Will telcos ever die? Now that's the last resort

With today’s talk of telecoms industry disruption, how likely is it that the super-size giants of the telecom world really will disappear? Is disintermediation, envelopement, or sheer dumb pipery going to do away with the BTs, Telstras, Bharti Airtels or Vodafones of this world?

The fashionable thinking is that pervasive technological change, aggressive anti-monopolistic regulation and disruptive digital business models all spell trouble for the telecoms sector.  Over-the-top players and device manufacturers will win out, content will rule, and pipe-owners will be reduced to the fate of other infrastructure providers: large asset base, single-digit growth, dependable dividends and a low return on capital employed.

But AT&T’s story, observed over 100 years of relentless technology change, regulatory intervention and market disruption, suggests that none of these disruptive issues may be sufficient to simply do away with such a business: what also counts is long-term access to capital, institutional know-how about how to win, serve and retain customers, and an ability to navigate long-term industrial policy.  So let me tell you the story of AT&T.

In 1885, the American Telegraph & Telephone Company was formed through the takeover of the struggling business founded by Alexander Graham Bell, the man who invented modern day telecommunications in 1872. From there began the epic story of AT&T, a mighty company that once rose to inexorable powers, then fell following a tumultuous regulatory break-up, and ultimately rose again to become a business with $127bn in revenues in last year, equivalent to the GDP of Hungary.

In the early 20th century, AT&T was seen by Americans as nothing short of heroic. This organisation's intrepid engineers were criss-crossing a vast country of inaccessible mountains, unexplored canyons and arid deserts to connect towns and cities and bring together the estranged peoples of a great nation.  While facing a $100m debt crunch in 1907, financier John Pierpont (or JP) Morgan stepped in to bring back former empire-building AT&T Chairman Theodore Vail to serve a second term, and at the same time convinced policy makers to institutionalise the company’s dominant position as a monopoly with the full protection of US law. For the next seventy years, AT&T scaled such heights as the prized telecom service provider of the United States that at one point it actually became the world’s single largest company. It seemed nothing could touch AT&T.

But by the late 1970s, conventional academic thinking that infrastructure industries have to be monopolies was moving on. Economists realised that only a few parts of a telecommunications system (or a power grid, airport or railway, for that matter) are a “natural” monopoly. These are the parts where it is uneconomic for multiple companies to build competing infrastructure, for example the railway track itself, the airport runway, or the long-distance trunk cable. The other parts, such as the railway services that use the track, or the airlines that use the runway, or the companies that provide the telecoms service could be competitive – and competition would result in better services, more customer choice, and lower prices.

With the 1984 US Telecommunications Act, the once untouchable AT&T was broken up into several Regional Bell Operating Companies (known as Baby Bells) and one long-distance telecommunications company (AT&T). AT&T could no longer offer local services, and within a few years, it was only one of three licensed long-distance service providers in the US. For the unquestioned king of telecoms, this was a big fall.

A few years’ later, economists realised that even this wasn’t right. Why should customers have the choice of only one company in any region? Just like the national monopoly of before, there was no need for this local monopoly: the network could be made subject to competition by obliging operators to provide open access to other licence holders.

And so, a decade after the fateful break-up, a further round of deregulation meant that customers could now choose who to buy long-distance and local services from. As Baby Bells started marketing in each other’s regions, and AT&T in all, the less deep-pocketed and nimble Bells began to struggle. Through clever acquisitions spread out over another decade, AT&T started to rebuild back into local service provision across the US, and also into mobile. By the early 2000s, AT&T was once again a nationwide long distance, regional and local service provider, now with a major wireless business in the mix as well.

If there's a lesson in all of this for the large Indian telco, its all about remaining relevant. While fancy applications providers come and go, and handsets are enjoyed but ultimately lost or replaced, large Indian telcos must believe that they are here to stay.  It is this belief that has to extend to a jealously guarded customer relationship, and to being known as the communicaitons service provider of last resort.  Because ultimately for you and me, having a voice connection with a network that works, with a service provider that connects me to lots of other services too, is a relationship I really need to have right.

The “dumb pipe” theory may have sense in it, but it won't kill off today’s telcos provided they keep morphing to meet new challenges, while relying on their core strengths.  Just like AT&T, a handful of our Indian telcos may also never die!

The thoughts and opinions shared here are of the author.