Telecoms carriers go back to basics: plumbing the web

"There's a lot of soul searching amongst operators," Nokia Chief Executive Olli-Pekka Kallasvuo said at Nokia's capital markets day last week. "Operators are asking themselves, is my asset really the network? Am I in the plumbing business?" Nokia Networks chief Simon Beresford-Wylie added. A decade into the Internet era, it is becoming clear to former telecommunications monopolies that they may not have what it takes to operate at internet speed. "The integrated telco model is broken. All innovation is coming from the edge of the Internet. It's coming from companies other than telecoms companies, from the likes of Google, Amazon," said James Enck, an analyst at Daiwa Securities in London. The future for the telecoms operators will be one of key topics for discussion as the world's biggest players convene in Hong Kong for ITU Telecom World 2006 this week.

None of the big names in the Internet space have been born inside a telecoms company or, for that matter, any big corporation, observed Charles Dunstone, the chief executive of British mobile phone retailer Carphone Warehouse at a communications conference in London. That is not an easy pill to swallow. For a long time operators reckoned that, since they controlled the Internet pipes into homes and offices, they were ideally placed to control the services offered over the Web. "The existential crisis is that telcos are asking: what are we here for? Are we here to provide connectivity or are we here to provide all the other services?," said Stephen Young, analyst at market research group Ovum. The question has become acute, because the Internet is rapidly going multimedia -- just look at how YouTube came out of nowhere to become a 100 million video downloads a day site -- and this means that the stakes are raised for telecoms carriers who want to play along, because it is neither easy nor cheap to become a television and video distributor. One company which knows just how hard it is, is Italian broadband provider Fastweb. Six years after it started offering TV services over its fast fibre-optic network, only 6% of its residential revenues are from video. Quite telling is a recent survey amongst telecoms carriers from conference organizers Telco 2.0, asking how confident they were about the future of their companies in a world where all communications would be based on the Internet Protocol.

Out of 250 telecoms executives, 82% confessed not being confident or unsure, while only 15% said they were confident and 3% very confident. Telecoms regulators are doing their bit to speed up the process. In Britain, BT Group set up the company's networks operation as a semi-independent business, called Openreach, in a compromise move by BT to regulator Ofcom which had threatened to break up the former monopoly which was not opening its networks fast enough to smaller competitors. In Italy, Telecom Italia is planning a similar move, separating the networks and the services businesses. Most industry observers agree that the networks are the key assets of the former monopolies, and the big question is if their services businesses, when spun off, have any hope of competing with media and Internet companies. "If you think of services companies like BT Retail, and strip it out, that part would look pretty vulnerable," analyst Enck said. An operator like KPN from the Netherlands, a trend-setter in European telecommunications, is not even trying to make the elephant fly. "Of course we need help from non-telco people, because it's a totally different world. We're not used to buying content, we're not used to set up the TV user interface and things like that," said Eelco Blok, responsible for the fixed line operations at KPN.

Mobile carrier 3, owned by Hutchison Whampoa, is doing the same thing in wireless by throwing open its broadband network for Internet start-ups such as Sling Media and Skype. "We're leaving the walled garden behind us," said Frank Sixt at Hutchison Whampoa. Some even say that the next big trend in mergers and acquisitions may be the coming together of focused telecoms network operators and media and Internet companies. Isn't that how television started in the first place -- with broadcasters who created a loyal following with unique shows over their own airwaves? Cable TV carriers and satellite TV operators are already moving into that direction, with cable carrier NTL in Britain interested in acquiring producer ITV The writing has been on the wall for nearly seven years, said Daiwa Securities' Enck, pointing to early 2000 when media behemoth Time Warner joined with Internet distributor AOL. If it weren't for the fast networks that weren't available in 2000 and AOL's shaky business model that was based on customer loyalty to a walled garden rather than its own infrastructure, that deal might have just worked out in 2007. (Reuters)