[PEN-L:4963] Re-engineering the telephone industry

[D Shniad <shniad@xxxxxx>]

6

Communications Week International
10 April 1995

Re-engineering the telco

By Jennifer L. Schenker

  In  1987,  a few years before New Zealand  opened
its  market,  the country's incumbent monopoly  had
26,500 employees--including craftsmen who made  the
company's furniture and mechanics who serviced  its
motor vehicles.
  Once  competition was introduced,  the  workforce
was trimmed and remaining employees went to work on
upgrading   the   operator's   network,   improving
customer service and developing new products.   The
operator is spending NZ$4 billion ($2.6 billion) to
phase out its 55,000 party lines and completely dig
ititize its network, a process now almost complete.
It  is  developing broadband services for  business
customers,  expanding its cellular  activities  and
looldng to invest abroad.
  As  Telecom  New  Zealand continues  to  cut  its
workforce,  to  7,500 by 1997, it is apparent  that
few of these employees will be raising a hammer  or
turning a wrench on company time.
  The  company  now considers itself a  world-class
competitor,  pointing to 1993 and  1994  consultant
studies  that  ranked  its  infrastructure  highest
among    telecoms   operators   in   industrialized
countries for meeting business requirements.
  "We  have nearly completed tuming the vision into
a  reality," says John Crook, Telecom New Zealand's
strategic  issues  manager.   "The  fact  that  New
Zealand   has   the   most  open  and   competitive
telecommunications  market  in   the   world   made
realizing   this  goal  possible.   It  also   made
achieving it a necessity."
  The    lesson?     As   telecoms   markets    are
deregulated, competition is introduced and  tariffs
are lowered in line with costs, telephone companies
must overhaul their businesses to survive, analysts
say.   Even  more  radical restructurings  will  be
required as bandwidth becomes plentiful and network
digitization  both  decreases  network  maintenance
requirements   and   changes   the   dynamics    of
competition   by  allowing  several  operators   to
cohabitate on the same wire.
  The  telco of the future will be leaner, and  its
core  business will extend to entirely new services
and businesses.

Heyday over

  The  heyday  of  huge profit  margins  for  basic
connections  and  international  calls   is   over,
analysts say.
  By  2005,  end-users may pay as little  as  $0.03
for an hour-long international call, according to a
report    by    consultancy   Cambridge   Strategic
Management Group.
  The report, titled "The Macroeconomic Effects  of
Near-Zero Tariff Telecommunications," predicts that
market  liberalization and a  bandwidth  glut  will
lead  to an electronic commodity market for  global
telecoms  capacity, with buyers choosing the  least
expensive option of the day.
  "The   big   message  is  don't  stay  in   basic
connectivity,"  says  Simon  Forge,  one   of   the
report's  authors.   "For the  first  time  in  the
history of telecommunications, telcos will have  to
completely re-engineer their companies.  They  will
have to shed 80 or 90 percent of today's staff  and
find a new operating profile or diversify into  new
businesses."
  Conventional  telecommunications will  no  longer
be  the  core business of most telcos, Forge  says.
"Which  services  a telco chooses  to  be  in  will
change  radically, with customization becoming  far
more  important," he says.  "And what telcos charge
will  change.  As we move up the value  chain,  con
nections could be given away."
  Telcos  will  slip  into new, value-added  roles,
providing  credit  card  or entertainment  services
over   their  networks,  or  specializing  in  such
sectors   as   health,  financial  or   educational
services.

Getting the message

  That message is starting to sink in.
  Telecom  New Zealand is rolling out  a  cable  TV
network,  offering original entertainment and  news
programming as well as connectivity.  The  operator
is talking with health providers about developing a
telemedicine  network and is considering  branching
into other sector-specific services.
  For  its  part, Sweden's Telia has laid off  more
than  15,000  employees  since  1992,  reduced  the
number  of switching points in its network  to  250
from 6,000, and digitized its entire network.
  Basic  telephony represents only  about  half  of
the  operator's revenue, compared to an average  of
70   percent   at  public  telecoms  operators   in
industrialized   countries.    Telia   sees   basic
telephony generating only about 30 percent  of  the
operator's revenues within a few years, says Bertil
Thorngren,  senior  vice  president  in  charge  of
strategy.
  Thorngren concurs with the Cambridge report  that
international  call tariffs could drop  as  low  as
three  cents  an  hour.   "There  is  a  tremendous
decrease of costs, especially for international and
broadband   services,   and   prices   have    been
artificially high and cannot be sustained over  the
longer term," he says.
  Shedding  businesses that no longer fit into  its
plans,  such  as manufacturing telephone  handsets,
PBXs  and  Unix minicomputers, Telia  has  branched
into  mobile  and  financial  services.   And  like
Telecom  New  Zealand,  the  Swedish  operator   is
looking  for  partners  to  develop  expertise   in
sectors  such as medicine.  It has also created  an
internal restructuring program called-Project Telia
2001.   "We are trying to restart the company  from
scratch  to move as fast as possible away from  the
present structure," Thomgren says.

