I moderated a panel today at the annual meeting of (ANPI), a Springfield, Illinois based aggregator of switched access and other telecom services. The panel focused on industry issues and trends and their implications for small independent telecom carriers. A provocative discussion point was offered by ANPI’s CEO, , who suggested the independent telecom industry should take a hard look at the current troubles of and consider how those troubles could be a cautionary tale for independent telcos. His analogy is an interesting one. GM is a company that at its height was all powerful and almost ‘anesthesicized’ to market factors and their implications. In effect, GM wasn’t paying attention to the market because they felt they didn’t have to, and as recent headlines suggest, did so at their own peril.

Are independent telcos following a similar path? Is their reliance on regulated subsidies and USF giving them a certain comfort level which allows them to ignore market factors? The issue of naked DSL came up in our panel discussion as an example. More and more customers are demanding it – it’s becoming a ‘market factor’ which can be ignored if companies (and the regulatory framework which drives it) choose to do so. But in so doing, are service providers doing so at their own peril? I’m not suggesting that naked DSL by itself is a big enough issue to put the independent telecom industry in peril. But it’s illustrative of a larger issue – an issue that has to be addressed by the whole independent industry, including regulators, settlement administrators, associations, and service providers. Service providers of all types and sizes need to be in the business of providing the products and services that the market demands – not the products and services that are convenient to the service provider or its regulatory framework. It amounts to a cultural shift and a difficult one. But one that must be addressed. Just ask GM.

What do you think? Offer your opinion by using the comment tool below.

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5 thoughts on “Are Telco’s Following GM’s Path?

  1. Bernie/All,

    I wanted to insure my full analogy was provided as in reading the blog post, it could be construed that it was my position that we along with our Independent bretheren our out of touch with market demands.

    In fact, my point was to simply point out that GM was a company that in the 50’s was the largest corporation in the world, but over time had found itself with cost structures that were materially higher than the entities with which it was in direct competition. For example, the average wage for autoworkers in the big three are anywhere from high $140k per year for Ford to $165 for Chrysler while Toyota and Honda are averaging around $95k.

    In a competitive market, entities with materially higher costs are at a distinct disadvantage, and such material differences in underlying costs (assuming a competitive environment) create an untenable competitive position for the entity with materially higher costs.

    Small operators, without the benefit of scale, and serving high cost areas, have materially higher costs than much larger companies serving more densely populated markets. When rate of return regulation is in place, that difference is neutralized, but when we compete head to head in competitive unregulated markets, we’re in a similarly distinct competitive cost disadvantage. More and more of the services consumers value fall into this realm – wireless, video and broadband to name a few.

    I then noted that the economic impact to GM of this competitive cost disadvantage was magnified substantially by having their big margin source – SUV’s and light truck sales – hit the wall due to a disruptive event – in GM’s case, the onset of a deep recession.

    Thus my analogy was that if we are to avoid some of the problems GM is experiencing, it is essential we begin working together in a collaborative way to assemble the scale necessary to drive our cost structures lower, and create new opportunities that would be off limits absent such collaboration (lower our cost, and develop new revenue streams). In closing, scale is going to be key in competing in the future, and we should figure out how to integrate our assets to assemble such scale before our high margin revenue stream – access and USF, encounters the same kind of disruption (through regulatory reform for example) that GM’s SUV revenue stream did.

    If we wait until the disruption occurs to begin the time intensive process of creating collaborative structures/ventures, it may be too late to avoid the kind financial disruption GM is experiencing now.

    Thanks Bernie, Dave

  2. Thanks for the clarification Dave. Hopefully the original post isn’t misinterpreted as an indictment by anyone on telcos being out of touch with market factors. It was more in the spirit of provoking thoughtful discussion about difficult issues and trends in the market. I think we can all agree – these discussions need to happen more – whether through a blog like this, at industry events, or just among colleagues. Hopefully more will chime in!

  3. This is a discussion that has significant merit in the small RLEC industry. Not necessarily the GM comparison, but the issue of some small RLEC’s operating in a mode that continues to fuel their future dependency on regulatory revenues, i.e. USF. Given the regulatory uncertainty within the industry, and the increase in legitimate competition on both legacy and new products, the successful RLEC of the future is one that is working to diversify revenues and profits. Growing to an economy of scale through both strategic products and acquisition/consolidation will be an important ingredient. RLEC’s have the opportunity now, while support funds are still healthy, to focus on continually increasing their percent subscriber revenues as compared to their regulatory revenues.

  4. i agree with all the comments. while the GM analogy may not be perfect, it does illustrate an important point. no company or industry is immune to market forces, no matter how big and strong. rural telcos aren’t GM, but they do need to diversify beyond their current subsidy heavy business models.

  5. Having been in the Telco industry for 30 years assessing the economics and the regulatory policy, your article is right on. I offer that it also extends to the Cable companies also in multi-carrier markets.

