TCS Daily

Why Size Matters

By Duane D. Freese - June 7, 2005 12:00 AM

Daniel Caclin, after his merger of Equant with Global One in 2001 to make it "the largest pure player for large-scale communications infrastructure for corporate customers," told Oracle's E Business Magazine a non-trade secret: "We're in a business where size matters."

Indeed, with France Telecom completing its full takeover of Equant last week, British Telecom buying up Infonet and, on this side of the Atlantic, SBC seeking to merge with AT&T and Verizon with MCI, that certainly appears to be the case.

The old idea in telecommunications of national monopolies to take care of national markets has given way to globalization. In just 20 years, since the breakup of the old AT&T, all the major nation's phone monopolies have been broken up or privatized and are now being remolded into international competitive players -- if regulators will let them.

The break up and privatization were taken by politicians hoping to lower costs to consumers. The U.S. Congress also gave a push to Germany's and Japan's state-controlled monopolies to privatize by saying this country wouldn't open its doors to any telecom competitor in which government had a controlling stake.

But the plain fact is that old national public telephone systems simply in some ways weren't big enough and certainly not flexible enough to meet the needs of international businesses that operate in dozens of countries.

International commerce has more than doubled for the United States, home of half the Fortune 1000 companies, since 1990. The more than $3 trillion in combined imports and exports amount to nearly 30 percent of the nation's total economic output. But as Adrian Gonzales, director of logistics at ARC Advisory Group has noted: "The Achilles' heel of global supply-chain management is connecting all the trading partners and players together so they can share the same information."

Companies engaged in commerce from auto manufacturing to banking to oil to soybeans all need to tailor communications networks to fit their needs. An off-the-shelf public system just won't cut it.

As Bill Archer, president of AT&T operations put it before AT&T's merger plans were announced: "The user experience and the total economics to the user are driven by being able to control the design, the features and the performance of the underlying network. If you cannot control those, you cannot deliver the experience and the economic performance to the user."

And what that requires, Caclin noted in 2001, is a telecom provider having a "concentration of skills" that yet is "spread out over the surface of the globe" to allow its business customers to operate and communicate in the same way everywhere.

And that's one big reason that size matters. Because without it, no telecom provider can have the talent to tailor networks to businesses' needs so each can, as Caclin said, "differentiate itself from the competition and develop long-term competitive advantages."

Size matters in telecommunications in another way that helps explain the recent urge to merge.

As Paul Hibbert, Infonet's chief technology officer, told Telecommunications Magazine in January after BT moved to buy Infonet: It helps cut costs without cutting the quality of service that can be provided. And that is vital if you want to be one of the two or three major players that Hibbard believes can profitably serve the multinational corporation market.

Technological change, according to Hibbert, is occurring so fast that such multinationals are more likely than ever to farm out their information technology management to avoid the cost of retraining. But the company that gets the business will be the one that sits on the edge of that technological change. And that means it will have to commit substantial sums to research and development as well as to sales.

The mergers of telecom business players with the remnants of the old national phone monopolies are providing the economies of scale to do that. Size, in this case, is not a crime, but a business necessity - for both telecom companies' survival and for America's international businesses that have the most to gain from vigorous competition in the enterprise market.


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