From America's Network
November 1, 2002

The telecom situation isn’t going to improve unless we take ownership and find leadership. Policy changes are needed. Here are suggestions and methodologies.

      By Krish Prabhu and Greg Blonder

     Has there ever been a period in telecommunications history when the outlook appeared so bleak? Those who remain in our decimated industry strain for metaphors to describe the current situation - "nuclear winter" for the almost total absence of demand in some sectors and "deer caught in the headlights" for corporate executives who don't know which way to turn.

     To find clearer direction, however, we would do well to look to our brethren in the semiconductor industry, whose entire history has been one of dramatic highs and terrifying lows. Survivors in that industry have become experts in looking beyond reflex responses to decreased revenues - e.g., plant closings and layoffs - to create new business and technological fundamentals that will form the basis for the next upturn.

     As Craig Barrett, CEO of Intel, likes to say, "You innovate your way out of recessions."
In the case of telecom, however, plenty of innovative technology is available; what we need most is innovative policy, both corporate and governmental.

Food for thought - and action

     Herewith are three policy suggestions that, if adopted, could open the way to a much more productive telecom environment.

     For carriers: Unequivocally divide service provision from network operation by creating an open standard interface. This would facilitate third party services development that can be used on their networks, as well as allow carriers to offer their service on others' networks.

     Over the next decade, service providers will increasingly focus complete on delivering to customers the Internet benefits we all know are inevitable: games, music, entertainment, news and information, commerce and communications. In other words, this is the "always-on" world. The mindset of the service providers would be to find and integrate all the software and connectivity necessary to create that always-on world - no matter who developed or owned it - and to completely satisfy the consumer.

     On the network side, by contrast, the energy should be focused on providing the best pipes and connecting seamlessly with all other networks, large and small. The mindset ought to be to become the network of choice for service providers everywhere.

     While such unbundling appears to neutralize a carrier's existing advantage, at first glance, one has to realize that it is inevitable in the long run.

     Besides, it may be necessary to expand carrier service portfolios to offer a full slate of Internet services, and just to keep up with the pace at which these services would evolve. Enough new technology, whether wireless or satellite, is emerging and enough overall demand is growing that some competitors will put themselves in a position to eventually offer low cost broadband service. In so doing they will capture valuable, perhaps even irretrievable, market share. The way for carriers to head that off is to unbundle now, reap the resulting cost savings, and get Wall Street excited. The carrier that becomes the first to take this approach, will emerge a winner.

    For large equipment vendors: Take the layering of the industry one step further and accelerate the transformation into becoming system integrators just as IBM has in the computer industry.

     Such a corporate structure would get vendors closer to the customer and raise margins. Though much discussed in vendor boardrooms, however, actual change has only proceeded partway. Vendors have been reluctant to part with hardware or processes they think give them proprietary advantages, when the best course would be to sell them while they still have value.

     Above all, vendors need to speed up adaptation to the very different culture of system integration. Successful system integrators, for example, often reap most of their profits several years after the initial sale. They know how to make accurate projections, set appropriate prices and then extract a profit. The successful telecom equipment vendor will be the one that learns how to graft talent with those skills onto its existing talent base.

    For the government: Release much more unlicensed spectrum. The small amount of such spectrum already released has proven the most fertile for innovation (cordless phones, et al). More spectrum would mean even more innovation, especially in wireless communication, and, indeed, would inevitably introduce more competition.

     There is no need to repeat the government's Soviet-style policy of allocating fixed spectrum to fixed uses. Such policy not only obstructs innovation, it proceeds on the assumption that spectrum is inalterably fixed. It's not. New technologies enable us to both expand and reuse spectrum. Release of fresh spectrum would thus produce a powerful multiplier effect.

     Finally, there are far more sensible alternatives to auctioning off spectrum, which effectively bankrupts companies before they get started. Instead, the government could statistically monitor signals and charge a small, ongoing fee for usage. With clear "wins" possible for so many players, we believe this is one policy change that could actually make it through the Washington labyrinth. The result would be a regular revenue stream for the government, a profitable field for implementation of new ideas and a reinvigoration of the entire ecology of communications.

     No one could ever pretend that fundamental change comes easily. Yet we believe each of the above policy innovations, driven by the energy that comes from desperate times, are achievable. We are beyond simply waiting for the business cycle to rescue us. It is time for leadership.

Greg Blonder and Krish Prabhu are general partners at Morgenthaler Ventures, a venture capital firm, and are based, respectively, in Princeton, New Jersey, and Dallas, Texas.