Wednesday, May 25, 2005

A little knowledge is a dangerous thing

I always appreciate a bit of exposure, but I have to say that I have some big problems with this post at Business Week, citing me as an apparent vindication for a view that telecom is poised for some sort of reinvention, in a positive sense. Firstly, I disagree strongly with the assertion that Europe is somehow structurally incapable of promoting innovation. Institutionally, and at a macroeconomic level, yes, large parts of Europe may be screwed, but if we're talking telecom, then let's acknowledge that both Skype and SIP are European in origin, and as I hopefully demonstrated in Stockholm yesterday, I think we can reasonably state that European countries are at the forefront of VoIP adoption (as has also been shown to be the case with P2P).

Whatever his underlying case for arguing that Europe and Japan lack "killer apps" (a very curious oversimplification of some very complex market dynamics), where the author really misses the clue train is in the fact that the really important developments unfolding now are ultimately about a huge technology revolution driven by consumer empowerment, or, as Espen Fjogstad from Telio states, "a genuine unbundling of the last mile in a way which regulation has failed to deliver." In other words, it's a partial transfer of market value/wealth, in which some disappears (or reverts to the consumer), and some moves to non-traditional beneficiaries. However, I believe the overall effect will be profoundly deflationary in the aggregate.

My statement that EuroTelcoland was awakening to the threats facing it was not underpinned by any serious optimism. Admitting to the threat is rational, but the reactions to it may not be. So far, the flurry of M&A activity (which has been repeatedly documented here ad nauseum) fills me with unpleasant flashbacks to the Quixotic mobile land-grab of the 1997 - 2000 period, albeit with lower absolute cash outlays. Nevertheless, I would argue that the business case assumptions may be no more sound.

Historically, there seemed to be an unwritten rule that, regardless of what happened in mobile, the PTTs would never mess around with one another's traditional voice markets, but the gloves are now off. I fear that the incumbents are now well on the way to destabilizing both their voice and DSL markets to a crisis level, driven by what they believe to be the priorities of the capital markets. Again, let's think back to the 3G auction period and recall just how disastrously the markets misread that situation. Moreover, based on the investors I speak to, I can't find any consensus which would support such a strategy - rather, I think the market will increasingly react with alarm at the looming IP nuclear arms race.

That said, I have never argued that outright EuroTelcocide was likely, but rather that the incumbents of the future will have to be dramatically smaller and learn to live with far less, and that this process of transformation will be an excruciatingly difficult one. Culturally, I sense that many of them are still too wrapped up in notions of their own significance and growth potential to accept the cold reality of an insurrection jointly mounted by consumer choice, generational change, technological innovation/subversion, the agendas of global internet/media gorillas, and outright bloody-minded troublemakers from leftfield like Skype (long may they run).

Despite the dramatic recovery in balance sheets since meltdown in 2000, EuroTelcos collectively still have debts well in excess of a large number of national GDPs (take any three of the large cap stocks and you soon get to a number well over EUR100bn), as well as pension liabilities, an issue on which the airline industry offers little comfort. As I've undoubtedly said before, the next few years are going to be a fascinating and horrifying spectacle in EuroTelcotown, as innovation cycles compress and the incumbents struggle to adapt to a dynamic for which they are inherently ill-suited.

Yes, Mr. Dude, telecom is undergoing a revolution, but revolutions are intended to depose those in power, and revolutions frequently kill lots of people and give rise to all sorts of other dislocations which few could have foreseen earlier. Revolutions never result in the former ruling class having a higher standard of living as a result. One thing I notice from my Sitemeter tag is that the traffic driven to the site from this article is a lot lower than one would expect from a publication like Business Week. Maybe telco is not the only industry in the midst of a revolution.

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