipment Provider to Firm Struggling for Survival: Stock Price Down 96.9% Since March 2000. Former Baby Bell Lost 93.7% in Stock Value Since March 2000 DIGISPACE BOOM AND BUST Unprecedented Expansion Followed By Contraction Gave Policy-Makers Pause: CBS Excel Zephyr MediaOne Qwest • Post 1996 Telecom Act Bubble: • How Did “Good” Policy Go Bad? • Why Did the Bubble Burst? • How Long Will the Bust Last? • Versus • Longer-Term Structural Change: • Did Telecoms Become More • “Dynamically Competitive”? • If So, What Drove This Change: • Deregulation, Technology, • Globalization and or Competition. Motorola Microsoft MCI-Worldcom Lucent RCN AT&T Sprint Enron /AT&T Level3 Cisco Enron Williams Bell Atlantic/GTE/Verizon Disney Fox AOL-Time-Warner From Highly Profitable, Global Voice-Data Backbone and Retailer, to Bankrupt Firm, Top Executives Under Criminal Indictment. “New Economy” Media/Internet Merger Has Lost 80.7% in Stock ValueSince 2000. From Highly Profitable, Innovative Bandwidth Trader, to Bankrupt Firm, Top Executives Under Criminal Indictment.

  20. Brazil Germany Argentina France Deustche Telekom Spain Telebras South Korea France Telecom Telecom Argentina Telefonica South Korea Telecom Turkey Italy Singapore Britain Telecom Italia British Telecom Turk Telekom Singtel Mercury And Creative Destruction or Just Destruction in Europe and Emerging Markets... 1.19 PRIVATE ECSTASY AND AGONY IN INDUSTRIALIZED AND… Unprecedented Telecom SOE Sell-Off, Invest- ment, then Deterioration in Market Position Gave Policy-Makers Pause: EMERGING-MARKET COUNTRIES

  21. Brazil Germany Argentina France Deustche Telekom Spain Telebras South Korea France Telecom Telecom Argentina Telefonica South Korea Telecom Turkey Italy Singapore Britain Telecom Italia British Telecom Turk Telekom Singtel Mercury And Creative Destruction or Just Destruction in Europe and Emerging Markets... 1.20 PRIVATE ECSTASY AND AGONY IN INDUSTRIALIZED AND… Unprecedented Telecom SOE Sell-Off, Invest- ment, then Deterioration in Market Position Gave Policy-Makers Pause: Acquired Several Privatized Latin American Telecoms with Promise of Profitable Integration. Huge Losses, Fired “Visionary” CEO. EMERGING-MARKET COUNTRIES Prepared for Privatization Three Times in Last 7 Years, Each Time Withdrawn Prior to Offering Due to Market or Government Instability.

  22. Brazil Germany Argentina France Deustche Telekom Spain Telebras South Korea France Telecom Telecom Argentina Telefonica South Korea Telecom Turkey Italy Singapore Britain Telecom Italia British Telecom Turk Telekom Singtel Mercury And Creative Destruction or Just Destruction in Europe and Emerging Markets... 1.21 PRIVATE ECSTASY AND AGONY IN INDUSTRIALIZED AND… Unprecedented Telecom SOE Sell-Off, Invest- ment, then Deterioration in Market Position Gave Policy-Makers Pause: • Telecom Privatization Bubble and Bust: • Why Didn’t Self-Interested Shareholders Stop the • “Madness” of Technological, Organizational Acqui- • sitions? • When Will Global Capital Flow Again to Telecoms? Acquired Several Privatized Latin American Telecoms with Promise of Profitable Integration. Huge Losses, Fired “Visionary” CEO. Versus: EMERGING-MARKET COUNTRIES Prepared for Privatization Three Times in Last 7 Years, Each Time Withdrawn Prior to Offering Due to Market or Government Instability.

