Can Legacy Telcos Survive, Long Term?

Some would argue there are regulatory and other obstacles to investment in high speed access infrastructure in many emerging markets. Policies that effectively favor incumbent service providers might be a frequent complaint on the part of competitive providers.

Some of us would argue the problem is far more complicated than that. Rights of way, for example, can be formidable obstacles.

Business models are likely the biggest issues. Where some might argue the issue include disincentives for incumbents to invest, which is true enough, it might be reasonable to argue that new providers might ultimately emerge, in a sort of service provider product cycle.

To be blunt, there are growing signs that the traditional service provider business model is too costly to survive, long term, where competition is unleashed. That is not an easy challenge to finesse, if one is a policymaker.

In at least some instances, the implications might be that most legacy telephone providers will go away, as they simply cannot maintain present revenues, and have cost structures too high.

Consider the U.S. market, where rival cable TV companies slowly have managed to capture the leading market share in high speed access, while retaining the biggest share of the linear video business, a decent share of voice accounts, and rapidly-growing share of the business communications market.

Cable operators also are readying an eventual assault on the mobile business as well. To be sure, the outcome is not foreordained. The point is that cable TV operators are attacking with a lower-cost model that is structural. And some of us would argue that in a competitive market, the lowest cost provider tends to win.

In France, Illiad has shown the power of the strategy, and also the danger for incumbents.

In most markets, though, there are not rival terrestrial fiber access networks, as exists in the U.S. fixed network telecom industry.

So regulators have built competitive frameworks on wholesale access to incumbent networks. Some would argue that is likely the only viable solution, but still leaves the infrastructure owner clear incentives not to make life easy for its wholesale customers.

That is why some believe rival facilities-based networks are a more-sustainable way to promote competition.

Beyond that suggestion, structural problems with weighty political implications might remain.

Perhaps the incumbent telephone company model is unsustainable long term. It was designed for monopoly conditions, and therefore has a legacy cost structure that perhaps can be trimmed only so much, for legal and institutional reasons.

If so, in any future competitive market, enabled by relatively radical changes (either a full structural separation or enabling viable lower-cost infrastructure based competitors to enter the market, the lower cost new competitors eventually will win.

There are implications for regulation, as the present “national network” might go away, to be replaced by a new constellation of providers who cannot easily afford all the “universal service” requirements of the old legacy providers.

Neither will the new providers, because they operate with lower costs, support the same number of jobs, at the same pay rates as legacy telephone companies.

They will tend to operate at lower profit margins, hence will generate less surplus for authorities to tax.

Taken altogether, a huge and unsettling shift will be coming, in at least some markets, as competition intensifies.

Across the globe, incumbent profit margins and profits are tightening or declining. That might be one sign they cannot actually survive a broader competitive market, over the long term.
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