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Page updated:
4 February 1997
Page owner:
ETO Site Team
How will the growth of the Internet affect the traditional business of the telecommunications sector?
This is one of three linked questions raised as part of a study for the European Commission (DGXIII) in June 1996. The others are:
- Should the Internet be Regulated and if so,
How?
- Should Internet Access Become Part of "Universal Service" Requirements?
What effects does the growth of the Internet have on the telecommunications sector, especially for data and voice transmission?
At least one world class Internet player has disclosed to us that they expect to compete head to head with conventional Telcos (telecommunications operators - for example BT, France Telecom) for ordinary voice and data traffic, taking advantage of the fact that the Telcos (a) have an existing investment in analogue networking which they will seek to protect and (b) have an historic level of profitability expectation that will inhibit them from reducing prices at the rate the market requires and that is justified by technological price-performance improvements.
Evidence suggests that the traditional Telcos have great difficulty in adapting to rapid market change. Voice services should now be reducing in relative price at around 20% annually, based on experience in the IT sector. A more typical level of reduction found in the market is around 5% annually. Telcos justify this by citing the very high investment needed to implement next generation networks, for example fibre optics, ignoring the fact that the IT industry also has to make heavy investments in research and development, plant and technologies in order to sustain its growth and profitability in the face of annual price- performance improvements of 25% or higher.
Telcos have a long history of monopoly or near-monopoly and very little experience of competing in open markets. To date, after ten years of competition, BT's share of the UK voice market has only reduced from nearly 100% to around 90%, but competition has been very patchy. When BT competes internationally against Deutsche Telekom, France Telecom and others we might hope to see better price improvements, but since all the main players are similar in their characteristics and history, its unlikely that change will be radical or swift. Telcos need to sustain traditional price and profit profiles , suggesting a large gap for well funded Internet service providers to enter.
The market has a very large range of exciting new products and services waiting to be delivered across networks, but these will not really take off until we see significant improvements in the combination of accessible bandwidth and price. Internet service providers and other added value providers have everything to gain from higher bandwidth at lower prices, while Telcos have a lot to lose.
The net effect will probably by telecom prices moving to about a 10-15% annual down trend per unit performance, with a considerable proportion of the resultant traffic growth going to non-Telcos.
Many of the "old" Telcos may be reduced to being mainly wholesalers of voice and data circuits, with the main added value being created outside their ranks, unless they are able to radically change their financial structures and the expectations of their shareholders.
However, the growth that comes from such end user price reductions may well mean that this "wholesaler" role continues to be an attractive one, albeit at lower levels of profitability.