Change brings profits

  The  Telecom  New  Zealand and Telia  experiences
are interesting case studies because both companies
have   had   to   adapt   to  voice   and   network
infrastructure competition, something most  of  the
rest   of  the  world's  telephone  companies   are
expected to face by the end of the century.
  In  the  European Union, a deadline of 1  January
1998  has been set for member states to open  their
markets.   The  World  Trade  Organization,   which
represents 82 countries, is pushing its members  to
do the same.
  In  New Zealand, where all telecoms services have
been open to competition since 1991 and there is no
special regulation for the sector, and Sweden, with
widespread   voice   and   network   infrastructure
competition, profits at the incumbent operators are
up.  Other operators that face competition in their
homes   markets,  such  as  AT&T  and   Australia's
Telstra,  announced record financial  results  last
year.
  This  evidence  has  led  the  Organization   for
Economic  Cooperation and Development  to  conclude
that,  despite  losing market share to  competitive
operators,  incumbent  operators  stand   to   gain
financially, says Sam Paltridge, a telecoms analyst
in  the  OECD's directorate for science, technology
and industry.
  The  OECD,  which is to release  a  report  later
this spring on how telephone company employment  is
changing,  also  argues that market  liberalization
creates jobs.
  In  Japan, for example, former domestic  monopoly
Nippon  Telegraph and Telephone cut  its  workforce
from  329,000 in 1980 to 248,000 in 1994.  But  the
same  number  of  jobs  have been  created  by  the
country's  competitive long distance  carriers  and
value-added service providers, Paltridge says.
  In  the  United  States, the seven regional  Bell
companies collectively cut their workforces  by  13
percent   between   1988  and  1992   while   still
exercising  a high degree of monopoly  power.   But
employment  in  the competitive U.S. long  distance
market  increased  21  percent  and  employment  in
mobile communications services increased more  than
50  percent during the same period, Paltridge says.
Meanwhile,  competitive local access  carriers  and
equipment  suppliers have also  sprouted,  creating
their own j obs.
  No  operator in an OECD country has gone  further
than  BT, which has cut its workforce from  245,000
in  1990  to 137,000 today. Some, but not  all,  of
those  jobs  have been offset by new employment  in
the  booming  U.K. mobile and value added  services
sectors, analysts say.
  T'he  problem for those being layed off is  there
is  no guarantee they will step into the jobs being
created.  The growth jobs identified by the OECD in
its  "1995  Communications Outlook" report  require
expertise   in   software,  sales,  marketing   and
management   rather  than  line   maintenance,   in
stallation or operations (see chart).
  Fearing  strikes  and voter dissent,  governments
are reluctant to allow their telcos to whip out the
hatchet--even   if   they   are   convinced    that
restructuring  will  ultimately produce  efficiency
and net employment gains.  And European governments
are  not  taking  the necessary  steps  to  retrain
workers, says consultant Forge.
  "In Europe, there are legal, social and
political barriers to the cost shakeout seen in the
U.K.," says Andy Embury, a partner at Price
Waterhouse in London.  "It is difficult for telcos
in France, Germany, Spain and Italy, because on the
one hand they are told you need to get your costs
sorted out and be competitive within three years
and on the other hand you can't  lay anybody off."
  France  Telecom,  for example,  is  restructuring
more  slowly  than  any other telco  in  the  OECD,
Paltridge  says.  Revenue per main line is  falling
faster than wages per main line, meaning the state-
owned   company  is  under  pressure  to   increase
productivity   by  downsizing.   But   the   French
government  is  reluctant  to  face  the  wrath  of
unions, he says.