  23. Brazil Germany Argentina France Deustche Telekom Spain Telebras South Korea France Telecom Telecom Argentina Telefonica South Korea Telecom Turkey Italy Singapore Britain Telecom Italia British Telecom Turk Telekom Singtel Mercury And Creative Destruction or Just Destruction in Europe and Emerging Markets... 1.22 PRIVATE ECSTASY AND AGONY IN INDUSTRIALIZED AND… Unprecedented Telecom SOE Sell-Off, Invest- ment, then Deterioration in Market Position Gave Policy-Makers Pause: • Telecom Privatization Bubble and Bust: • Why Didn’t Self-Interested Shareholders Stop the • “Madness” of Technological, Organizational Acqui- • sitions? • When Will Global Capital Flow Again to Telecoms? Acquired Several Privatized Latin American Telecoms with Promise of Profitable Integration. Huge Losses, Fired “Visionary” CEO. • Versus: • Longer-Term Institutional Failing: • What :Post-Privatization Role Should the State • Have Played? • What Should Privatizing Telecoms Do If State’s • Role Isn’t Played Well? EMERGING-MARKET COUNTRIES Prepared for Privatization Three Times in Last 7 Years, Each Time Withdrawn Prior to Offering Due to Market or Government Instability.

  24. Creative Destruction in Telecoms Globally: Understanding Basic Concepts, Analyzing Current Debates 1.23 • Joseph Schumpeter Meets the 21rst Century (or at Least the 1980s and 1990s): • “Dynamic Competition” and Innovation in US Telecoms • Was It a Bubble or Did Something Fundamental Change in US Telecoms During the 1980s and 1990s? • The Evidence on Long-Term Change in US Telecom Stability • How Bubbles Are Blown Up and Burst by Exuberant First-Movers • Entrepreneurs Meet the 21rst Century (or at Least the 2000s): • Defining Basic Telephony Business-Model Drivers: • Defining Alternative Telecom-Internet Service Provider (“TISP”) Models: • Developing 3-Dimensional TISP Model Space; Mapping Actual and Potential TISP Players in Portugal • What Are the Public Policy and Business Strategy Implications?

  25. How This Fits In With Bigger Picture 1.24 • Organized into Four Sessions Today (Morning, March 14): • This Session: Creative Destruction in Global Telecoms, Business Model Responses I (Paul Vaaler) • Second Session Later This Morning: Creative Destruction in Global Telecoms, Business Model Responses II (Lee McKnight) • Third Session After Lunch: Executive Presentations and Student Project Presentations • Fourth Session Later This Afternoon: Creative Destruction in Global Telecoms, Business Model Responses, Introduction to ANT Case Simulation (Lee McKnight, Burkhard Schrage, Paul Vaaler) • And Two Sessions Tomorrow (Morning, Mach 15): • Tomorrow’s First Session: Simulated Negotiated Equity Offering to Foreign Investors Interested in Privatizing State-Owned Telecoms: ANT. • Post-Simulation Debriefing, Review and Wrap-Up.

  26. Telephony: Technology and Business Models in Creative DestructionUS Telecoms in the 1990s Instituto Superior Tecnico Lisboa, Portugal March 14-15, 2003 Lee W. McKnight Associate Professor of Communications Syracuse University Paul M. Vaaler Associate Professor of Int’l Bus. Fletcher School of Law & Diplomacy Burkhard N. Schrage Post-Doctoral Fellow/Visiting Professor IST/Fletcher School/Syracuse

  27. Two Perspectives on the (Creative) Destructive Processes in US Telecoms During the 1980s and 1990s 2.1 • It Was a Bubble in the Late 1990s…That Burst in 2000s • Nothing Really Deep About It: US Telecoms Are Dutch Tulips of the 1990s. • Strong Economy, 1996 Telecom Act Mandating Competitive Entry in Long-Distance and Local Exchange Markets, Internet and Cable Telephony, Investor Irrational Exuberance. • No, Something Deeper More Gradual Was/Is Going On • At Least Since Deregulation Began in the 1980s (1984), Telecom Performance Instability (Dynamism) Was Increasing. • Dynamic Competition for Markets (Technology-Standards Based) vrs. Static Competition Within Markets (Price-Output Based) • Telecoms with Formerly Predictable Strategies and Performance Were Forced to Change Strategies, Exploit Temporary Advantages/Mitigate Temporary Disadvantages More Often. • This Implies Greater Performance Instability: • Last Year’s Profitability Decreasingly Predictable of This Year’s Profitability • Rates of Industry Exit (Mortality) Increasing • Likelihood of Losing Position of Market Leadership Increasing

