Today European telcos focus on financial engineering instead of attacking their real problems: lack of innovation and missed opportunities. Only by opening up their value chains and splitting organizations into separate network, innovation, and retail layers will telcos jump-start innovation and capitalize on new opportunities, according to a new Report by Forrester Research B.V. (Nasdaq: FORR).
“European telcos don’t appreciate that the root cause of their malaise is the vertically integrated model of the past 100 years,” said Forrester analyst Lars Godell. “With an industry in crisis, traditional mergers and acquisitions and restructuring within the outdated vertical organizational model can’t solve the telecom industry’s persistent problems with innovation and missed opportunities. Instead, layering will fix European telcos’ fundamental problems as they abandon vertical integration and move to a horizontal structure that will foster innovation, delight customers, tap new sources of demand, and speed up organizational processes.
“We believe that layering Europe’s telecom industry will work for several reasons. The deintegration of European telecoms will happen because it’s happening in other industries — computers for instance. It also makes sense technologically, as the network layer will provide the foundation for integrated end-user solutions developed and delivered by innovation and retail companies. Financially, there’s money to go around for all three layers in an open environment, and layering means transparent, market-determined prices replacing wasteful haggling over transfer prices, followed by months of discussions with competitors and regulators.”
Forrester’s Report “The Rebirth Of European Telecoms,” argues that telcos across Europe won’t switch from the vertical, fully integrated model to a layered model overnight. Instead, industry and company deintegration will happen in three stages through the rest of this decade. Phase 1, in 2001 and 2002 will be a period of innovation, of opening up and marking the first moves to a horizontal industry structure which is becoming visible now. This period is characterized by network consolidation, the externalization of innovation through ecosystem partnerships, the emergence of open value chains, and technology and economic interfaces. Layered telecoms will first be tried out by the Nordic telcos, while Europe’s biggest telcos will keep their vertical model a bit longer.
The writing on the wall will be clear by the second phase in 2003 and 2004, as mobile operators start feeling the heat of declining operating profits, giving layering traction. Through this process, mobile-only dreams will be smashed as fixed, mobile, and Internet networks coordinate, new entrants focus and combine, common customer interfaces develop, and big players come under close scrutiny. In the third phase — from 2005 to 2010 — incumbent operators will break apart. By 2005, the combination of strong competitive, financial, and innovation pressures, and the big management burden coordinating three very separate businesses will become too much for even the most integration-minded incumbents, and a new whirlwind of deals will occupy the latter half of the decade.
“With years of experience with open value chains and working with external innovation partners, incumbents will see little reason to keep their three separate businesses under one corporate roof any longer,” Godell added. “Instead, they will formally separate the businesses either by giving existing shareholders shares in each of three separated companies or by selling pieces through trade sales to large investors and focus on one layer. The Nordics will again be ahead of the rest of Europe in implementing this final step of a layered model. Also, new players with big bucks to spend such as private equity firms like KKR, retailers like Ahold, and SIs like IBM, will step in and grab pieces of previously integrated telcos that fit their business areas.”
For the Report “The Rebirth Of European Telecoms,” Forrester interviewed 39 senior executives, visionaries, and experts inside or related to the European telecom industry.