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Home - Key
Questions - Fixed Networks: Section
4 - Question 12
Question 12: Will the specialist technology suppliers
become network operators?
We showed earlier in Question 4 that specialist
technology suppliers – such as Lucent, Nortel, Cisco, Ericsson, Nokia,
Alcatel, Siemens, NEC and Fujitsu – have come to specialise in the
R&D-intensive parts of the new telecoms industry, producing the equipment
and software used in networks and the running of telecoms businesses.
We have also emphasised that these suppliers have had a significant
impact on the dynamics of the industry by producing the R&D-intensive new
technologies that improve communications processes and provide new products and
services, and by significantly lowering the barriers to entry facing new
operators, thus increasing the degree of competition.
Until now they have specialised in the equipment and software layer,
that is Layer I (see Industry Mapping). But might they
not use their knowledge of network equipment and software to integrate forwards
into the network layer, that is Layer II?
There are at least two arguments that may be put forward to explain why
they are unlikely to move into the network layer and construct or buy their own
networks. The first argument is based on their distinctive competencies.
According to this argument their knowledge is rooted in telecoms equipment and
software and not in the running and managing of networks. Furthermore, the
costs of acquiring knowledge in the latter area would outweigh any benefits
that they could derive from commercially using that knowledge.
The second argument depends on business strategy rather than on
knowledge-specificity. The reasoning here is that although the costs of
acquiring knowledge in network operations and management would not be
prohibitive - since they already know a good deal about networks through their
development of equipment and software – it would not make business sense
to move into the network layer
The explanation is that such a move would require them to compete with
their major customers, the network operators. For example, if Lucent, Nortel or
Cisco were to provide equipment for, say, AT&T, BT, MCI WorldCom or Qwest,
while at the same time competing with them, they would create a conflict of
interest which might provide an advantage for specialist suppliers who had
undertaken not to compete. Indeed, this was one of the reasons that AT&T
gave for its voluntary trivestiture in September 1995 when it spun off Lucent,
its equipment subsidiary, as an entirely separate company. AT&T has not
regretted this decision and at times Lucent has had a market capitalisation
that has exceeded its erstwhile parent.
But if these arguments are to be convincing - even though to some extent
they contradict one another - it is necessary to confront them with recent
evidence that, although not yet overwhelming, can be used to support the
alternative hypothesis that these suppliers, or at least some of them, are
becoming more involved in the network layer. The evidence comes from the
Swedish incumbent, Telia, that in 1999 announced that it had reached an
agreement with Cisco. The latter company has a dominant share of the global
market for internet routers and has been using this base in order to launch an
attack on traditional telecoms equipment companies such as Lucent and Nortel in
order to provide IP-based data networks which are also capable of carrying
voice communications. Lucent and Nortel responded to this threat by acquiring
the data networking equipment companies, Ascend and Bay Networks
respectively.
Under the agreement with Telia, Cisco undertook to build a new data
network for the Swedish operator who would in turn lease it back from Cisco.
Not only would Cisco build the network, it would also operate, manage and
upgrade it. A few months later, however, it was reported in the press that
Cisco had encountered certain difficulties (that were not made explicit) in
fulfilling this contract and consequently Telia had decided to switch the
contract to Nortel.
How should this evidence, tentative as it is, be interpreted?
Does it suggest that at least some specialist technology suppliers will
move into a new ‘network outsourcing market’ whereby they provide the
functions of network construction, operation, management and improvement on
behalf of network operators?
And if they do, will they own and control the networks (as appears to be
the case in the Telia contracts with Cisco and Nortel) leaving the network
operator to specialise in the selling of services such as voice, frame relay,
ISDN and ATM?
Or will they simply provide these functions on an outsourcing basis
while leaving ownership and control of the networks to their network
customers?
Alternatively, is this evidence atypical and will specialist technology
suppliers remain only in the equipment and software layer of the new telecoms
industry?
If you wish to express your views on questions such as these go to the
Workshop (Area 1). To
compare your visions with those of others go to Vision Check.
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