  28. Which of These Two Perspectives Do USTelecoms Researchers and Executives Prefer? 2.2 • Most Prefer the #2 (Deeper, Gradual Processes) • Competition in the American economy has fundamentally changed over the past few decades from static to dynamic (Thomas, 1996) • Strategic decision makers in the 1990s have seen both the emergence of a hypercompetitive global marketplace… (Johnson & Greening, 1996) • But a Few Brave Souls Argued for #1 (Bubble) • Is it Time to Wake Up and Smell the Tulips –as in the Infamous Dutch Tulip Mania? …Tulips are Pretty, but of Limited Utility as a Store of Wealth. Sort of like Bits on a Network of Networks? Might Many…Business Models be Built from Similarly Misplaced Conceptions of Value? (McKnight, 2001) • Let’s Consider Each Argument • Bubbles First…

  29. Creative Destruction in US Telecoms: A Bubble Blown and Then Burst: 1996-2003 2.3 • Speculative Bubbles Often Form for Rational (Unspeculative) Reasons • New Markets Are Emerging • Many New Market Players Have Recently Entered • Accepted Market Strategy Is to Compete for “The Future” as a “First-Mover,” Taking Advantage of Temporal-Based Factors to Gain and Sustain Superior Profitability Over Time • First Movers May Not Have Created the New Market, but They Are the First to Exploit Through Major Investment, Product Commercialization. • Cisco Did Not Invent Router Technology But They Mass Produced It • Voice Stream Did Not Invent GSM-Based Wireless Telephony But Were the First Large-Scale GSM Service Provider

  30. Environmental Opportunity Competitive Strategy • First Mover • Resources • Capabilities • Late Entrant • Resources • Capabilites Competitive Strategy Understanding First Mover AdvantagesA Conceptual Framework 2.4 First Mover Positional Advantages • Late Entrant Advantages • imitation costs • free-rider effects • shifting industrial and techno- • logical factors • learning from first mover Cost Differentiation Scale Economies • Pre-emption • Legal • Non-Legal • Behavioral • Reputation • Switching • Cost Learning Curve - + + + + Overall Magnitude of competitive Advantage First Mover Performance -Profits -Market Share -Pricing -Other + -

  31. Environmental Opportunity Competitive Strategy • First Mover • Resources • Capabilities • Late Entrant • Resources • Capabilites Competitive Strategy Understanding First Mover AdvantagesA Conceptual Framework • Post-1996, Many Telecoms Saw First-Mover Opportunities: • Mandated More Local, LD Entry, Competition • New Internet, Wireless Technologies, • “Winner-Take-Most” Rules • Cheap Capital • Fast-Growing Economy • Hubris 2.5 First Mover Positional Advantages • Late Entrant Advantages • imitation costs • free-rider effects • shifting industrial and techno- • logical factors • learning from first mover Cost Differentiation Scale Economies • Pre-emption • Legal • Non-Legal • Behavioral • Reputation • Switching • Cost Learning Curve - + + + + Overall Magnitude of competitive Advantage First Mover Performance -Profits -Market Share -Pricing -Other + -

  32. Environmental Opportunity Competitive Strategy • First Mover • Resources • Capabilities • Late Entrant • Resources • Capabilites Competitive Strategy Understanding First Mover AdvantagesA Conceptual Framework • Post-1996, Many Telecoms Saw First-Mover Opportunities: • Be the First Nat’l Microwave (MCI), Fiber (Sprint), Satellite (Iridium) Network • Be the First Global ISP-Media Firm (AOL-Time-Warner) 2.6 First Mover Positional Advantages • Late Entrant Advantages • imitation costs • free-rider effects • shifting industrial and techno- • logical factors • learning from first mover Cost Differentiation Scale Economies • Pre-emption • Legal • Non-Legal • Behavioral • Reputation • Switching • Cost Learning Curve - + + + + Overall Magnitude of competitive Advantage First Mover Performance -Profits -Market Share -Pricing -Other + -

