Key Determinants of Environmental Change in UK Telecommunications: Empirical Evidence David Lal and Peter Strachan ABERDEEN BUSINESS SCHOOL THE ROBERT.

Key Determinants of Key Determinants of Environmental Change in UK Environmental Change in UK

Telecommunications: Empirical Telecommunications: Empirical EvidenceEvidence

David Lal and Peter Strachan

ABERDEEN BUSINESS SCHOOL

THEROBERT GORDON

UNIVERSITYABERDEEN

Main Aims of ArticleMain Aims of Article

1.1. Present empirical evidence on key Present empirical evidence on key determinants of environmental change from determinants of environmental change from the perspective of the UK telecoms incumbent the perspective of the UK telecoms incumbent since deregulation that drove strategic change since deregulation that drove strategic change at the firm;at the firm;

2.2. To consider the evolving and dynamic nature To consider the evolving and dynamic nature of the global telecoms market.of the global telecoms market.

THEROBERT GORDON

UNIVERSITYABERDEEN

MethodologyMethodology

• Research Content - Qualitative DataResearch Content - Qualitative Data

• A series of face-to face interviewsA series of face-to face interviews

• Senior Executives at BT (Purposive Sample)Senior Executives at BT (Purposive Sample)

• Semi-Structured Questionnaire ChecklistSemi-Structured Questionnaire Checklist

• Content Analysis applied to Data-SetContent Analysis applied to Data-Set

THEROBERT GORDON

UNIVERSITYABERDEEN

Pre – PrivatisationPre – Privatisation

• The introduction of the The introduction of the telecommunications act of 1981, telecommunications act of 1981, separating telecommunications from separating telecommunications from postal services;postal services;

• The breaking up of the network operator's The breaking up of the network operator's monopoly of the supply of customer monopoly of the supply of customer premises with equipment, which was one premises with equipment, which was one of the earliest measures in UK telecoms of the earliest measures in UK telecoms market liberalisation by the government;market liberalisation by the government;

Pre – PrivatisationPre – Privatisation

• The companies of Cellnet and The companies of Cellnet and Vodaphone were licensed to compete in Vodaphone were licensed to compete in the provision of mobile communications the provision of mobile communications services, opening up the UK mobile services, opening up the UK mobile communications market;communications market;

• Liberalisation of "packaged solutions" Liberalisation of "packaged solutions" thereby increasing the use of outside thereby increasing the use of outside suppliers to provide these to the suppliers to provide these to the business market;business market;

Pre – PrivatisationPre – Privatisation

• Limited competition was introduced Limited competition was introduced into the UK fixed network services into the UK fixed network services market, with Mercury Communications market, with Mercury Communications being elevated to the status of the 2nd being elevated to the status of the 2nd national UK operator and the duopoly national UK operator and the duopoly was created (duopoly guaranteed for was created (duopoly guaranteed for seven years)seven years)

Pre - PrivatisationPre - Privatisation

• UK government creates a telecoms UK government creates a telecoms regulatory body - OFTEL - with the Office regulatory body - OFTEL - with the Office of Telecommunications;of Telecommunications;

• British Telecommunications plc was British Telecommunications plc was created with privatisation of the created with privatisation of the incumbent - 51% of the firm's shares incumbent - 51% of the firm's shares being sold in the first of three tranches of being sold in the first of three tranches of the sell-off.the sell-off.

