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Telecommunications industry urged to move with the times

October 11, 2002

TELECOMMUNICATIONS companies worldwide must make "fundamental adjustments" to their business models if they are to survive in the complex and highly competitive new economy, according to new research by the Universities of Newcastle and Strathclyde, UK.

A research paper published in a special issue of the journal Telecommunications Policy (1), urges companies to sharply examine and revise their pricing policies to encourage greater revenues and reverse the recent stock market slump in telecommunications shares.

Telecommunications companies form backbone of the new economy, which has been formed around the global technological revolution and needs sophisticated and many-folded communication links to function.

But the paper`s authors - Feng Li, Professor of E-Business at Newcastle University Business School, and Dr Jason Whalley of Strathclyde University Business School - say that although telecommunications companies provide the essential infrastructure for the new economy, most of these companies themselves are still operating on the very different principles of the old industrial economy.   Traditional pricing models such as the `cost plus profit margin` model are still abundant - despite the fact that they do not suit the intensively competitive market where unit costs of telecommunications bandwidth are rapidly falling towards zero and profit margins are being increasingly squeezed.

The research says companies urgently need to reassess their business models and look at new ways of generating revenue in keeping with the business principles of the new economy. A possible solution is that instead of giving a uniform price structure to their products companies introduce a personalised pricing strategy based on the `value added' to the customers, rather than the amount of data transmitted or time spent. In other words, instead of telling the customers how much a service will cost, asking them what they are prepared to pay for specific services under different circumstances.

The researchers based their conclusions on detailed observations of the telecommunications industry since deregulation in the 1980s until the present day. Professor Li, of Newcastle University, said.

"In less than two decades, the telecommunications industry has been transformed from a heavily regulated, largely state owned monopolistic public utility, to one of the most exciting, innovative, competitive and perhaps lucrative industries in many parts of the world.

"The long term future is very bright but many more radical changes are needed to unleash the enormous potential. When the market is expanding very rapidly and when telecom shares are the darlings of the stock market, most companies can afford to ignore some of these fundamental, long-term issues. But the market downturn is forcing the industry to look into those issues which perhaps should have been addressed several years ago.

Professor Li highlighted the major problems in his research. He added: "The telecommunications industry provides a vital infrastructure for the new economy but the companies have failed to apply the new economy principles to their own industry.   The current cost plus margin pricing models are no longer capable of generating sufficient revenue for the investment, let alone future growth.

"One thing the companies need to look at is gathering intelligence and moving towards a more targeted, personalised service in order to generate revenue and to keep a foothold in the marketplace. For example, they need to assess how much people are prepared to pay for particular services under particular circumstances.

"Phone operators already have different pricing strategies depending on what time of day the customer makes a call. They and other companies really need to operate these strategies, however, on a more sophisticated level to understand the real value of these services to customers and maximise the revenue they can generate from the services they provide."

The paper highlights how deregulation of the telecommunications industry in the USA, the UK and other countries lowered the barriers to entry into the industry and allowed a number of new players in at various levels.   This has led to greater competition, rapidly decreasing prices and a very complex, intertwined industry framework.

Until recently most of the companies benefited from a boom in the telecommunications industry and a corresponding rise in share prices. But investors lost confidence when they failed to reap the huge revenues they had expected to gain and share values plummeted.

The researchers say that the slump in the industry`s fortunes is a crucial time for companies to examine where they are going wrong - and how they can put it right. New competitors are emerging all the time in various aspects of the market, causing more radical restructuring of the industry and threatening the market positions of more established players. For example, some credit card operators are considering handing out subsidised mobile phones to their customers, who will use it as a credit card as well as a device to make telephone calls with.

Professor Li added: "Some of the current changes in the telecommunications industry are very radical - and all companies need to re-evaluate their strategies and market positions and make hard decisions as to where to go next."

Newcastle upon Tyne, University of