Management pitches in

  Some  telcos  are getting around the  problem  by
setting  up new companies geared around the  skills
of  surplus employees.  For example, if  a  network
maintenance  operation  has  25  percent  too  many
employees,  the  telco helps  to  come  up  with  a
service those employees could provide both  to  the
telco on a contract basis and to other companies.
  "A  number of people are exploring it because  it
saves  hundreds of millions of dollars from  coming
straight off the bottom line in redundancy  costs,"
Embury says.  "But there is a commercial risk to it
because  you  might not be able to  make  that  new
business work."
  While  BT  has  been criticized  for  laying  off
large numbers of employees with little warning  and
Bell  Atlantic  strikers last year donned  T-shirts
reading  "I'm roadkill on the information highway,"
other  telcos  have cut their workforces  with  the
cooperation of unions .
  Nynex  Corp., which reduced its work force by  19
percent  to 76,200 in the decade since the AT&T  di
vestiture,  drew praise from the U.S. Secretary  of
Labor  for the agreement it was able to hammer  out
with union officials last year.
  Telia  was  able to make its cuts without  social
unrest,   offering  its  employees  a  variety   of
options,  including early retirement, training  for
new  skills and education for new positions  within
the  company.   And it is encouraging employees  to
start   their   own  businesses,  sometimes   under
outsourcing arrangements.
  "There  were  sad stories and even tragedies  and
also  quite a few success stories,' Thomgren  says.
"Overall, we managed very well."

Multimedia era

  Once telcos have streamlined, they must decide
how to best approach the multimedia era.
  Given  current U.S. restrictions, cable TV  is  a
key  option  for the Bell companies because  it  is
their  only  way  to  expand  domestically  on  the
delivery    side   outside   of   their    regional
territories.
  "We  look  at  it as a great financial  hedge  at
worst and at best a great bet for the future," says
Euni Park, director of the media and telecoms group
at Lehman Brothers in London.
  Nynex, meanwhile, has gone a step further,
investing $1.2 billion in Viacom Corp. to jointly
develop video-on-demand applications, games and
other content.
  In  Europe,  Deutsche Telekom is still  in  talks
with  German media giant Bertelsmann AG, which  has
teamed  with America Online Inc. to jointly  launch
on-line services in Germany, France and the  United
Kingdom.   BT,  barred from delivering broadcasting
traffic,  is nonetheless conducting video-on-demand
trials.
  Telstra  and  partner News Corp., under  a  joint
venture  called Foxtel, plan to spend $2.7  billion
on  a digital broadband network that will run to  4
million Australian homes by 1999, delivering  cable
TV an advanced interactive services.
  "The  $64,000 question," analyst Park  says,  "is
whether   telcos   should  own  content."   Telia's
Thorngren  says  it is important to  at  least  "be
related to it."
  To  some extent, you can't own media even if  you
have the money," he says, "so it might be wiser  to
try and understand media better than to spend a lot
of money."

Developing world

  In  the developing world, the issue for telcos is
"not   about  owning  content  or  when  should   I
introduce  video dial tone, but rather  how  can  I
double  my penetration in my domestic marketplace,"
says  Price Waterhouse's Embury.  "Issue No.  2  is
how  can I radically improve my productivity  as  a
PTO."
  When  competitive  operators arrive,  they  bring
the  latest technology and their costs are a  small
fraction  of  those borne by the incumbents.   They
attack  the most profitable business segments.   So
telcos in the developing world must get their  cost
bases under control in anticipation of competition,
analysts  say.   But  most are starting  with  poor
infrastructure and poor productivity.
  "The   nature   and  timing  of  competition   is
absolutely critical," Embury says.  "If  they  face
full-blown competition without restriction, without
giving  them time to adjust, they risk being  blown
away."
  Operators  in Latin America, in particular,  face
a  difficult situation, says Andrew Fyfe,  head  of
the   telecoms   practice  in  Price   Waterhouse's
Washington    office.    As   part   of    operator
privatizations  in  the  region,  governments   are
pushing for shorter monopoly concessions than those
handed out in the 1980s and early '90s.
  "In  nine years, maybe you could get to some sort
of  state of equilibrium but there is no way to  do
it in five years," Fyfe says.  And even though most
operators   are  meeting  government  targets   for
quality, he says, the targets are too low and  will
not prepare the incumbents for competition.
  Meanwhile,  incumbents  in  some  of  the   Asia-
Pacific's  developing countries, such as  Indonesia
and  Malaysia, are "diverting government  attention
with  initial public offerings, claiming  financial
markets will make them more efficient," Fyfe  says.
"How  will  this  ever  make them  more  efficient?
These  countries  would have  more  telephones  and
better service if they allowed strategic investors,
but this is not favored in Asia."
  For  its  part, Telecom New Zealand is  proud  of
the  transformation it has made from a bloated part
of the post office .
  "The  challenge  now  is  to  continue  being  as
innovative  and  flexible into  the  future,"  says
strategy  manager  Crook.   'We  must  be  able  to
recognize  the  opportunities new technologies  and
the  growing  synergy  between  telecommunications,
computing   and   electronic   entertainment    are
creating."