Periods One and TwoPeriods One and Two

• Competition was launched by mobile Competition was launched by mobile network operators Vodaphone and Cellnet network operators Vodaphone and Cellnet via their respective cellular radio networks;via their respective cellular radio networks;

• Market liberalisation allowed cable Market liberalisation allowed cable television operators to offer fixed link television operators to offer fixed link telephony services but only agents for the telephony services but only agents for the duopoly players (British duopoly players (British Telecommunications and Mercury Telecommunications and Mercury Communications). Thus, “resale of Communications). Thus, “resale of capacity” i.e. the leasing of lines from BT capacity” i.e. the leasing of lines from BT continued to be the “modus operandi”;continued to be the “modus operandi”;

Periods One and TwoPeriods One and Two

• Technological advancements - both Technological advancements - both internally (within British internally (within British Telecommunications) and externally Telecommunications) and externally (industry - wide) were evolving, with new (industry - wide) were evolving, with new digital technology overtaking existing digital technology overtaking existing analogue technology products;analogue technology products;

• More demanding customers, requirements More demanding customers, requirements for an increasing range of products and for an increasing range of products and services – plus falling prices/costs;services – plus falling prices/costs;

• Hence – Limited impact on incumbent!Hence – Limited impact on incumbent!

Period ThreePeriod Three

• Phase 1:Phase 1: There was a boom in 2nd lines There was a boom in 2nd lines and an increase in the requirement for and an increase in the requirement for bandwidth.bandwidth.

Period ThreePeriod Three

• Phase 2:Phase 2: There would be a There would be a substitution of new Internet services for substitution of new Internet services for traditional services. Here, Internet traditional services. Here, Internet Protocol Wide Area Network Services (IP Protocol Wide Area Network Services (IP WANS) would replace private circuits; WANS) would replace private circuits; Internet fax would replace phone; Web Internet fax would replace phone; Web transactions would replace toll free transactions would replace toll free services; and email would substitute for services; and email would substitute for voice and fax;voice and fax;

Period ThreePeriod Three

• Phase 3:Phase 3: The pre-emption of The pre-emption of Internet technologies over Internet technologies over telecommunications technologies was telecommunications technologies was being seen as the primary platform for being seen as the primary platform for service innovation. This was evolving in service innovation. This was evolving in the areas of E-Commerce, Multimedia, the areas of E-Commerce, Multimedia, and Networking.and Networking.

Period Four and BeyondPeriod Four and Beyond• Wireless technology, where it is Wireless technology, where it is

increasingly becoming the primary increasingly becoming the primary access technology for voice;access technology for voice;

• Telecommunications becoming Telecommunications becoming increasingly about carrying data, increasingly about carrying data, although voice will be the major money although voice will be the major money spinner for many years to come;spinner for many years to come;

• Newcomers displacing the traditional Newcomers displacing the traditional telecommunications operators;telecommunications operators;

Period Four and BeyondPeriod Four and Beyond

• Strategic alliancing and acquisitions Strategic alliancing and acquisitions playing a major role in the evolving playing a major role in the evolving structure of the UK, European and structure of the UK, European and Global telecoms markets.Global telecoms markets.

• Demand led by customised solutions; Demand led by customised solutions; packaged solutions; wholesale bit packaged solutions; wholesale bit transport and retail products/services transport and retail products/services (including through mobile (including through mobile products/services).products/services).

Period Four and BeyondPeriod Four and Beyond

• Nine hundred firms were registered to Nine hundred firms were registered to compete within the UK telecoms market - compete within the UK telecoms market - primarily in the areas of: -primarily in the areas of: -

– Provision of public access mobile radio services;Provision of public access mobile radio services;

– international simple voice resale services;international simple voice resale services;

– international facilities based services; international facilities based services;

– fixed link public telecom operator services; fixed link public telecom operator services;

Period Four and BeyondPeriod Four and Beyond– value added services; value added services;

– regional/national radio paging services; regional/national radio paging services;

– mobile public telecoms operator services mobile public telecoms operator services (cellular);(cellular);

– radio data services (including baggage radio data services (including baggage tracking and reconciliation services); and tracking and reconciliation services); and

– Broadband cable public Broadband cable public telecommunications operator.telecommunications operator.

ConclusionsConclusions

• From governmental perspectives, the From governmental perspectives, the main objectives in telecommunications main objectives in telecommunications liberalisation and deregulation were the liberalisation and deregulation were the offerings of greater competition, choice, offerings of greater competition, choice, and value for money services. and value for money services.

