Everyone loses if tier-1 telcos fail

Since the 2008 collapse of Lehman Brothers, governments and pundits have struggled with the question of which financial institutions should be considered too big to fail. It’s a worthwhile debate, but its fixation on financial institutions ignores the equally important role that other industries play in national and global economies.
 
For example, what if the largest telco in a major country suddenly underwent a Lehman-style implosion? That possibility isn’t as far-fetched as it might sound, considering how many tier-1 operators are in precarious financial situations.
 
In 2011, Telecom Italia posted a net loss of €4.73 billion. In 3Q11, Telefónica posted its first quarterly loss in nine years. State-run operators also are struggling. For example, India’s BSNL reported a 2011 loss of nearly €1 billion.
 
All three operators, along with their peers, are under enormous margin pressure due to fierce competition in their home markets and the global recession. According to Emeka Obiodu, Ovum principal telco analyst, European operators used to offset losses in their home markets with revenue from emerging markets, but now those gains are no longer sufficient to compensate for poor performance at home.
 
Can any economy – developed or developing – literally afford to lose the services that are provided by any of the large telecom operators?
 
One way to answer that question is to look at how much tier-1 operators contribute in terms of spending and jobs, both in their home countries and foreign markets. For example, AT&T has more than 242,000 employees worldwide – at least eight times what Lehman had when it went bankrupt. In the first six months of 2012, AT&T spent nearly $9 billion (€7 billion) just on network upgrades, such as LTE.
 
Another way to quantify the role that tier-1 operators play in the economy is to look at how their services are catalysts for growth. For example, a 2010 World Bank study found that a 10% increase in mobile penetration increased per-person GDP by 0.8%.
 
 
One might argue that telecommunications is a free market where alternative operators can easily step in and take over the role of a tier-1 player. This is not true because the incumbent operators usually occupy an exceptional position in the national telecom markets, owning a substantial part of the fixed network resources.
 
In Europe, for example, each incumbent builds and maintains a network that spans an entire country, thanks to regulatory tradition: Before market deregulation, it was the federal government’s responsibility to use tax revenue to build networks to connect its people, businesses, schools and hospitals. If it were left to a free and unregulated market, we would be facing significant price discrimination based on the location of the end user (big cities versus remote towns), and it could not be taken for granted that everyone had access to basic telephony and/or the Internet.
 
The result is that decades of regulatory policy have put incumbent operators in a position that’s fundamental to both the economy and everyday life. So if they were to undergo a Lehman-style bankruptcy and liquidation, the financial shock would ripple through nearly every individual and institution in their respective countries.
 
There are a couple of reasons why that analysis isn’t hyperbole. First, if developed and developing economies weren’t so heavily dependent on telephony, broadband, mobile and other telecom services, the United Nations wouldn’t have recently added Internet access to its list of human rights. Second, how many economies could shake off the sudden loss of an operator that spends billions of Euros or U.S. dollars annually in network upgrades, advertising and salaries?
 
When we consider our communications infrastructure as a critical resource for our global economy and daily life, it’s clear that we must get serious about the possibility of losing multiple tier-1 operators to a Lehman-style implosion. Are we comfortable with the risk of allowing them to fail, as the U.S. government did with Lehman? Or should they be bailed out, as the U.S. government did with other large financial institutions?
 
These are uncomfortable questions that can’t simply be swept under the rug. The current plight of tier-1 operators in Europe and elsewhere strongly suggests that it won’t be long before these questions are no longer hypothetical. Indeed, India is a prominent example of a government stepping in to bail out a major operator.
 
To avoid a Lehman-like fate, tier-1 operators must quickly get serious about adding intelligence to their networks and value to their services. Otherwise, they’re doomed to providing dumb pipes. Next generation service providers that rely on them should also be worried, because when a tier-1 is no longer around to invest in LTE or FTTx, the growth prospects of next generation providers will tank.
 
When a telco that’s too big to fail does, no one wins.
 
Rodrigue Ullens is chief executive officer of Voxbone. For more information, visit www.voxbone.com

 

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