Telecom Convergence Analysis

1. Executive Summary

The communications industry is facing unparalleled changes which are breaking down traditional industry boundaries. Providers from different technologies and backgrounds all focus on the same converged service offerings.

On the one hand, customer demand for convergent services and content provide new revenue opportunities. At the same time, intensifying competition from existing industry players and new market entrants, including cable, ISPs, content providers and consumer brands, bring renewed demands for innovation and differentiation. Increasingly discerning customers expect a value added services experience, irrespective of technology. At a time of rapid technology change, these factors add to existing pressures on telecom infrastructures and market expectations for growth.

IP technology is the catalyst for this disruptive change. Convergence brings together previously parallel networks (cellular, fixed, enterprise, Internet) onto a single IP-based infrastructure. Convergence enables integrated service propositions (ÐŽ§tripleЎЁ and ÐŽ§quadrupleЎЁ plays). Convergence enables virtually ÐŽ§anytime, anywhere, anyhowЎЁ service delivery. Such changes present major challenges and demand renewed attention to strategies.

Convergence requires companies to take hard strategic choices on their positioning in the value chain, and ensure their investment and acquisition strategies are focused on building and accelerating revenues rather than shoring up declining legacy streams. PlayerÐŽ¦s responses to date reflect a number of different rationales: building scale and achieving cost synergies within discrete markets, extending the footprint to new geographies, and accessing new capabilities across industry boundaries. In this respect, GoogleÐŽ¦s strong brand and its proven ability to collaborate flexibly and in a gain-sharing way with a range of partners, notably content and technology providers is a critical asset to take a revenue share in the emerging market.

2. Attractiveness of the convergence industry

Broadly, convergence describes the tendency of traditional telecommunications, Internet, IT, entertainment and broadcasting to come together through the ability to transport, store and manipulate digital information. Convergence is enabled by technological development and is driven by the search for innovation and improved operations. Convergence is also driven by changing and maturing customer demand. Finally convergence is driven by the potential perceived value growth opportunity.

The content of this report has been built upon the Economist survey (Economist Survey, 2006) and upon personal knowledge of the Telco industry.

2.1. Convergence macro environment analysis

2.1.1. STEP Analysis

The objective of the STEP framework analysis is to look to environmental changes likely to affect the structure of the convergence industry.

Social

Social factors impact is high since convergence is likely to transform human interactions:

Ñ"Ю Interpersonal and business relationships and behaviours change as technology permits new methods of interaction and socialising. Communications anywhere and anytime are changing everyday behaviour (for examples see Appendix 1)

Ñ"Ю Convergence offers whole new ways to function, business and personal-wise (see Appendix 2 for examples).

Economical

Economic factors impact is medium because of a balance between economic risks (players past debts/overflows), growth potential (revenue, globalisation), and a positive economic context:

Ñ"Ю Convergence holds the promise of enhancing value growth. Thousands of new jobs could result from convergence deployment, both directly (infrastructure, services), and indirectly (related industries).

Ñ"Ю Legacy revenues from voice are currently set to decline faster than the increase in revenues from convergence services. If this trend continues, Telcos will experience a severe dip in overall revenues and enterprise value, driving major upheavals and possible widespread restructuring. Declining revenues, combined with past licence auctions and infrastructure investments debts, rise a major risk that financial markets decide to reduce share prices and supply of capital.

Ñ"Ю Global macro economic, investment climate and trade policies stability have a positive impact on financial markets. Moreover, interest rates increases remain limited.

Ñ"Ю Worldwide liberalisation movements provide opportunities for international growth.

Ñ"Ю National Telcos often have an overflow of capital after their national market liberalisation and local loop unbundling, and are looking for investment opportunities into new competences or in smaller players (globalisation).

Ñ"Ю With the shift to digital, the number of channels has multiplied, and audiences are becoming fragmented, reducing the efficiency of traditional advertising (TV, newspapers) in favour of localised, personalised and integrated (ability to order) advertising.

Technological

Technology impact is very high since innovation is likely to further transform the environment:

Ñ"Ю IP enables radical change in service innovation and competition by providing the basis for interoperability and cost efficiency through open standards. Traditional service specific and proprietary networks are difficult to integrate, inflexible and costly to maintain.

Ñ"Ю Convergence is characterised by services supported by a single provider, progressively delivered on a single device, interconnecting multiple infrastructures to perform an extend functionality. However, as long as technical capabilities vary across platforms, there will be scope for services designed for a particular platform.

Political

Political factors impact is high by presenting serious challenges to regulatory bodies to:

Ñ"Ю Avoid unjustified biases favouring or retarding one industry segment, prevent monopoly practices, and ensure full and fair competition among providers currently operating under different regulatory regimes:

Ñ"Ь Mobile Number Portability improves competition by reducing customersÐŽ¦ barriers to switching operator.

Ñ"Ь Authorities determine services regulation,