Converge and conquer

Hard times are leading the telecom sector to invest in a new way forward.

FROM THE FLUSH TIMES of the mid 1990s, where it saw money pouring into its coffers, thanks to dominant fixed-line businesses and per-minute internet billing, to the more recent era, when technologies such as WAP and 3G have failed to deliver on their promise and lost the sector serious amounts of cash, the telecoms industry has certainly been a hive of activity.

With average spend-per-customer beginning to drop substantially, the telecoms industry has practically bet its future on convergence being its new cash cow.

Essentially, convergence is the delivery of broadband, mobile, fixed-line phone and digital TV from one provider over one line. This new paradigm has seen the industry redirect and reshape its business model, as it starts to go beyond its traditional strengths of voice- and internet-traffic delivery.

But is convergence just a pipe dream or will it deliver the goods and customer service? For the telco sector, putting its money into new technological areas is always a huge risk. The industry invested billions in fibre-optic cables during the 1990s, but there was no reciprocal hike in traffic. European telecoms then paid almost €100 billion for licenses to build "third generation" (3G) mobile networks, in the search for a new revenue stream from data-services. So far, take-up has fallen significantly short of expectations.

Mike Maloney, chief operating officer of BT Ireland, is sure that convergence will be the success and revenue generator the industry so badly needs.

He says that internet protocol (IP) technology is driving the new business models because it is capable of delivering different services and forcing telcos, media companies, mobile operators and TV businesses to think about what this new experience will look like for the consumer in the future, and what way it will be consumed. "Everyone is still trying to feel their way around and some of them have no answers except that they know it's coming," says Maloney. "In BT, we set out our strategy pretty clearly, announcing a £10 billion NGN [next generation network] global upgrade, which is currently being rolled out. That means the world can be reached from any location. And we've designed it in an open-standard manner, unlike the way networks were cossetted in the past.

"We're rolling it out in Britain and the North by selling home-hubs. So you get broadband, freeview TV and a range of digital content on demand. It also has a PVR [personal video recorder] to record TV. We bought the IP rights for content from companies such as Setanta, and it will be available over a broadband connection to a TV. So here you have a classic example of how things are changing - an old fixed-line telco like us, now in the media business."

But what if convergence isn't the tipping point and the public doesn't embrace it with open wallets? Maloney says that there's no question that BT and companies like it have placed a bet, and put all their eggs into the convergence basket.

"We are so convinced that this is the way the new world will look in the next few years. As a company, we're not looking at 'what if' scenarios - we're getting out there and transitioning our business model. While it's a big bet, it's not a reckless one. Voice will still be the single most-important application in an IP world, but not the way it was done before or at the same margin."

Gerry Fahey, strategy director at Vodafone, says that the history of convergence has been littered with many false dawns and has been talked about for around 15 years. But it's now coming to fruition because IP is beginning to underlie all networks. So mobile, fixed line, broadband and TV are all becoming very similar services, thanks to IP. "There are big bets being made but there is an increasing feeling that convergence is somewhat close to the right answer," says Fahey. "But there are still significant problem areas, such as IPTV and TV over broadband, which isn't quite the same experience as regular TV."

Scale is important here and having lots of customers is essential. The smaller operator will find it difficult to compete. "You're going to see everyone in the market fighting for every customer of mobile and fixed telephony, TV and broadband, which is a different scenario than in the past."

Fahey claims that previously new entrants to the telco market could come in and grow quickly, but this won't be the case in the future, as a huge amount of investment will be required by new entrants. "The battle will be around the people already in the market jumping out of their area into someone else's. Profits may be more modest but the revenue opportunities are bigger - you might get a smaller slice of a bigger pie, but overall you're better off, if, of course, you're successful."

CONVERGENCE FAILURES

WAP (WIRELESS APPLICATION PROTOCOL)

Wap was seen as a first step to the mobile-internet era. Problem was, it was too slow and, ultimately, the technology died on its inability to deliver speedy information. When users were asked whether they were likely to use a Wap phone within one year, a calamitous 70 per cent answered no (this was after respondents had used Wap services for a week). When users were asked whether they might get Wap within three years, the "no" responses dropped to 20 per cent. This signified that users saw the potential in mobile internet and that it could take off in years to come. This hope paved the way for Wap's cousin, 3G

3G (THIRD GENERATION PHONES)

European mobile phone companies spent around €100 billion in 2000 to buy licenses for "third-generation" networks, which would enable users to read e-mail, browse the internet, make video calls, listen to music, watch films, and buy products and services, anytime, anywhere. Unfortunately, most people today still use their phones for the revolutionary process ofmaking a phone call. The main problem with 3G is the poor content which mainly revolves around sport and music downloads. In addition, the handsets that truly cater for 3G technology are only really coming on-stream now, yet are found by the average user to be confusing.

Throughout Europe, 3G take-up has been limping along. Of the nearly 720 million mobile connections in Eastern and Western Europe by mid 2006, 38.6 million, or 5.4 per cent, were 3G, according to Wireless Intelligence, a joint venture of the GSM Association and market researcher Ovum. Having said all that, 3G licence holders remain hopeful that as the platform evolves, it will find its legs in the future, more converged world of telecom services.

DEREGULATION IN IRELAND

The success of deregulation in Ireland has to be questioned when you consider there are only four mobile-phone operators (though Digiweb's 088 service, which will be available in approximately 18 months, is a positive forward step) and how Smart Telecom ran afoul of Eircom late last year, when an unpaid bill to Eircom threatened to close Smart down. With the prospect of no phone or broadband service, thousands fled back to Eircom and other providers, who were circling like vultures over the wounded company.

Smart stayed in the game, but it served to highlight that competition in the telco market is still, to a certain extent, manipulated by the incumbents. Many people lay this problem at the door of regulator Comreg, which remains a toothless beast.