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Story URL: http://www.silicon.com/research/specialreports/sme/0,3800004380,39128239,00.htm

Telcos told 'you're no better than the gas board'...
Customers – it's time to start paying utility prices...

By Will Sturgeon

Published: Monday 28 February 2005

Incumbent telecoms providers have been told to start falling into line with utilities companies as bandwidth and connectivity become commodity products, piped into customers' homes like gas and electricity.

Consumers are now entitled to pay "utility prices for a utility product", said Morten Singleton, director of telecommunications equity research at West LB.

Singleton said incumbents have been "investing billions in next generation networks which will yield little more than utility prices". At the heart of this issue is the decline in the traditional voice business of many large incumbent telcos, where voice revenues are in a decline of up to 10 per cent per year.

Ironically it was the incumbents' provision of broadband bandwidth which has brought about the most rapid period of decline due to convergence and the arrival of free, or very low cost internet telephony (VoIP), said Singleton.

"Incumbents have been sustaining their fixed line business with their broadband revenues," said Singleton. "However, that in turn opens users up to VoIP which creates a self-perpetuating cycle."

The move to VoIP will further increase pressure on incumbents to cut the costs of voice calls.

"Once it is known that you can make voice calls for free it is very difficult to reverse that mindset," said Singleton.

Singleton also had harsh words of warning for smaller alternative telecoms companies who aren't doing enough in his opinion to guarantee their survival in the face of such revolution.

Colt, for example, is one company he believes has failed to position itself effectively for the further drop in voice revenue.

Singleton told silicon.com: "Colt's current operational performance is too reliant upon switched minutes and doesn't have the necessary depth of customer relationship to offer comfort as to its viability in an era of continuing declines in per minute pricing.

"This remains the year when they hope to reach sustainable free cash flow positive but I believe Colt will continue to have to fight hard in order to merely stand still."

However, Colt believes it is adapting and moving with the times. Speaking at an industry event last week, Andy Irvine, director of voice services at Colt, said: "We don't want to continue to build on a pence-per-minute basis. Now few calls are very expensive, except those to mobile operators. We can offer a bundle of other things. Voice still has value but we see it in terms of a subscription charge."

Irvine said such transition is similar to going from dial-up ISPs to broadband. "I can see voice going the same way," he said.

John Lewis, VP mobile carrier services at Cable&Wireless, agreed that "voice will continue to be an important application".

He added that any large-scale VoIP migration "won’t happen fully in the current [regulatory] environment."

West LB's Singleton added that companies who put all their eggs in the voice basket, selling voice calls on other company's networks represent a "business model with no future, as margins continue to decrease".

The issue there is once the voice margin hits zero they have nowhere else to turn, whereas those with a critical mass of infrastructure will still make money from other services at low, but still profitable margins.

"There is a limited life span for companies with a limited amount of infrastructure," said Singleton.