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International Issue: July 2005
Come buy with me
Telco alliances are coming back — but only 'airline-style'
by Ouida Taaffe
A number of wrecks of global fixed-line alliances loom up, from time to time, out of the mist of the industry’s past: Unisource, WorldPartners, Concert. All of them promised to enable incumbents to reach out beyond their domestic market to provide a global service to the corporate user. All of them came to an ignominious end.
But the need to offer a “seamless” global service to that prized business customer has — the market seems to agree — not gone away. If for no other reason than they need to bolster their margins with value-added service, operators have to work together.
Is, however, a global alliance a good idea? “I’m not aware of any one operator that has the scale, scope or cheque book to provide a full service suite to customers everywhere,” says Stephen Falk, vice president of global development at Sprint. “So, by definition, if you are providing a seamless service to corporates, there is a need for global alliances.”
Singtel agrees. “It is not possible for any telco to span the globe. It is too costly,” says Soon Nam Wong, the vice president of corporate business marketing at Singtel. Wong points out that corporates take service, such as reliability and quality, to be a given. They also want to see similar service support across the countries in their networks.
We can (largely) go it alone
This focus on a predictable level of global service appears to have given rise to an interesting exception to those who advocate the ‘together we can offer more’ approach: AT&T, veteran of the Concert alliance with BT. “From our vantage point,” says Bill Archer, president of AT&T EMEA, “we view providing service to the multi-national corporate — that is global by definition — to be a challenge that requires ownership, control, management and investment related to or around the assets and services used by the customer.” Archer argues that delivering a single, predictable service to a customer — something “that can’t be emphasised enough” — is best done through control and ownership of one network asset. What AT&T learnt from its experience of global alliances, Archer adds, is that “it is essential to have control of your network assets globally so that you can provide consistent performance”.
That does not mean that Archer sees no place for alliances. He does. They are just not necessarily the network alliances of the past. “What we’re observing,” Archer says, “is that the networks that MNCs are creating are growing in depth, applications and richness. Having relationships and partnership abilities with a host of companies is valuable to our customers.”
An example Archer gives of the new-style alliance is AT&T’s use of Microsoft’s service delivery platform. Archer stresses that AT&T is “prudent” when it comes to choosing the network partners that it needs in order to offer full global reach. He believes that a two-tier model of, on the one hand, the ‘haves’ of network control and value-added services capability and, on the other, of ‘have nots’ of less functionality, is the future of the market.
Others agree. “A number of players will invest in next-generation networks,” says Euan MacLeod, director of global carrier services at Cable & Wireless in the UK. “We will get to a two-tier environment, those who have upgraded to allow converged products and those who have not.” MacLeod’s comments, though he works in wholesale are — given that C&W’s primary aim is to serve the retail market — not directed solely at the wholesale space.
There are, of course, dissenting voices on the issue of whether one provider can do it all, or even most of it. “Customer buying behaviour means that you have to be very good at some things, rather than trying to be all things to all men,” argues Drew Kelton, managing director of Telstra Global Business, which sees itself as a niche, regional player. However, Kelton also says that, if he were to go down the partnering route, he would look at a different set of players than might have been considered ten years ago. “We would look at people who have complementary areas of skills and who offer synergies,” says Kelton. “You don’t want to work with somebody who has a strategy for world dominance and aims to use you as a piece of it.”
Both Wong and Falk lean more towards Kelton’s — rather than Archer’s — stance. In Falk’s view, mutual interest or needs can go from basic access, via technical issues and geopolitical considerations to the garnering of a particular set of customers. “The subtext of all of this is the cost of capital,” says Falk. “How much would it cost to develop that business [alone]?”
What Kelton sees as complementary to Telstra’s global business is someone who can bring people and resources, access and distribution that Telstra lacks and who, in turn, is looking for growth outside of their own existing marketplace. “It is not about sending voice around the world, but where we need to be in the IP space,” says Kelton.
Wong points out that, though going it alone would be preferable, pragmatism is required. “Personally, I think that global alliances in the next 1-2 years are unlikely,” he says, adding that the opening up of markets to the insertion of nodes removes some of the need for alliances. “If you can do it on your own and non-equity alliance provides some additional reach then equity M&A is less likely.”
