Financial Times Conference
World Telecommunications
2-3 December 2003, London
Good afternoon ladies and gentlemen. It is a pleasure to be here in London
and to address such a distinguished gathering. It brings to end speaking
engagements this year in three continents and fifteen countries, plus a few
countries where I was silent.
I want to try to paint the big picture, the global picture, of what it
is that operators are delivering and what is missing. What it is that they
are not delivering. When they listen to users and when there are none so
deaf as those who will not listen. I will try to offer some explanations
for the variations in their responsivness. I am not unsympathetic to their
situation, merely frustrated by it.
INTUG is an association of international telecommunications users, both
multinational companies and national telecommunications users groups. We date
back to 1974 so that we can claim to have argued for liberalisation in good
times and in bad. We have brough some of this upon our own heads by arguing
for competition and free markets.
Finance 101
We have learned a lot this year about advanced financial engineering and
stress test on it. And also about the intricacies of bankruptcy law
and of what can be writen-off and when. Finally of who does and does not
end up in gaol.
For the average telecommunications manager there have been two simple financial
questions. Firstly, which firms can he or she reasonably put on a short
list of those to be sent tender documents for future business. This has
become something resembling Russian roulette. It has to be discussed at
length with the CFO and the audit Committee. Secondly, which operators are
taking water, listing or are sinking and require the preparation or indeed
the activation of plans to abandon ship. We have jad to think of shorter
contracts and contingency plans that are far from theoretical, in anticipation
of the failure of suppliers. We have to think of more contracts covering
smaller geographic areas.
I have learned and re-learned more about bankruptcy law in the last twelve
months than I had ever expected to do. There have been strange questions
of comparative international bankruptcy laws.
We have seen the Securities and Exchange Commission (SEC) struggle with
the advanced financial reporting of telecommunications operators. A balance
sheet can be read by an MBA, but cannot be truly interpreted by more than
a handful of global experts.
The last few weeks have seen write-offs of quite staggering sums of money.
Deutsche Telekom AG sent around EUR 20 billions up in smoke. France Telecom
is going down a more complex route with the French government showing a
remarkable willingness to support and seemingly write off its debt. Nonetheless,
France Telecom and Vodafone will have to make similar write-offs in the
near future.
However, we have not yet reached the light at the end of the tunnel. There
has been far too little attention paid by the analysts to the likely effects
of IP telephony and its effect in driving down the revenues of telephone
companies. The TelCos can run, but they cannot hide from that.
The aftershocks of the crash of the dot com bubble are not yet finished.
We are seeing third generation balance sheets without any real sense of
confidence in what the numbers might mean.
Third Generation
Three words on 3G: games, gambling and girls.
If you do not believe me, try www.pocketjoy.com. It is a site which is
nothing if not explicit in its objectives. I do not condone or condemn the
site, I merely wonder how much money is to be made from viewing so much naked
flesh on such tiny screens.
Someone suggested that it is called 3G because that is the number of guys
using it.
Perhaps the biblical quotation on the sins of the fathers is most apposite.
That the sins of the fathers shall be visited unto the third and the fourth
generation. Not the sin of lust, but greed, sloth and gluttony.
First let me say that 2G is characterised by long-running market abuses.
There is a dominant oligopoly (i.e. a cartel) running international mobile
roaming charges and SMS. These people think that forwarding a call to my
mobile phone when I am in the USA is worth €1.60 per minute. That is a price
we have not paid for trans-Atlantic calls since before the introduction of
competition.
Individually, the operators have benefitted from cheap call termination
on the networks of the fixed operators, while pushing up the price of termination
on their own networks. They make a quarter of their revenue by leveraging
their market power from their call termination market into domestic and
foreign call origination markets.
The Federal Communications Commission (FCC) in September issued a customer
alert against calling cellphones in most European and some Latin American
countries. This was not surprising given that the "surcharge" to call a
mobile phone can be 15 to 20 cents per minute.
The mobile operators would have us believe it is added value.
I maintain it is a breach of competition law.
These abuses need to be and will be regulated over the coming months.
The financial analysts have grasped that and have written down the share
prices accordingly. However, it has been a long and bitter battle.
