It is a trait common to all large organisations that, while they like to believe they are in control of their own destinies, they are in fact driven almost exclusively by external pressures. Where they seek to create momentum in their chosen sphere of activity, they instead generate only inertia. Change, if and when it occurs, tends to come about because outside forces grow to the point where that inertia can be dislodged, however momentarily.

Telcos have long been the perfect embodiment of this type of corporate beast. Today, after three decades of intensive efforts designed to change this ingrained behaviour, it is still the dominant characteristic of the C21 Telco. It can hardly be described as an environment which encourages pro-active decision-making, as is especially clear in matters financial.

An apt analogy is the old favourite about steering or stopping a supertanker. C21 Telcos are like the mightiest VLCCs – except that they are rudderless and under the dubious control of demonic pilots and a fleet of erratic tugboats. Oh, and by the way, the seas in which they sail are littered with icebergs and floes.

Leaky feeders
Make no mistake, a fully-laden supertanker is a valuable piece of kit. Ditto the C21 Telco. Indeed, it is worth drilling a bit deeper into the parallels between the oil and telecom industries.

Like the largest oil corporations, telcos have traditionally been active at every stage of the process, equivalent to the chain stretching from exploration and extraction through transport and refinement to distribution and retail. For traditional telcos, until quite recently. most if not all of these areas were guaranteed by state-given monopolies. Liberalisation and the proliferation of new technologies has been eating away at all these areas, notably at the beginning (think R&D, manufacturing) and end (think unbundled loops, MVNOs) of the product/value chain.

This change to the traditional all-encompassing scope of telco operations had an immense impact on the structure of C21 Telco finances.As monopolies, telcos could select where in the chain and across the product range to place the greatest margins; added to this, as state-owned utilities, the profit imperative was often (although not entirely) skewed by social and political considerations.

Theoretically, this was brought to an end by privatisation and liberalisation. On paper at least, this brought market forces and commercial considerations into play for the first time.

In reality, telcos were granted an extended honeymoon period in which to adjust their finances to market forces, followed by a bonus stay of commercial execution created in the aftermath of the technology implosion. These two distinct but interlinked episodes of market distortion are worth looking at in a tad more detail.

Gently does it
The coincidence of the privatisation of monopoly telcos and the opening of telecom markets to competition – in 1998 in much of Europe, for instance – created some weird market dynamics. These were primarily centred on the dual role of owner and regulator which governments were expected to fulfil. While eager to see the economic benefits of competition and earnest in their desire to stimulate it, they simultaneously adopted a protective attitude to incumbent telcos that was both politically (as a source of employment and universal service) and economically (post-IPO, telcos were an enormously valuable state asset) motivated.

At its crudest, this took the form of tariff rebalancing, which gave telcos time to adjust their pricing structures along more commercial and competitive lines. To describe the result of such rebalancing as ‘cost-based pricing’ is risible, however, since most telcos simply took margins from the parts of their business subject to the most competition and stuffed them into near-monopoly or natural monopoly areas of activity.

The extent to which state owner-regulators were complicit in this charade is made apparent by even the most cursory examination of local-loop pricing patterns. While international and long-distance telephony rates tumbled, local calling and fixed charges remained firm or actually increased. This might be defended as an action rightly intended to remove the distorting effect of social subsidy in the telephone service, were it not for the fact that the value of the local loop, in a conventional book-keeping sense, was near-zero and the cost associated with its operation was bloated by telco inefficiency which saw analogue staffing levels still in place for the digital age.

At quite an early stage in the liberalisation experiment, local loop unbundling was identified as the optimum means of introducing market pressures to this last bastion of monopoly. Again, however, governments saw fit to obfuscate on this and other forms of simple resale, thus performing the seemingly impossible feat of dragging their feet while kicking would-be new entrants in the teeth at the same time.

In most countries, throughout most of the 1990s (depending on the exact timing of liberalisation), telecom regulation was conducted according to these warped dualist principles. It might have worked, and most telcos were undeniably suffering acute financial pain as a result of the perceived potential of new competitors as the 20th century prepared to turn.

Superficially, the pain was inflicted by those armed with new technology. Yet their time ran out and their  threat evaporated as boom turned to bust. The incumbents, newly christened as ‘C21 Telcos’, could hardly believe their luck.

Scale not skill prevails
The telco pain referred to above was in fact largely due to the mad desire of traditional operators to compete against new entrants and the dot.coms in all areas and with the full gamut of related excesses. There are three vital aspects to this which many otherwise intelligent observers still fail to realise.

Firstly, while there was much talk on the part of telco chiefs about ‘re-inventing’ their companies, they were mostly unable to do any such thing. At best, they were able to manipulate the market in order to manage their decline, so that few of the revenues thereby shed ended up in the hands of others.

Secondly, as the body of the telco began to wither, so too did the opportunities for parasitic new entrants to nourish themselves on its flesh. The entrepreneurial ethos of the dot.coms, which had categorised telcos as mere carrion, was revealed (too late and to their horror) to be unsustainable. Without a telco off which to feed, they were themselves doomed.

Thirdly, and crucially, the telcos were able to seek emergency financial sustenance while new entrants expired in the baking heat of the commercial desert which was formed by the technology bubble’s collapse. C21 Telco emerged into the new century bloodied and bruised but unbowed. Its strategy for recovery was not very efficient in an economic sense – rights issues and enforced job cuts rarely are – but these were avenues of recovery closed off to their leaner, meaner and frothier rivals.

Falling off a bicycle
There are two ways of looking at the lasting effect of these twin market distortions in the context of telco finances today. On the one hand,they paved the way for a financial strategy of evolution rather than revolution, which probably suited just about everyone (with the possible exception of failed new carriers). On the other hand, it means that C21 Telcos are still arguably unprepared to react to true competitive stimuli where they arise.

Likewise, while some might cite the experience of the last 15 years as evidence of inherent telco durability, placing today’s C21 Telcos in the box seats, others would contend that traditional operators have yet to face genuine competition. Knowing the exact situation is becoming critical as C21 Telcos stand on the verge of entering a Redux era.

C21 Telco war chests are fattening, although certain streams of replenishing revenue are under threat. Two threads are interwoven within the fibres of telco finances – investments, cashflows, profits – as they move forward. The C21 Telco supertankers must navigate ebbs and flows of new technology and competition, in the hands of new entrants and in the hands of their peers. They will not have to wait long to see if their ships, now refloated, can be steered in the right direction.
Jim Chalmers

Tomorrow: technology... friend or foe?