New entrants were once expected to tread where incumbents, mostly monopoly-based, more often than not state-owned, were afraid to go. For much of the 1990s as waves of liberalisation washed over telecom shores, market newcomers projected an insouciant, cocksure and revolutionary self-image. The incumbents, by contrast, were condemned as dinosaurs (in both senses of the phrase). 'Apocalypse Herewith' was forecast, with no glimpse of Redux in sight for the old-style PTOs. An overdue Apocalypse, at that – or so we were told.

So what went so badly, badly wrong? Here are five clues you might want to consider.

The fact is that the ‘dinosaurs’ still bestride the Earth, albeit having evolved more quickly than many would have suspected was possible. That’s clue No.1: new entrants underestimated the commercial force of the ‘natural monopoly’ enjoyed by those who had spent a century developing today’s telecom network and much of its underlying technology.

Clue No.2 is that far too many new entrants based their entry strategies on identifying the weaknesses of the incumbents and formulating business plans – costs, margins, manpower, etc – on the premise of being slightly less weak than the PTOs. For goodness sake, in Japan, the licensed alternative international carriers were known as ‘little KDDs’, in homage to the former monopoly KDD. For good measure, KDD was expected to lend its experience and expertise to these new competitors, just as NTT was expected to do in the domestic long-distance market. In other countries, new entrants achieved much the same effect, albeit in a more market-driven manner, by poaching senior PTO execs to head their thrusting new and competing businesses. If you think about it, that makes little sense: doubly so since many of the incumbents responded by pulling in executives with non-telecom backgrounds to confront the challenge of competition.

Sue first, act later
Due to the nature of liberalisation, the US does not fit this template. Yet it provides us with clue No.3. The United States set the standard for the notion that new entrants might achieve more through litigation than they might ever hope to through engineering. Thus MCI, the original competitor to the all-powerful AT&T (how times change) was known as ‘a law firm with an aerial on top’. This was aped in many other markets (small wonder that US-trained telecom lawyers were in such demand around the world) and still, as a strategy, was self-defeating.

Hence clue No.4. Arguably, each small courtroom win for most new entrants was like a steroid injection, their performance being measured against anything but networks, subscribers, revenues. Thus was the boom in technology shares gestated: put simply, analysts and investors were more impressed by legal developments than anything that might be associated with the ‘business’ of telecom operating. Grabbing headlines and finding favour among investors surpassed in importance the rather mundane functions – everything from service delivery to billing – that most objective observers would associate with an effective (never mind successful) telecom business.

All of which combines to create the optimum breeding conditions for clue No.5. Buoyed by a legal and regulatory tide running in their favour, convinced of their righteousness in tackling monopoly incumbents, convinced of the weakness of their opponents – they put themselves in hock. They created a boom which had little to do with business and much to do with perception.

Make no mistake, the boom was created by new entrants and served to punish incumbents. But the new entrants, or at least the vast majority of them, are no more. The incumbents were forced to pick up the pieces, but at least they still had pieces to pick up. While they are at it, the incumbents have also hoovered up the few useful assets of the failed new entrants.

Back to the future or forward to the past?
So can true new entrants return to the fray? The answer is yes, with two caveats.

Firstly, remember that when markets were first tentatively opened, most second carriers were backed by incumbents from elsewhere. Now this is happening again – but at least it acts as a form of surety.

Secondly, remember that in all true markets, price pressures and hence prices themselves fluctuate, more often than not in a cyclical fashion. Yet in responding to the market opportunities thus created, network-based new entrants are forced to invest heavily in technology and/or marketing. Until the investment community’s appetite for technology recovers – and it’s still in a prolonged state of indigestion – all will remain quiet on the new carrier front.
Jim Chalmers

Tomorrow: how are vendors faring in the State of the Redux?