I wonder how many times a salesperson has come into the offices of a telecom service company and briefed management on their latest sales opportunity that has a multiyear contract value of $1M, $5M, or even $10M or more of service revenue with a major corporation.  During the conversation about the details of the opportunity, management can sense the salesperson’s level of excitement and dedication to winning the business and serving the customer.  Most salespeople have the ability to calculate the commission payment on the deal before even communicating the opportunity to management.  It is obvious to the salesperson that all of the company’s resources should be focused on winning their deal.

Many, many telecom service companies, based all over the world, have been created with the sole purpose of serving the corporate or business market.  Many of them have come and gone over the years, buried in business history as failed enterprises.  These companies have many of the following characteristics.

• The business plans needed a very small market share to be successful because the addressable markets are “huge”.
• The amount of capital available to management is relatively small in relation to long-term incumbent providers or better-capitalized competitors.
• The services are customized so that the customer could have exactly what they wanted in terms of services.
• Competitive pressures from incumbents require the service provider to invest capital on behalf of its customers at a fully allocated profit margin significantly below the level required to meet or exceed the company’s real cost of capital.
• Management of the service provider approves many under priced deals because revenue growth and market share growth are critical for continued development of the company or the services are priced based on incremental cash flow to help the company survive.
• The companies have local access assets but insufficient national or international assets or they have national or international assets but insufficient local access assets.
• Management believes they can compete effectively by reselling the services or customer premise equipment provided by another company.

The reality of the situation in almost every case is a failure of each company to create any type of fundamental competitive advantage in the markets they are trying to serve.  Small companies cannot grow into large successful companies if they do not create fundamental competitive advantage that can be applied on a scale that will allow the company to achieve a dramatic increase in market share.  Large companies can’t stay successful unless they maintain a real competitive advantage.

Since the telecom industry has worked extremely hard to create global standards that allow the corporate user community to conduct its business efficiently anywhere in the world, it is extremely difficult or impossible to achieve a sustainable technical differentiation.  Therefore, differentiation must be based on quality of service parameters, “value added services” and price.  If the competitors are sufficiently skilled in delivering standard services then the only differentiators of consequence are price and “value added services”.  It is extremely difficult for most telecom service providers to create “value added services” that are fundamentally differentiated from competitors and in reality they are part of the basic service capability that is required to compete. In the end price is the differentiator in most competitions with the other items being tiebreakers. This situation has created the price wars that are rampant in virtually every competitive telecom market in the world. The bigger and more complete the network in any given market the more competitive a company can be.

For most corporations the telecom network and telecom services in general are overhead costs for the corporation.  The goal of any professional business manager is to minimize the overhead cost of their company.  Therefore, the presence of many competitors, big and small, in the telecom market is a wonderful situation for the corporate telecom and IT managers around the world.  In their efforts to minimize costs and reduce overhead they can create intense competition among all potential suppliers.  The buyers will evaluate any technology that has a reasonable chance of meeting their requirements. They have the ability to tell every salesperson of any viable competitor that they have a shot at getting the business.  There is nothing wrong with this approach.  The corporate network buyers are simply shopping for the best financial deal, the best service and the easiest management task that is available in the market.

The relationships between the salespeople and the corporate telecom and IT managers spur the competitive fever.  Even when there are many competitors involved in a deal each salesperson believes they can win if their company will “do what it takes”.  The total cost of competing in this market is immense.  Prices charged for services in the corporate market are the lowest among all users of telecom services on a per unit basis.

In the end there is a very limited role for small and midsize telecom service providers in the corporate telecom market because it is virtually impossible for a small company to be financially successful serving this market.  Many are at a stage where they are not large enough to compete effectively but still capable of staying alive. 

We would hope that the managements and shareholders of these companies would come to understand that they must continue the process of consolidating the industry into a much smaller number of larger players with more diversified sources of revenue and improved cost of revenue and overhead structures.  This must happen for the shareholders of existing companies to obtain some return on their investment, otherwise many of them will end up with nothing.

We have seen substantial consolidation of the telecom/media delivery industry in the past few years and more will take place during the next stages of The Great Market Battle that are underway.  Will someone or some company create a truly differentiated network that does not compete on the basis of delivering services based only on global telecom standards but on the uniqueness of its service offering being delivered via a standard global transport platform?

Will we be surprised when we see who ultimately wins the Great Market Battle?  I think the answer will be – Yes! We will be surprised.

Copyright 2002/2007 by TPM