Leveraging Market Fragmentation, Internet Growth

Posted: 09/1999

Soap Box

Leveraging Market Fragmentation, Internet Growth
By Paolo Guidi

It is clear that two market forces are driving the creation of a next-century business
model for global telecommunications providers: (1) The market liberalization sweeping the
globe; and (2) The exploding bandwidth requirements of telecommunications and Internet
service providers (ISPs) throughout the world.

These trends have necessitated new growth strategies for global carriers that are based
on the opportunities found in the fragmentation of international telecommunications
markets and the raw network power requirements of the Internet. These carrier
opportunities also will lead to bonuses for users by bringing new services at increasingly
lower prices.

Fragmentation Spurs Growth in Wholesale Markets

The regulatory changes that have fostered this global market fragmentation are
exceedingly complex, involving pronouncements by the International Telecommunications
Union (ITU) and the Federal Communications Commission (FCC), as well as rules imposed by
foreign governments and the World Trade Organization (WTO). This virtually endless set of
evolving rules has been challenged by structural changes within the industry, new
technologies and the growing belief that some of these rules simply cannot be enforced as
the "gray area" they have created grows even wider.

What telecom companies are faced with today, as a result of these regulatory changes,
is a world in which liberalization is spreading. Today, the United States generates 30
percent of the world’s international traffic and has extensive competition. Western Europe
generates 35 percent of the world’s international traffic and has opened competition in 15
countries. Asia Pacific is not uniformly liberalized yet and generates 15 percent of the
world’s international traffic. Chile and Mexico lead liberalization in Latin America,
which generates 5 percent. The rest of world, which has 40 percent of the population and
generates 10 percent of the international traffic, is still relatively closed to
competition. But the arrow clearly is pointed in the direction of further liberalization.

The net result of deregulation and liberalization, whether de facto or de jure, is a
new, exciting market for wholesale services, consisting of a matrix with thousands of
elements, each in turn consisting of hundreds of routes. The networks that are
geographically well positioned have an opportunity to become carriers’ carriers. Those
that are geographically challenged cannot aspire to becoming hubs for international
traffic, not unlike airlines. Several traditional and emerging companies have pursued
these opportunities. In a very short time, Teleglobe Communications Corp., for example,
has evolved from a Canadian monopoly into a global carrier that competes in more than 100

Who is the beneficiary of this new market for wholesale services? There is no doubt
that it is the end user. The consumer who pays the bill already is benefiting as prices of
international calls continue to decline. The development of carriers’ carriers has spawned
another important phenomenon: the separation between service and infrastructure. At least
this is true for a mature service such as telephony. This is not always the case for the
Internet, in spite of its obvious and inherent capability to fill the time and geographic
separation between suppliers and consumers electronically. Such separation between service
and infrastructure accelerates the market-share fragmentation process, thus increasing the
size of the wholesale market as new entrants generally are "network poor."

The Challenge of the Internet

The trends surrounding the growth of the Internet are somewhat different from the
growth spawned by global liberalization. Nonetheless, they are clearly fascinating as they
will redefine the industry. First, the traffic is U.S.-centric and inbound–the opposite
of telephony. Second, the demand will require the construction of unprecedented levels of
transmission capacity, a multiple of what is required to meet the telephony demand. As
such, telephony will piggyback on a transmission network built for the Internet, but will
continue to command much better revenue per unit of capital. For example,
wireless-to-wireless communications is a service for which users gladly will pay premium
prices; whereas surfing the ‘Net without a clear purpose will not extract the same price
per minute. The key point is that operators and entrepreneurs are building gigantic new
facilities–capacity increases two orders of magnitude every five or six years–in
anticipation of massive new demand.

Where will all this take the industry? First, to the construction (on a speculative
basis) of global network infrastructure based on new technologies that promise to harness
all applications, whether voice, data or video, in a single network. Recently, Teleglobe
announced it would build the world’s first globally integrated Internet, voice, data and
video network, Globesystem. This five-year, $5 billion investment, based on advanced
lightwave Internet protocol (IP)/asynchronous transfer mode (ATM) technologies with
next-generation network management systems, will transform the network capacity to almost
200 times the current capabilities by 2004. This investment is essential to position
Teleglobe to grow its Internet and carrier businesses, as network traffic levels and
customer demand for bandwidth continue to increase dramatically.

As Teleglobe and its competitors continue to add new capacity and technology to its
global networks, its network-rich industry will foster the emergence of new
marketing/software-based service providers riding on this third-party infrastructure.
This, in turn, will lead to even further fragmentation of market share and competition.
The new technology in the next-generation networks finally will enable service providers
to redefine services and their associated prices. The price a user will pay for service
will reflect many attributes other than the traditional time of day, length of call and
destination. Instead, we will see call-by-call-defined grade of service reflecting speed,
error rate and delay. The true differentiating characteristic of the new international
services will be consolidation of all services under a common portfolio and network
architecture. Exploding demand, new and powerful technologies, massive infrastructure
expansion and more capital availability will be extremely positive for operators and
customers alike.

Paolo Guidi Paolo Guidi is the chairman and CEO of Teleglobe Communications Corp., which
includes Teleglobe Canada, Teleglobe USA and 22 other Teleglobe carrier entities
worldwide. He can be reached at +1 703 755 2000 or

the ‘Digital Divide

‘"The cheaper connectivity is, the easier it is to cut across the economic, ethnic
and geographic divides. State regulators have been fundamental players in building this
[concept] by keeping phone service cheap."

–Gene Kimmelman, co-director, Consumers Union

"Universal regulation, when applied universally … will give us universal service
as the end result. And this will end the Digital Divide."

–Priscilla Hill-Ardoin, senior vice president, SBC Communications Inc.

"There is a digital divide. AT&T [Corp.] and MCI WorldCom [Inc.] aren’t there
for the ‘have nots’ and there’s no one who’s going to make them do it."

–Roy Neel, president, United States Telephone Association

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