Bankruptcy for Former Incumbent Telcos?

Few veterans of the monopoly telecom business can imagine outright failure of the former incumbents. But few should hold such views. Outright failure seems not only possible, but increasingly likely, over the next couple of decades.

Pre-1980, the notion that a national telecom company could go “out of business” was fanciful in the extreme. In the Internet Protocol era, any single provider probably can “go out of business” without imperiling the national interest in maintaining a viable communications fabric.

That is, to say the least, a huge change in possibility that all too often seems imperfectly reflected in regulatory approach. We keep regulating as though some markets need to be “stimulated,” when in fact markets already are evolving in a fundamentally more competitive direction.

We keep acting as though “former incumbents” have decisive market power, when at every turn their power is eroding.

Someday we will have to confront actual market failure on the part of former incumbents. Because we now live in an IP world, specifically designed to overcome failures and outages, the communications fabric will not suffer catastrophic damage.

But the mindset has to change.

Some big telecom companies can--and most likely will--eventually go out of business. There are multiple reasons. Some legacy firms simply have unsustainable cost structures, while operating in markets where lower-cost, higher-value competitors are emerging.

In the U.S. market, it is not unreasonable to argue that Comcast will eventually become the biggest and most-important provider of many fixed network “telecom” services (Internet access, voice, video) and a leading provider of mobile services.

It is not unreasonable to expect that although Verizon, AT&T and Comcast lead, other former leaders will be absorbed, merged, or otherwise removed from the market as branded entities.

It is not unreasonable to assume that leading app providers such as Google and Facebook, or major device suppliers such as Apple, might not become significant providers of mobile access services.

All of those trends will undermine the legacy telco business model, but also provide the replacement providers, so that the national communications infrastructure remains intact. IP really helps, in that regard.

“Dumb pipe” (access and transport functions) is “supposed” to support all the other layers of the software function. Over time, even as communications providers sell a mix of managed and “dumb pipe” services, dumb pipe is going to become more important.

But dumb pipe also tends to imply much lower profit margins. That is not to say incumbents cannot hope to create new managed services. They can do so, and will try very hard. They might ultimately succeed at finding big new revenue sources to replace the lost managed voice and messaging revenue sources.

It just is not easy. Eventually, some big household names are going to disappear, and new providers are going to emerge to replace them. Our switch from monopoly to competition, and from TDM to IP, are going to wring inefficiency out of the business, imperiling survival for high cost providers.