Telecoms - 'Backbones & Economics'

June 2002

It is fair to say that the world of telecommunications is teetering on the brink of something - exactly what sits on the other side of this brink is open to debate. Vodaphone announcing the biggest loss in corporate history at a trifling £13.5 billion has only served to emphasise this. One thing is certain, that this will not be 'the end of the beginning' or 'the beginning of the end' but something nasty that straddles the two. What is likely, is that the big telecoms companies will huddle together for protection from their huge debts through mergers and acquisitions.

Much has been gambled on 3G Mobile Technology, but even the usually bullish handset manufacturers will not devote effort into creating usable devices for a number of years. Even then, a great deal of evidence is pointing to the fact that mobile devices are always going to be perceived by people as a messaging device, hence the success of SMS against the failure of WAP. In a way this all makes a great deal of sense - how many of us really need to access your e-mail or pictures while speeding along in car? If there is a need to access data wirelessly, but while fairly static, then normal wireless networks are far more capable and very much cheaper to develop. BT itself has been one of the giants to start along this route competing with its recent offshoot O2. As time goes on, the telecoms companies will not just compete with each other but also with some of their own business customers as strategies overlap.

But how does this impact the local specialised marketplaces offshore? Well, if they look at themselves as singular entities then the answer is that it should not. Real and sustained competition is not apparent and this will tend not to change because the size of the markets is so small and static. At the same time, the largest margins in the telecoms market are in international communications. Offshore centres are islands, so all communications can be viewed as international from a certain perspective. This contributes to making the profit per capita very high. In other words, the stability of these micro economies means that telecoms should be able to avoid getting the cold that affects everybody else - but is it really that tidy and insulated?

Quite apart from maintaining an independence from the monolithic organisations, nearly all offshore jurisdictions are doing exactly the opposite and deciding that the best way to progress is to enlist the help of Global entities such as O2 and Cable & Wireless using the lure of a virtual monopoly. While the logic of this form of devolved responsibility can be fairly compelling, the intimacy of the offshore economies demands that you are mindful of the risks of association in this wider world of turmoil.

These companies are there to create shareholder value for their entire organisation, most of which is based elsewhere in the world. While making a profit offshore can be quite easy to do, especially if handed the whole proposition on a plate, remember that 'profit' and 'shareholder value' are not the same thing. Profit may actually become subservient to growth or sector strategy - offshore dynamics do not easily lend themselves to the support of either when taking a global perspective. So there is the constant possibility of the local component being sold off, or at the other end of the spectrum the core company having a change of ownership.

As with any business relationship there needs to be mutual certainty of benefit - what each side gets out of it and the associated terms and conditions. In this case all this is achieved through the licence to operate and subsequent regulation. For example, if you want to have universal service provision (i.e. a flat rate to connect each phone regardless of where it is) then the telecoms company will legitimately be seeking the trade-off to balance out profit - the cost of this will have to appear somewhere.

This can become much more complicated with the introduction of any element of competition in these areas that were originally calculated as providing profit. As with any business, a strategy and business plan will have challenges through its deployment. The difference in this case is that if the financial dynamics change, the community cannot afford for the company to take one of the possible choices, and withdraw from the market. This notional dependence also has a dramatic effect on the contract (or licence) itself as you really only have one opportunity to get it right. However, the need to encourage and support the main provider needs to be balanced with a set of contradictory factors.

Firstly, competition in telecoms needs to be encouraged but not to the ultimate detriment of the sector. Certainly a 'price war' in a limited market can only ultimately lead to reduced competition as, in the nature of a war, someone eventually has to lose. Secondly, the core provider should be allowed to compete in other markets to expand their business proposition. However, they cannot be allowed to use their dominant position in one market as direct leverage to support another; otherwise they have the potential to 'out-invest' almost every significant local business and become a full unregulated monopoly by default.

If the core provider is going to be profit focussed rather than a community or 'nationalised' organisation, then the only way to ensure the benevolence of the monopoly is to clearly regulate it against it's operating licence. OFTEL does this in the UK, but in an offshore environment this is all the more important and a little more complicated. Telecoms is a core asset and contributor to the economic prosperity in a geographically isolated environment. If ceding control of this asset is really the best policy (and this requires more than a passing thought), then there is a need to unravel the complexity of dependencies to make sure that assets are protected by the clear, strong and strategic application and enforcement of the rules of regulation.

In Vodaphone mode I'm now off to convince my bank manager that my mortgage is a historical debt and that my financial outlook should be gauged against future aspirations to be a multi-millionaire...