Confusion, denial and anger: The response of the telecommunications industry to the challenge of the Internet

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Abstract

The author discusses the impact of the Internet on the telecommunications industry drawing upon own professional experience of the past 20 years. Applies the Kubler-Ross model of grieving to argue that telecoms operators have moved from denying the disruptive power of the Internet, to anger and then to adaptation of their own business models and acceptance of the Internet. Highlights fundamental differences in approach to competition, interoperability and innovation. Discusses failure of ‘walled gardens’, attempts to block VOIP and proposals for ‘data termination rates’. Argues that telecommunications operators must consider Internet services as complements not substitutes and adapt business models accordingly. Concludes that European telecommunications operators have been slower to understand this than those in the United States.

Introduction

There is a growing literature explaining how the publishing, music or entertainment industries have been disrupted by the Internet.1 The telecommunications industry has been deeply affected too. It has lost control over many of the services which run over its networks. The post-war conventions of the industry have been turned upside down. It has struggled to adapt and, in doing so, has displayed the same symptoms – denial, anger, bargaining and acceptance – of anybody experiencing a profound loss.2 This article, written from the perspective of somebody who has worked inside the industry for the past 20 years, seeks to describe that process.

Section snippets

The telecoms heritage

The telecommunications industry of the early 1990s had seen the liberalisation of some telecoms markets and the privatisation of a former state monopoly, namely, British Telecom. The United States had experienced something similar a decade earlier and the rest of Europe was soon to follow. But the key features of the industry had changed little in decades.

Telecoms services were provided by the operators themselves, rather than by someone else. This was because services and networks were coupled

The Internet challenge

In contrast, the fundamental feature of the Internet is that the creators of internet services are able to operate independently of the networks over which the services run. The phrase ‘over the top’ (OTT) aptly describes services that run over networks but remain outside the domain of the telecommunication operators themselves. Since services and networks were now decoupled, the barriers to developing new services collapsed. Anyone could develop a new communications service and there is an

Denial

Telecommunications is not the only industry to struggle with the Internet, as music and publishing have shown. The Internet developed on the west coast of the United States, with a very different culture from the European telecoms industry and those who run it. The Internet keeps changing, which makes it hard to pin down. During the past decade European telecommunication operators have been preoccupied with threats posed by Microsoft, Nokia, Google, and then Apple. Each of these companies has

Anger and bargaining

As these strategies failed, denial has turned to anger, at least for a group of larger European operators as the erosion of traditional revenues from telecommunications has accelerated. This reaction is also reflected in, and to some extent fuels, a broader political debate about whether Internet companies are meeting their responsibilities in areas such as corporate taxes, competition law or in recognising the costs they ‘impose’ on other industries (Robinson & Schechner, 2013).

A recent study

Acceptance

If, as has been argued, the main consequence of the Internet is to transfer a huge amount of value from the telecommunications industry to its consumers, then it is hard to avoid the conclusion that the telecommunications industry must look to those same consumers rather than the Internet companies if it is to recapture some of that value in the future.

Several things will need to happen if telecommunication operators are to charge more for the Internet and replace their traditional revenues in

The future

There is no reason why the telecommunications industry should expect to escape the disruptive power of the Internet when so many other industries have been transformed by it. There are also features of the telecommunications world – the way competition works and the industry co-operates, the engineering traditions, the (weak) relationships with users of telecommunication services – that have made it particularly difficult for the operators to adapt. Early reactions, in the form of walled

Acknowledgements.

The author was formerly Group Public Policy Director at Vodafone between 2001 and 2013. This comment is based on a lecture delivered at Imperial College in London on 14 May 2014.

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