    There has been a large economic inefficiency created from all the technology changes, and the government’s pro-competition stance, while not doing anything on the regulatory front to change the rules in a meaningful manner.

    Today, for Cable and LEC’s, particularly those where the % of revenue is highly weighted to consumers and small businesses, to pass 2-4 homes/sites, and get 1, results in assets not utilized.

    Unlike GM who can close down a plant, these companies are left with the decision to build or not. Cable has that luxury, LEC’s do not under Carrier of last resort efforts.

    The common good is not being advanced because of this situation, and I use the following anaolgy to make the point>

    Would an airline (or auto industry produce cars) ever use an existing plane, or buy new ones, if they thought they would fill the seats only 25-50% of the time. The answer is unfortunately yes, if they can charge enough (baggage, etc.), or cut costs and services, to meet Wall Street expectations, to make up for the under-utilized/excess inventory!

    Does that sound like the mission of a public service company, that these companies once were? But this is exactly what is going on with Cable and LEC’s today.

    Regulators are struggling. You have those who regulator voice, and those who regulate video, but with the internet and the need for speed, the rules have not adapted for “converged services”.

    There is a solution though. If the government was to mandate an all fiber soluton by the year 201x, fiber becomes the great equalizer, and all benefit from it.

    Each can do it on their own like Verizon is doing, but those same economics above (pass 2-4 get 1) are the result. and we all know there is discriminatory capital spending going on by Verizon because you build where customers can pay for the best.

    I offer two alternatives that form a public/private solution, that gets to the advancing fiber everywhere.

    Many municipalities, who are fed up with the reluctance of the incumbents to upgrade the infrastructure, go and build on their own….a mistake from any measure in looking at when 3 facility based providers offer residential/small business services. It will become a tax burden to the citizens, even though they claim victory from economic development.

    My solutions are simple

    The first is, lets build out fiber where you don’t today at the same time, facilitated by the Municipality(could be city, county, or state). With labor being 50-70% of the cost to build, by doing this at once, the Companies could get 30% or more unit cost savings, to garner all the benefits that independent research shows they would get with a fiber solution, and Vz’s business case points out.

    The second solution is a patent pending solution I am evolving. In this solution, the incumbents simply extend their current fiber in the field to demarcation points, and then the city/county, owns the plant from that point forward and leases it back, and maintains it for them. No capital spending on the part of the incumbent, or very little to get to the demarcation point.

    In the multi-carrier markets, this gets the companies competing on “service” again, not the legacy technology of copper vs. coaxial, where all are losing. I call this the kids in the sandbox syndrome, as you can watch them kill one another, or the government could step in and say “thou shall have an all fiber plant” by the year 201x, all for the common good.

    This is not unlike 1934 when the government stepped in and said for the common good, we want everyone to have phone service, and thou shall be an auhtorized monopoly ….as it produced the best economics to meet this need (cost/ 100% market share is what the “rate payer” paid).

    In single Carrier markets, I agree USF – high cost fund, and having calls in between 2 cities in state costing more than calling Hong Kong, and market conditions create a situation where folks “cheat” and use IP to hide it and get away from paying. It also is not sustainable, and is a major risk for these Telco’s. They should be taking action now to update their plant to provide all 3 services, and work with the government on those 50 loops, or where the economics of building fiber everywhere cannot be justified absent some time of subsidy.

    However, let’s not pro-long the subsidy process that we have on Voice today…..let’s get if fixed up-front, and de-average it…if that person in the mountains truly wants fiber ran to his/her home, add it to their taxes they pay, as the municipality owns the plant, not the Phone/Cable companies.

    In these single wire markets, and where it is uneconomic to build given density, but under the social policy of everyone should have broadband, the government has the opportunity to fix this and inter-carrier compensation in the single wired markets, and in cities where Cable competes with LEC’s, but Cable has not built everywhere.

    Mandate this doctrine, and on a municipality by municipalty basis, deal with uneconomic build via local taxes. If they want to lower taxes, build a wi-max soluton, which does buy you time, but is a sub-optimal network solution (nothing faster than the speed of light with fiber).

    Again, my solution for single wired markets, pool your purchases and build together to lower the cost of build.

    It is interesting times in the industry, and the economics have to be fixed for all. I provide not only consulting services to aid in the decision making process, but for each cost area, and value block in the business case to upgrade from existing copper/coaxial, I have formed relationships to help you achieve the results of the business case.

    Back to the beginning. I do see Telco and Cable companies going down the path of GM and the auto industry in general,and the airline industry as veryhigh fixed cost businesses, and I see it even worse, given we do not have ‘discrete” units such as planes or factories that we can shut down.

    With a network, you are either in our out, and if you are out, it goes counter to the pro-competition position of the government that I fully support where it makes sense.

    Again, very timely article.

    Randy Markway
    President – Light the Way Solutions
    913 219 6618

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