At the World Conference of French telecoms equipment maker Alcatel in February 2005, the keynote speaker, Dr James Canton, chairman of the Institute for Global Futures and a former White House science and technology advisor, attempted to shake up his audience by making a bold prediction: "Within 10 years telecoms companies will have ceased to charge customers for voice calls, and will instead generate all their revenue from data services." Telcos that fail to recognise this trend and respond accordingly, he warned, will not survive.
If Canton had been expecting his prediction to provoke shock or protest, then he chose the wrong audience. Probably the only aspect of Canton's remarks that the assembled telecoms professionals might have disagreed with was his timeframe. Many of them, possibly most of them, recognise that the death of voice tariffs will happen much earlier than 2015.
Indeed, although they are sometimes still loathe to admit it, most of the world's telcos have been preparing themselves for life after POTS (the 'plain old telephone service') for sometime. The business of charging per minute for connecting two telephones across a network has been their chief revenue source for the last 120 years – but not for much longer.
The writing has been on the wall for POTS ever since a wave of widespread market deregulation hit the industry in the 1980s. Under pressure from competitors, per minute charging began to decline for the first time; then, in the 1990s, new routing and transmission technologies made the real cost of making such calls infinitesimally small – sparking an international trade in 'bulk' voice minutes.
Consequently, even before voice-over-IP 'softphone' companies (such as Net2Phone, Vonage and Skype) began to give anyone with a personal computer and an Internet connection the ability to talk to each other for free, switched voice minutes had become a commodity business. And, as Canton might have put it, most telcos have been planning their response accordingly.
However, recognising that it is time to create a post-POTS exit strategy is one thing; deciding on what that strategy should be and, crucially, when to execute it, is an altogether more challenging problem. Certainly for former public telephone operators (PTOs) such as BT, Deutsche Telekom and France Telecom, deciding overnight to abandon decades of investment in a public switched telephone network (PSTN) is neither viable nor necessary.
In the UK for instance, BT is still the first port-of-call for the vast majority of the nation's phone users — even after 23 years of competition from alternative fixed-line carriers and almost as many from wireless network operators. Critically, it is also still the sole owner of a local loop infrastructure comprised of around 400 million miles of copper cabling that terminates in some 30 million homes and businesses.
Such assets aren't cast aside lightly and BT, alone so far among Europe's leading telcos, has in fact published its plan to upgrade its network infrastructure to support a new set of IP-based services (see page 14).
Given that it will be five years before BT has completed its 21st century network (21CN) project, it is no surprise to find that the plan has been greeted with healthy scepticism both by BT's rivals and by some independent analysts. According to Margaret Hopkins, an associate analyst with telecoms consulting group, Analysys, the most significant feature of BT's new project is not the extent to which it is adding new infrastructure to the national network, but the extent to which it is preserving the useful life of existing investments.
"21CN is all about sticking to copper," says Hopkins. "It means there won't be any roll out of fibre, unless it's to large new housing estates or other greenfield sites." All the same, she adds, "It does mean that every residential line will automatically get an upgrade to broadband."
It is this universal provision of broadband to the home that is seen as the central point of BT's post-POTS business strategy, which is to shift away from connecting people across a private metered circuit and to become a provider of a full range of broadband services, including voice, data and television.
The same so-called triple-play strategy is also being adopted by other European telcos. In Italy, new carrier FastWeb is taking advantage of a slow start by the incumbent operator, Telecom Italia, and has rushed ahead with a three-pronged voice, video and data package that has quickly caught on with subscribers.
In Germany, the former PTO Deutsche Telekom (DT) is taking a more measured approach, treating business as the primary target for its broadband services. "Convergence [of data and voice] is real in the enterprises, but not in residential," explained CEO, Kai-Uwe Ricke, at a recent conference. Denying DT's focus on business rather than residential broadband shows a lack of ambition, he says DT is committed to using broadband as a lever for radical change: "DT is not a network provider anymore, it's an ICT company," says Ricke. "Businesses need billing services, HR services, and they need them with guaranteed service levels. These are all things that we have a history in."
As the former UK national PTO, BT starts off with advantages that other telcos will struggle to match, particularly the near universal access to the UK residential market that the broadband 21CN will provide. However, with broadband wireless alternatives such as WiMax and 3G either set to match or exceed the likely peak capacity of BT's xDSL broadband over copper technology, and with cable and satellite TV operators already having dipped more than a toe in the telecoms space, BT's residential play position is by no means assured. For this reason, it is pursuing business customers with equal gusto.
Indeed, for the post-POTS telcos, the business services sector offers both the richest potential for immediate top-line gains and its sternest competitive test. BT Global Services, the company's business network services arm, already has an enviable customer base both at home and abroad, thanks in no small measure to the company's £520 million acquisition of Infonet. This deal puts BT Global Services on a more or less equal footing with major international competitors such as SBC's AT&T and France Telecom's services arm, Equant. These are the companies BT's Global Services business is most likely to go head-to-head with for big multi-million full service contracts. However, this won't stop BT's customers becoming the targets for a host of smaller, and more specialised competitors, such as Colt, Kingston Communications, Vanco and Savvis.
BT's size and comprehensive services portfolio ought to give it the edge over most rivals when it comes to winning major contracts from businesses such as Reuters and Unilever – who tend to favour a one-stop-shop approach to their communications requirements. However, according to Larry Velez, senior European telecoms analyst with Forrester Research, a number of companies are eschewing the risk of placing all their communications needs with one operator, and are instead pursuing a best-of-breed strategy that plays into the hands of smaller players.
There is no shortage of operators that fit this description, such as Colt, with its rich estate of metropolitan fibre ring assets, and Savvis, the IP network and data centre operations specialist. The view of the financial and IT market analysts is that technological convergence does not necessarily mean consolidation of suppliers. The IP services market will be as complex as the networks themselves.