Musical chairs on a grand scale

America's Network, Feb, 2005 by Lester Craft

The communications industry is playing musical chairs on a grand scale, to a tune that will determine the future of the business. On one level, the game looks simple: acquire subscribers and collect cash from consumers, enterprises, municipalities and so on. Make sure you're not left without a seat when the music stops.

But this game has some added complexities compared to the standard version, starting with the fact that so many players are trying to grab more than one chair. Cable operators want in the phone business. Phone companies are gunning for video and data. Third-party VoIP providers are signing up long-distance subscribers. Etc.

In fact, claiming more than one chair is a necessary survival tool in today's game. The rigid compartmentalization of the past, in which technological and regulatory barriers kept telephone, cable and data apart, has given way to a new set of rules.

The Internet, by its very existence, ensures that the new rules are permanent. IP has created a different kind of network--open, flexible, application friendly and almost completely uncontrolled by regulation and taxation. In addition to rapidly taking over as a primary workhorse for many traditional network functions, IP is a key force driving the convergence of multiple services that in turn can be bundled by providers.

So back to the game: When the music stops, as invariably it must, some companies and perhaps even entire business segments will look for a place to sit and find that someone's stolen their chair--i.e., their subscriber base. In other cases, "new" seats that service providers covet simply won't pan out.

As chairs are removed, of course, players begin to fall by the wayside. Business failure is one way to balance the equation. Another is for the players to partner up or even acquire one another, and that's exactly what we're seeing now. Consolidation is a natural outcome as formerly discrete markets converge and broader product and service offerings are required. The stakes in the current M&A cycle are huge, and the twist is that some acquisitions that look good on paper likely will prove disastrous, while others will result in a new set of dominant carriers whose services span wireline and wireless phone, data, video, and broadband access--encompassing both consumer and enterprise.

The music is playing. Don't forget to stake out a seat!