  33. But What If There Are Many First-Movers? 2.7 The Hold or Fold Game • US Long-Distance Companies in the 1990s. • US Wireless Companies in the 1990s. • US ISPs in the 1990s. • -Producing Similar Services • -Invested (Heavily) in Networks, Some with Incompatible Standards. • Fog of War • - Establishing Standards • - Guessing Your Rivals Intent • - Reputation for Toughness • Rules of Game: • If You Both Hold, You • Both Lose $10 Billion • If You Both Fold, You • Both Lose $0 Billion • If One Holds and the • Other Folds, Folder Gets • $0, Holder Pays $10 • But Gets $100! • Rules of Game: • Fight for $100 Billion • Market (Wireless) • Costs $10 Billion to • Stay in Annually • Each Year You Hold • (Pay $10 Billion) or • Fold (Leave).

  34. Creative Destruction in US Telecoms: A Bubble Blown and Then Burst: 1996-2003 2.8 • Speculative Bubbles Often Form for Rational (Unspeculative) Reasons • Contractions, Bankruptcies and M&A Are Natural Results of Hold or Fold Game in US Telecoms During 1990s. • Managerial Implications: Get In Line But Don’t Go First… • Experimentation with (Rather Than Major Commitment to) New Markets • Wait for the Bubble to Burst and Acquire Firms/Markets At Bargain Prices • “Late-Mover” Advantages (“Last Man Standing” Strategy). • Policy Implications: State Has A Role in Encouraging Competition But Not Market Mania. • More Transparent Accounting Practices • Better Corporate Governance • More Deliberate Deregulation

  35. But What About Argument #2: Deeper, More Gradual Changes in 1980s and 1990s? 2.9 • Overall Research Proposition: As Hypercompetitive Forces Developed in the 1980s and 1990s, Market Stability for Telecoms Decreased • Hypercompetitive Forces in the 1980s and 1990s: Internationalization of R&D, Technology Cross-Licensing, Industry Deregulation and Liberalization, Trade Liberalization, Professionalization of Technology Management and Policy-Making • Hypotheses for Testing: Indicia of Decreasing Stability in Telecoms Performance During 1980s and 1990s • Persistence of Abnormal (Higher-Than-Average) Telecom Returns Should Be Decreasing • Persistence of Market (Share) Leadership Should Be Decreasing • Rates of Exit (Mortality) from Telecom Industries Should Be Increasing

  36. Evidence Lacking: Nothing Really Changed for Telecoms from 1978-1997 (Pre-Bubble) 2.10 • Analyzing the Data from Year-to-Year, We Detected No Statistically Significant Trends Either in the Decay Rate of Abnormal Business Returns or in Business Mortality Rate • Hypercompetitive Forces Appear to Be Increasing then Decreasing Over Time: Fluctuation

  37. Evidence Lacking: Nothing Really Changed for Telecoms from 1978-1997 (Pre-Bubble) 2.11 • Analyzing the Data from Year-to-Year, We Detected No Statistically Significant Trend in the Persistence of Market Share Leadership • Forces of Dynamic Competition Appear to Be Increasing then Decreasing Over Time: Fluctuation

  38. Two Perspectives on the (Creative) Destructive Processes in US Telecoms During the 1980s and 1990s 2.12 • And the Winner Is…It Probably Was “Just” a Bubble in the Late 1990s…That Burst in 2000s • Nothing Really Deep About It: US Telecoms Are Dutch Tulips of the 1990s. • Still Hurts Deeply (But Perhaps Not As Durably). Next Economic Cycle Will Light Up Dark Fiber, Restore Venture Capital Markets, But Fewer Telecoms Will Be There (e.g., 6 Wireless Companies Now, But Only 3 Are Likely to Survive). • And the “Deeper, More Gradual” Change in Telecom Dynamic Competition? • Largely a Figment of Less Well-Informed, Biased Researchers and Executives • Competition in Telephony in Late 1990s Was No More (or No Less) Difficult Than in the Late 1970s. • The Late 2000s May Look Much Like the Late 1980s (“That ’80s Show”).