The rise of Asia
The big global alliances of the past tended to focus on bringing together businesses in Europe and America, simply because that is where most of the multi-national business was. Global One — the ill-starred alliance between Deutsche Telekom, France Telecom and Sprint — is an oft-quoted example of that sort of deal. Interestingly, the recent take-over of AT&T by SBC (which has yet to close — the CEO of AT&T recently stated that it is still on track) is viewed by some as being in this pattern.
“Historically, there is a lot of business between the US and Europe,” says Falk. “But, increasingly, telecom operators are becoming aware of very strong growth in Asia. To respond for requests for proposals (RFPs), there has to be a strong Asian component. I think the focus is swinging from Europe-US or the Americas.”
What, then, are Asian players like Singtel focusing on? “China and India are always key in Asia and we will go in as early [and potentially as acquirers] as the regulatory environment allows us to,” says Wong. “We will look at anything that helps our corporate customers.”
The locals are not the only people interested in expanding in the Asian market. Sprint recently signed network agreements with Reliance Infocomm of India for the provision of international connectivity to India and last mile access there.
However, despite the scramble to move East, no-one is prophesying a shrivelling of the American market. “Who knows what is going to develop over the next twelve months at companies like AT&T/SBC etc, what these organisations strategies are,” says Kelton. “You can only wait and see to what happens there, because it is too big a market to ignore.”
Making it fly
What are those carriers that do see a need for alliances actually considering? “Most people are looking at non-equity based alliances; the idea of code-sharing in airlines has been much talked about,” says Wong. “Is Singtel interested in doing that? We have been looking at many forms of alliances. The key issue is serving customers in areas where we don’t have coverage. We would explore the possibility of a ‘code sharing’ model,” adds Wong.
Kelton also sees this approach as promising. “Something like the alliance model seen in airlines could led itself to the geographical distribution of telecom,” he says. “You can get a Quantas ticket and fly round the world, but you don’t need to be on a Qantas plan to do that. It is about looking for geographical distribution and the complimentary nature of partners in that alliance, rather than because three incumbents decide it is a good idea.”
Of course, when airlines work together they can cut capacity. Instead of flying, say, ten competing and half-empty planes a day from London to Sydney, they can agree to not compete quite so ferociously and fly just five full ones. They can also share ground staff and facilities. Telecom operators, however, cannot just do away with networks, or network maintenance. Can they still make cost savings by emulating the airlines?
“There is a lot of opportunity for the sharing of resources, particularly of submarine capacity,” says Wong of the cost-saving issue. “If you look at the current market, some of the biggest challenges are in submarine capacity. There is a shortage of capacity on some routes, which means that costs could start to rise and managing that cost is imperative.” Positive though he is on the airline model, however, Wong is still cautious. In his view, there is a lot of hype the argument, and it is still too early to gauge what sort of cost benefits it might bring.
The ‘C’ word
One obvious objection to the airline model is that it could find itself coming up against regulatory objections. “Cartel is an interesting word,” says Kelton. “Do I think that, in certain cases, some of the airlines have got a cartel? Yes, I do. Would I like to see that in telecommunications? Absolutely not — and I wouldn’t.” Wong is not even sure that monopolistic positions would, necessarily, arise. “If you have a monopoly position, you are a cartel,” says Wong. “There are many alliances in the market and most are non-exclusive. The customer always has a choice.”
Kelton supports the airline model partly because it would provide, in his view, some price stability. “The big problem at the minute is that there is too much supply out there,” he says. “You get organisations offering supply at cost or below cost with no ability to build a service wrap on that facility. The only way you can stop that is controlling the release of supply. That would be good for the industry. The customers get a better service. They don’t get it for nothing, but, then, you don’t get anything for nothing.” At the same time, Kelton does believe that owning the assets — “if you are on the right part of the depreciation curve” — makes for a much better cost base. “Margins can be sustainably stronger if you are blending your services with your own assets,” he says.
AT&T also stresses the importance of owning the network to offset pricing pressures. “The best way of controlling costs is to have control over the assets,” says Archer. “If you have chosen the right place, there should be sufficient traffic.”
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