- Sprint to buy Nextel for $36B- December 2004
- SBC to buy AT&T for $22B - January 2005
- Verizon to buy MCI for $6.8B - February 2005
- Telefonica to buy O2 for $32B - October 2005
- AT&T to buy BellSouth for $67B - March 2006
The telecom industry is responding to price decline, revenue loss and intensified competition by consolidating itself like there's no tomorrow.
The strategy reminds me of Barbara Tuchman's Guns of August. A Pulitzer prize winner, the book provides a detailed account of the first month of World War I during which the generals made battle plans and decisions based on previous conflicts ignoring the technology changes which resulted in mass slaughter.
The industry is in the middle of a massive technological transition, going from old-fashioned circuit-switched networks to more advanced IP-based networks to offer services including video, voice, high-speed Internet access, and wireless. The trend is also putting price pressure on equipment makers, because open standards, IP-based gear is generally cheaper than the specialized equipment it replaces. As the number of service providers continue to shrink, they are regaining buying power and are squeezing out deep discounts from their suppliers.
The carriers' consolidation is now starting a Network Equipment Providers (NEP) consolidation as illustrated by Cisco acquiring Scientific Atlanta and the merger talks between Alcatel and Lucent. The last combination could create the world’s biggest telecom equipment maker with customers and operations around the world and with strengths in voice, video and data across wireless and broadband networks. The potential new company would bring strong wireless, broadband and IMS assets to address Fixed Mobile Convergence opportunities, but the merger would also create the world's largest network system integrator to better compete against IBM. Because of overcapitalization and the high cost of raising capital, the carriers are looking at outsourcing as a solution to manage their infrastructure. Alcatel, Lucent, Ericsson, Nortel, and others have dramatically increased their services capabilities to a point where it represents 30% or more of their total revenues.
There's room for more consolidation especially to build global players with Ericsson, Juniper, Ciena, Tellabs, and Motorola (test: who is acquiring whom?). What Huawei and ZTE could do is everyone's guess, but let's not forget that prices are driving this market and the Chinese equipment makers are not to be underestimated. In this environment, Sun is the partner of choice for the NEPs and already provides carrier grade equipment and integrated software to reduce cost and complexity of the next generation network infrastructure.