  39. Telephony: Technology and Business Models in Creative DestructionTelecom Business Models for the 2000s Instituto Superior Tecnico Lisboa, Portugal March 14-15, 2003 Lee W. McKnight Associate Professor of Communications Syracuse University Paul M. Vaaler Associate Professor of Int’l Bus. Fletcher School of Law & Diplomacy Burkhard N. Schrage Post-Doctoral Fellow/Visiting Professor IST/Fletcher School/Syracuse

  40. 3.1 Introduction • How Do We Describe the Current State and Near-Term Trajectory of Portuguese Internet Service Provider (“ISP”) and Traditional Telecommunications Service Provider (“Telco”) Industries? *From State Agency to Private Monopoly to Monopolistic Competition to Further Liberalization and now to… • A Range of Licensed Businesses. Some Just Telecom, Some Just ISP, Some Both. Dominated by PT. With Several “Upstart” Competitors (e.g., Oni, Bragatel) and Many Other (Very) Small, Often Niche-Playing Carriers, Subscriber TV (“STV”), ISPs. *Industries with Quite Differentiated Segments, Business Models. *Fluid State of Affairs: Several Pending Licensees and “Stealth” Competitors Looking for Capital . *Emerging Technologies, Evolving Regulatory Policies and Customer Preferences, Capital Market “Volatility,” Particularly in Countries “on the Cusp” of Industrialized and Emerging-Market Status Like Portugal. • Better to Describe Current Trends, Key Variables and Likely Near-Term Scenarios and Industry Sector Segments Than Engage in Conclusory Industry Soothsaying.

  41. Applications • Value-Added • Services • Hosting • Services • ISP • Telephony • C&STV Backbone POP Access AT&T 2001 (Cable, ISP, Nat’l/Int’l Telecom Verizon SBC (With Williams, Concentric) Org., Tech., Inst., Drivers Pooling Telecom and ISP Industries • Common Value Chain Links • Common Production Technology • Common Customers • Common Regulatory Institutions • Illustrations: • Voice Over IP (“VoIP”) Telephony • AT&T Acquisitions/Diversification AOL, MSN, Net-to-Phone Intel Current Trend in US: Merging of ISP Telecom Industries into “TISP” Sector 3.2

  42. Applications • Value-Added • Services • Hosting • Services • ISP • Telephony • C&S TV Backbone POP Access PT Org., Tech., Inst., Drivers Pooling Telecom and ISP Industries • Common Value Chain Links • Common Production Technology • Common Customers • Common Regulatory Institutions • Emerging-Market Factors Reinforcing Trends • Lower GDP Per Capita • Lower Stock Market Capitalization/GDP • Developing Institutional Framework • Thin External Capital Market, Greater Reliance on • FDI/Internal Capital Sources ONI, Jaztel, Bragatel, Novis The Portuguese TISP Sector: Less Complex But Developing Faster? 3.3 Niche Players

  43. Key Near-Term Variables: TISP Customer and Supplier Preferences 3.4 Emerging Customer Preferences TISP Customer Preferences Local Connections End-to-End Network Solutions Simple Inter- Complex Connected Solutions On-Net Solutions • Key Variable Drivers: • Customer Buying Behavior • Solution Complexity • On-Net vs. Off-Net Benefits

  44. Emerging Customer Preferences Emerging TISP Provider Preferences TISP Customer Preferences Local Connections End-to-End Network Solutions TISP Industry Structure Simple Inter- Complex Connected Solutions On-Net Solutions Key Near-Term Variables: TISP Customer and Supplier Preferences 3.5 Vertically Integrated Business Models (Integrated Offerings and Operations) Separate and Distinct Horizontal Businesses (Separate Organizations, Package Offerings) • Key Variable Drivers: • Customer Buying Behavior • Solution Complexity • On-Net vs. Off-Net Benefits • Key Variable Drivers: • Standards Adoption • Interconnection of Networks & Systems • Basis of Competition (e.g., Scale vs. Customer Control)

