Consolidation and Its Consequences in the Telecom Sector

By May 4, 2005 February 15th, 2019 Opinion
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Published: May 04, 2005 in Knowledge@Emory

Lately, telecom industry headlines have read like juicy soap opera teasers: Verizon battles Qwest for MCI. Cingular picks up AT&T Wireless. EarthLink partners with SK Telecom. Nextel weds Sprint. It seems everyone wants a piece of someone else’s action—and acquisitions and joint ventures are the mode of choice. All this activity, however, is provoking a good deal of debate. When the dust settles, who will be the real victors? Do these transactions actually add any value, and if so, to whom? Most important, what will customers get out of the deals?

Get Used to It
In the wireless sector, merger and acquisition activity is likely to continue apace, notes Jagdish Sheth, professor of marketing at Emory University’s Goizueta Business School. “Companies want to enjoy economies of scale and synergies in procurement. It’s not as much about reducing the number of people, but more about increasing buying power. Unlike the wireline sector, wireless phone service is still fragmented in the U.S. so there’s potential for further consolidation.” Sheth believes that the field will give rise to just three large-scale national players, with the rest operating as niche providers. “Regional players will be in the worst position – especially if they have no differentiation, or if they are unable to take advantage of economies of scale.”

Similarly, the Internet service provider space will experience a major shakeup, says Sheth. “Anyone with a server farm can set up an ISP, so they number well over 1,000. But lately we’re seeing more consolidation, with AOL in the number one spot, MSN at number two and NetZero at number three. To compete, ISPs will need greater national presence, not just national connectivity.”

Sheth predicts that the regional Baby Bells won’t sustain the ISP service as a standalone business, but offer it as part of bundling their service with voice and data as well as portal services, like Yahoo!. “The ISP business model will become more advertisement-driven than subscription driven,” he says. In the short run, notes Sheth, ISPs may survive by capturing voice-over-IP business, but long-term sustainability has to be driven by ads.

Benn Konsynski, professor of decision and information analysis at Goizueta, believes that IP will be the dominant backbone for a variety of services. “As ISPs work to extend their service portfolios, they’ll not only look to bring over [standard] voice services but also more intelligent voice services, such as voice integrated commands,” he says. “Calls may not be placed from location to location but rather person to person, since people are mobile.”

The biggest and perhaps most vicious battle, says Sheth, will be the cable companies’ tug-of-war with telecoms. “Cable companies are being threatened by wireless cable offers such as DirecTV, while telecoms are struggling against the rise in wireless phones. Cable companies like Comcast and Cox are making inroads by offering voice services, while telecom outfits want to offer TV and video over IP.”

Value Propositions
Who benefits from all this sparring and deal making? Whether companies achieve their goals through an acquisition, a joint venture, or an alliance depends somewhat on the region, says Konsynski: “Companies that have approached it from the standpoint of trying to export domestic services or enter markets without experience have found themselves lost very quickly, so they’re best served by strategic partnerships that leverage attributes of the particular geographic markets.”

Typically, acquiring companies end up overpaying for their target companies. But with the Sarbanes-Oxley Act, companies have become more concerned about making sure their numbers are justifiable, says Rajendra Srivastava, a chaired professor of marketing at Goizueta and director, Emory Marketing Institute. “Companies have to show the value of the intangible assets they’re getting from the acquired firms. The difference between fair value and what’s on the balance sheet has to be somewhere. How that value is created is in the eye of the beholder. SBC, for instance, was a strong player regionally in the residential space, but its national presence was weak and its international presence negligible. So by acquiring AT&T, they buy their way into the business and global markets.” Srivastava likens it to a U.S. airline creating an alliance with (or buying) an Asian or European counterpart.

International Presence
In fact, telecom is fast becoming a primarily global proposition, notes Srivastava. “It’s harder for small or regional players to survive in the long run since services are needed on an international scale. You see it with Verizon Wireless – it brought Vodafone into the U.S. market.” As customers move around, says Srivastava, it’s increasingly necessary for their services to go with them. “A provider who lets me stay linked through both data and voice as I travel from New Zealand to India to wherever is more valuable to me,” he says. Srivastava points to the fact that already, companies like Nokia and Microsoft are linking up so that users can access their familiar Exchange server email through their handsets.

On the handset and equipment side, says Sheth, companies have no choice but to go international. “There will be fewer firms in the business – Ericsson already ceded its handset business to Sony [with the creation of Sony Ericsson], and Siemens will probably follow suit. Handsets will become a fashion industry – just as people choose activewear, they can choose a handset with Palm, camera, iPod, and PlayStation functionality.” All these bells and whistles will encourage operators to focus on broadband. While some European and American companies will survive, companies like Korea’s Samsung and China’s Huawei Technologies merit watching because of the huge domestic Chinese market, says Sheth.

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