• What we can learn from the BT What we can learn from the BT perspective of key determinants driving perspective of key determinants driving change in the evolving UK, European change in the evolving UK, European and indeed global telecommunications and indeed global telecommunications industries, is that there appears to have industries, is that there appears to have been a distinct failure in introducing real been a distinct failure in introducing real competition in fixed link voice telephony. competition in fixed link voice telephony.

Conclusions (Continued)Conclusions (Continued)

Accordingly, failure can be attributed to Accordingly, failure can be attributed to several factors: -several factors: -

1.1. The inherent contradictions in BT’s role: The inherent contradictions in BT’s role: it is both the owner and maintainer of it is both the owner and maintainer of the infrastructure - as well as - a the infrastructure - as well as - a competitor in the delivery of services.competitor in the delivery of services.

2.2. Continuing reliance on BT as the Continuing reliance on BT as the “owner” of the infrastructure, and the “owner” of the infrastructure, and the difficulty of making BT competitive when difficulty of making BT competitive when its licence conditions include service its licence conditions include service “obligations”. “obligations”.

Conclusions (Continued)Conclusions (Continued)

3.3. The large capital investment and The large capital investment and disruption to the environment required to disruption to the environment required to lay new cables, and new technology in lay new cables, and new technology in communications through computers is communications through computers is “by-passing” the regulatory problems of “by-passing” the regulatory problems of traditional telecommunications and traditional telecommunications and proving to be cheaper.proving to be cheaper.

4.4. The pursuit of the cable route and partial The pursuit of the cable route and partial neglect of the potential of wireless neglect of the potential of wireless technology, which would resolve the issue technology, which would resolve the issue and by-pass, the infrastructure problems.and by-pass, the infrastructure problems.

Conclusions (Continued)Conclusions (Continued)

5.5. The reliance which OFCOM is forced to make The reliance which OFCOM is forced to make on the incumbent for its “information,” and on the incumbent for its “information,” and therefore the regulatory difficulties placed in therefore the regulatory difficulties placed in the path of potential entrants to the market, the path of potential entrants to the market, based on the fact that they are placed in based on the fact that they are placed in direct competition to the huge clout of BT.direct competition to the huge clout of BT.

6.6. Tendency of new entrants to the market to Tendency of new entrants to the market to concentrate on the provision of value-added concentrate on the provision of value-added services due to the difficulty and risk services due to the difficulty and risk involved in entering the fixed link voice involved in entering the fixed link voice telephony market – setup costs being small telephony market – setup costs being small and therefore attractive to potential market and therefore attractive to potential market entrants.entrants.

Impact of deregulation on Global Impact of deregulation on Global Market Structure.Market Structure.

THEROBERT GORDON

UNIVERSITYABERDEEN

•Deregulation / Privatisation / Deregulation / Privatisation / LiberalisationLiberalisation

•Integration of : Integration of : – InformationInformation– Communication andCommunication and– EntertainmentEntertainment

THEROBERT GORDON

UNIVERSITYABERDEEN

•Shareholder ValueShareholder Value

•GlobalisationGlobalisation

•TechnologyTechnology

•Consumer DemandConsumer Demand THEROBERT GORDON

UNIVERSITYABERDEEN

•Strategic PartnersStrategic Partners

•Strategic AcquisitionsStrategic Acquisitions

•InternationalisationInternationalisation

THEROBERT GORDON

UNIVERSITYABERDEEN

•Providing a Basket of Services;Providing a Basket of Services;

•Globalising;Globalising;

•Restructuring;Restructuring;

•Development of a Customer Focus.Development of a Customer Focus.

THEROBERT GORDON

UNIVERSITYABERDEEN

Finally …..Finally …..

Key Determinants impact on :-Key Determinants impact on :-

The Evolving Nature of the Market The Evolving Nature of the Market StructureStructure

ANDAND

Affect the Bases of CompetitionAffect the Bases of CompetitionTHE

ROBERT GORDONUNIVERSITY

ABERDEEN