  45. Near-Term Likely Business Models : TISP (Inter-) Organizational Approaches 3.6 Fragmentation of Nat’l/Int’l Players on Vertically-Oriented End-to-End Solutions Providers Vertical Market Integration Integrated Organzation INTEGRATED SERVICES INTEGRATED SERVICES SEPARATE OPERATIONS SEPARATE BASIC TECHNOLOGY PLATFORMS Local Players Continuing to Expand Locally Inter- Organi- zational SOLUTION 1 SOLUTION 2 CONNECTED BASIC TECHNOLOGY PLATFORM Vertical Market Stratification

  46. Near-Term Likely Business Models : TISP (Inter-) Organizational Approaches 3.7 Fragmentation of Nat’l/Int’l Players on Vertically-Oriented End-to-End Solutions Providers Vertical Market Integration Nat’l/Int’l Players Becoming Vertically-Oriented End-to-End Solutions Providers Integrated Organzation VERT VERT ICALS ICALS Integrated Organization INTEGRATED SERVICES INTEGRATED SERVICES OPERATIONS SOLUTIONS SERVICES & TECHNOLOGY BASIC PLATFORM SEPARATE OPERATIONS SEPARATE BASIC TECHNOLOGY PLATFORMS Horizontal Market Stratification (Interconnection) Horizontal Market Integration Providers Focusing on One Step in the TISP Sector Value Chain Local Players Continuing to Expand Locally CONNECTED SOLUTION CONNECTED SOLUTION Inter- Organi- zational Inter- Organi- zational SOLUTION 1 SOLUTION 2 BASIC TECHNOLOGY PLATFORM CONNECTED BASIC TECHNOLOGY PLATFORM Vertical Market Stratification

  47. Near-Term Likely Sector Segments : Actual and “Stealth” Portuguese TISPs 3.8 1. Mass Integrated Local Players: TISPs w/Proprietary Networks and Services for Local Mass End-Users Supplemented by Interconnection to Outside (Locally) Networks and Services. 2. Mass Integrated National/Int’l Players: TISPs w/Proprietary Networks and Services for Mass End-Users Located Nationally or Internationally. 3. Mass Device-Local User Input Players : Single Technological Device and or Local Mass End-User Suppliers to TISPs. 4. Mass Platform-Nat’l/Int’l User Input Players: Integrated Technological Platform and or National/Int’l Mass End-User Suppliers to TISPs. Vertically Integrated 1 2 Novis PT VERTICAL MARKET SCOPE 3 4 Bragatel Oni De-integrated (Stratified) HORIZONTAL MARKET SCOPE Local (Stratified) National/ Int’l

  48. Near-Term Likely Sector Segments : Actual and “Stealth” Portuguese TISPs 3.9 1. Mass Integrated Local Players: TISPs w/Proprietary Networks and Services for Local Mass End-Users Supplemented by Interconnection to Outside (Locally) Networks and Services. 2. Mass Integrated National/Int’l Players: TISPs w/Proprietary Networks and Services for Mass End-Users Located Nationally or Internationally. 3. Mass Device-Local User Input Players : Single Technological Device and or Local Mass End-User Suppliers to TISPs. 4. Mass Platform-Nat’l/Int’l User Input Players: Integrated Technological Platform and or National/Int’l Mass End-User Suppliers to TISPs. 5. Niche Integrated Local Players: TISPs w/Proprietary Networks and Services for Local Niche End-Users Supplemented by Interconnection to Local and Outside Networks and Services. 6. Niche Integrated National/Int’l Players: TISPs w/Proprietary Networks and Services for Niche End-Users Located Nationally or Internationally. Onitelecom Jazztel Vertically Integrated 1 2 Novis PT 5 6 Local Internet Subscriber Group National Network For Enterprises Only VERTICAL MARKET SCOPE 3 4 Bragatel Oni 7 8 Niche-Users De-integrated (Stratified) END-USER MARKET SCOPE HORIZONTAL MARKET SCOPE Mass-Users Local (Stratified) National/ Int’l Evolution Experimentation Demonstration 7. Niche Device-Local User Input Players: Integrated Technological Platform and or National/Int’l Niche End-User Suppliers to TISPs. 8. Niche Platform-Nat’l/Int’l User Input Players: Integrated Technological Platform and or National/Int’l Niche End-User Suppliers to TISPs.

