Advisory Report (Europe)

How are Incumbents Re-organizing Company Structures to Face New Market Conditions?

Sandra O'Boyle
Research Director, Business Telecom Services Europe

Joel Stradling
Senior Analyst, Telecom Services Europe:

European incumbents face competition from several different types of companies in addition to the pressure imposed by fixed-line alternative operators, including, for example, systems integrators, cable companies, utility companies, and wireless operators.

The incumbent players also face a challenging combination of investment required to modernize legacy infrastructure, downwards pricing pressure on voice revenues and regulators forcing change to encourage open competition. Such carriers must upgrade their infrastructure to NGN in order to accommodate growing converged IP traffic and once that is achieved, voice revenues form TDM and PSTN services will continue to drop giving way to cheaper IP services. All this is affecting both the importance of the network component as well as the internal organisation of the carriers. In general, this will lead to a redefinition of where the core telco value resides. The advantage will no longer be in owning, or policing, access to the infrastructure, but rather in having the best and fastest service delivery platforms connected to that infrastructure.

So how are major European carriers reorganizing themselves to operate at a lower cost base, with more agility and faster customer response times? This Advisory Report looks at how BT, France Telecom, Deutsche Telekom, Telecom Italia, Telefonica, KPN and TeliaSonera have re-aligned their organization to meet these challenges.

BT

BT has created two new business units – BT Design and BT Operate. BT Design will be responsible for the design and development of new services, and BT Operate will handle deployment and operation. Approximately 20,000 BT employees will move into these new units from other parts of the business. BT Retail, BT Global Services and BT Wholesale will retain responsibility for marketing, sales and customer service. Openreach (the infrastructure access provider) remains unchanged. BT does not face integration of a mobile division into its operations, since it sold off O2 over five years ago. Each of its core business units are customer-focused - BT Retail (consumers and SMEs), BT Wholesale (SPs/carriers) and BT Global Services (enterprises).

The new structure is largely about efficiency, cost rationalization and taking out duplication of resources across the entire organization. BT creates a single operating unit to run all IT, networks, operations, service creation, etc. BT 21CN will sit in this new group (moving away from Wholesale) and will also have a clearer picture of service development needs across the organization. This should benefit BT Global Services and its margins in particular. More long-term, the structure could be the IP Service Factory that can deliver replicable solutions to business customers that would be faster, cheaper, better and more reliable. Also, potentially the new structure means that any job losses could come from outside the UK where BT is not heavily regulated. Also, financial reporting aspects (e.g., CapEx) will no longer be attributable to each business unit.

BT sees telco and network services as commodities that are fast running out of value. The network platform (21CN) is more of a pure enabler for software-based services and applications that deliver real value to end customers. Regardless of whether BT is delivering the application to its end customer or another provider, 21CN will generate revenue by being an open platform that software developers can build applications on top of.

BT has created the tools and interfaces that let third party developers, big and small, access BT’s core network and IT facilities as illustrated by its launch of Tradespace, which the carrier terms as ‘a social media platform for small businesses.’ BT´s Web services Application Program Interfaces (APIs) work with all the major development environments (Microsoft, Open Source, etc.). BT is getting an early start with the software developers – and Microsoft in particular – to compensate for basic telecoms commoditizing and hoping to gain differentiation, value and sales from software as a service.

Recommended End User Actions

► Get set for fast expanding broadband services and – more slowly – evolving FMC. When assessing carrier preparedness for this development, users should look at service rollout, supporting infrastructure and carrier organizations that will support FMC solutions - providing access to services and applications via multiple devices (i.e., PCs, laptops, mobile phones, PDAs) and the best available fixed or wireless network.

► Users need to measure the ability of telecom service providers to handle changes in accordance with technology evolution, and also how such change will impact business processes. For example, customers should ask whether the telco can deliver consistent and competitive service levels, or is the carrier likely to run into significant problems with over-staffing and lack of skills to handle new systems, which will inevitably impact service price and quality?

► It is important to recognize that the migration to an all IP NGN infrastructure will take another five to eight years, because it involves all elements in the delivery chain. A core IP infrastructure still needs massive developments and investments in the access network and the terminals to deliver end-to-end IP. However, carrier intentions as expressed in their own reorganizations are indicators of an orderly transition strategy.

► Users need to focus more on the services that they need, and less on the infrastructure aspect. The network platform is commoditizing and carriers are concentrating on their ability to deploy new services rapidly and cost effectively.

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