It is now a rearguard action, delaying the inevitable to protect whatever
revenue they can. I will spend next week engaged in that battle at the International
Telecommunication Union.
2.5G or mobile data is frighteningly expensive when used in one country.
I think Vodafone is offering its best business price of around € 1.4 per
megabyte. O2 in Germany offers monthly tariffs of:
L 1MB at € 9.95
XL 5MB at € 19.95
XXL 20MB at EUR 39.95,
Above the monthly cap, there is an charge of between €1.9 and €2.5 per
megabyte.
The response of business has been uniform and simple, that the operators
have made some sort of mistake and that they should check their sums. At
those rates, there will be no business users.
As one recent report recently suggested, GPRS may be a bigger disaster
than WAP. However, that remains to be seen., though we will know in the
first quarter of next year.
When you roam with GPRS it seems only to work in some rather exotic combinations.
The operators, at present, do not seem to have the billing software around
to track your use. Any prices we have seen are even more outrageous than
the in-country prices.
It will only be plutocrats who use MMS to send their skiing holidays photographs
to their pals.
Mobile data both 2.5G and 3G looks as if it will be like ISDN, something
which the manufacturers thought was terribly clever, but which could take
a decade to find even a niche market.
So, we know that regulation (if not competition) is driving down revenue
from voice. However, we see no corresponding rise in revenue from data.
This should be a major concern for financial analysts and ultimately for
users, since the financial model of the mobile operators may have passed
its sell-by date. Insolvent carriers with inappropriate business models
do nobody any good.
Despite globalisation and the single European market, companies have to
buy mobile voice services country by country in Europe and around the world.
There are no pan-European or trans-Atlantic services. The best you can buy
are home country plus some flatish rate roaming.
It is a depressing picture of reliance on cartels, the avoidance of competition,
striuct national markets and a failure to grasp the opportunities of mobile
data. It is not hard to see why Europe has lost its leadership in mobile
telecommunications to South Korea. If it is to be regained, it will take
time and new leadership.
Competition
The great scheme was to introduce competition, shelter the incumbent operators
for a while, then everything would be fine. Sadly, it has not worked.
The operators first tried international joint ventures which failed, then
they tried to be new entrants in each other's markets and that failed. Now
they are retreating and retrenching in their domestic markets. Their market
shares at home are disturbingly high, especially in the wholesale broadband
market.
The extent of competition will be documented this year in a series of assessments
of markets undertaken by European national regulators. It will not paint
a happy picture. There will be few players, high levels of market concentration,
dominance by the supposedly former incumbent and a general need to continue
regulation. .
The story in local loop unbundling has been bitterly disappointing. The
PTTs have thrown all their creative energies into a competition for the most
effective means to thwart the competition in broadband. There are Olympic
gold medal performance here for obstructiveness and playing the man, not the
ball.
Two European Union member states stand out. They are Greece and Ireland
where broadband has been successfully resisted by the incumbents. The numbers
to be published later this week by the European Commission in the Eighth Report
in Regulatory Implementation will confirm the dire position.
Pan-European and Global Services
The idea of the internal market now goes back many years. Lord Cockfield
was the originator of the Single European Act. Yet today, we find telecommunications
is an obstable to the single market, because the operators prefer to operate
in national markets.
You cannot buy Pan-European
mobile voice
mobile data
freephone number service
local rate number service
broadband for homeworker and teleworkers.
Conclusion
The operators have struggled to come to terms with competition. It is something
very new for them and has been a radical change from the past.
Sad to say, many still prefer a monopoly and have worked hard to exclude
competitors. Many like to compete by regulating their competitors out of
business.
INTUG still believes in competition and that in the long run it will work..
Later this week the European Union telecommunication ministers will meet
to discuss how to restore confidence in the telecommunications sector. The
French and German governments have a problem with their "national champions"
with debts of EUR 70 Bn each.
We are told that governments are to pour in money. The first tranche for
France Telecom is about EUR 9 Bn. It is a very, very bad idea. It will further
distort the markets and the regulation of those markets. It will deepen
the fragmentation of the European market. It will continue to fail to deliver
single market or global services.
It does not make Europe compete with Korea, Japan and China.
The answer is to eliminate the market abuses and make the operators compete
fairly.