  49. Near-Term Likely Sector Segments : Actual and “Stealth” Portuguese TISPs 3.10 1. Policy: Near-Term Challenges in TISP Sector: Promoting Experimentation w/ Different TISP Organizational Forms, Technologies, Customer Groupings. Encourage Entry in All Segments (Low Entry/Exit Barriers) Inter-Connection Rates Sustaining Entry in All Segments. For Non-Dominant TISPs Freedom to Price, Package Freely. As Facilities Creation Targets Are Met, Less Restriction of Dom- inant TISP Carriers. Simple, “Rural Reinvestment Licensure Requirement.” “Use It or Lose It” Rule on Licensing and Spectrum Allocation. Light-Handed, Pro-Competitive (Contestable) Reg Guidance. 2. Policy: Medium-Term Challenges in TISP Sector: Continued Regulatory Reform to Match Technological Trends. Collapse Licenses into Two: Mobile and TISP, One TISP License? Mass End-User Regulatory Protection. Onitelecom Jazztel Vertically Integrated 1 2 Novis PT 5 6 Local Internet Subscriber Group National Network For Enterprises Only VERTICAL MARKET SCOPE 3 4 Bragatel Oni 7 8 Niche-Users De-integrated (Stratified) END-USER MARKET SCOPE HORIZONTAL MARKET SCOPE Mass-Users Local (Stratified) National/ Int’l Evolution Experimentation Demonstration

  50. Near-Term Likely Sector Segments : Actual and “Stealth” Portuguese TISPs 3.11 1. Policy: Near-Term Challenges in TISP Sector: Promoting Experimentation w/ Different TISP Organizational Forms, Technologies, Customer Groupings. Encourage Entry in All Segments (Low Entry/Exit Barriers) Inter-Connection Rates Sustaining Entry in All Segments. For Non-Dominant TISPs Freedom to Price, Package Freely. As Facilities Creation Targets Are Met, Less Restriction of Dom- inant TISP Carriers. Simple, “Rural Reinvestment Licensure Requirement.” “Use It or Lose It” Rule on Licensing and Spectrum Allocation. Light-Handed, Pro-Competitive (Contestable) Reg Guidance. 2. Policy: Medium-Term Challenges in TISP Sector: Continued Regulatory Reform to Match Technological Trends. Collapse Licenses into Two: Mobile and TISP, One TISP License? Mass End-User Regulatory Protection. 3.Strategy: Near-Term Challenges in TISP Sector: Segment 2 (PT): Tremendous Customer Control-Stakeholder Relationships, TISP Service Bundling for Multiple Niches. Segment 4 (Oni?): TISP Service Bundling, Including VoIP, for Multiple Niches; Increasing Vertical Market Scope Through Proprietary Facilities Build-Out or Merger With Existing Facilities Network Other Segments: Do (Actually Do) What You Do Best! Onitelecom Jazztel Vertically Integrated 1 2 Novis PT 5 6 Local Internet Subscriber Group National Network For Enterprises Only VERTICAL MARKET SCOPE 3 4 Bragatel Oni 7 8 Niche-Users De-integrated (Stratified) END-USER MARKET SCOPE HORIZONTAL MARKET SCOPE Mass-Users Local (Stratified) National/ Int’l Evolution Experimentation Demonstration 4. Strategy: Near-Term Challenges in TISP Sector: Permitting Easy Movement Among 8 Sectors (Flexibility). Standardized Technology Platforms Complementary Customer Groups (Avoiding the Hold or Fold Game).

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