Home - Key Questions - Fixed Networks: Section 1 - Question 6

Section 1: Questions regarding the incumbent telecoms companies and the new facilities-based operators

Question 6: Will the successful operators be vertically integrated or will they be vertically specialised?

One of the key structural changes that has occurred during the evolution of the computer industry has been a transition from vertical integration to vertical specialisation. In the mainframe era companies like IBM and DEC produced their own semiconductors, operating systems, computers and software applications, and even marketed and distributed them. However, in the era of PCs and the internet vertical specialisation came to dominate the organisation of the computer industry. It was now organised into ‘layers’ each of which was dominated by different specialised companies. For example, the microprocessor layer was dominated by the likes of Intel; the operating systems layer by Microsoft; the computer assembly, marketing and distribution layers by Compaq, Dell and retail chains; and the software applications layer by numerous specialist software companies. For further details see Andy Grove, and Tim Bresnahan and Franco Malerba in Site Bibliography

An important question for the future evolution of the telecoms industry is whether a similar process of vertical specialisation will occur. If so, will the process be as complete as in the computer industry, or will only some of the layers in the telecoms industry become vertically specialised? (For the separate layers in the telecoms industry see Industry Mapping 1: The Basic Layer Model). For example, will different companies specialise in the Network Layer (Layer II) and in the Services Layers (Layers III-V)? Will each of the Services Layers be dominated by different specialised companies? (For the services that are provided in each layer see Industry Mapping 2: Products & Services By Layer).

Or, on the other hand, will we see vertical integration continuing to dominate the industry as it did in the pre-liberalisation era prior to the mid-1980s when vertically integrated state monopolies ran the entire industry? And if vertical integration does become the dominant form of organisation in the industry, will this involve all the Layers from II to V, or only some of them?

In posing these questions it is important to repeat that vertical specialisation has already become a key characteristic of telecommunications, with crucial implications for the functioning of this industry. More specifically, Layer I, the layer that provides telecoms equipment and software products, has already become the domain of specialist technology suppliers. These include companies like Lucent, Nortel, Cisco, Ericsson, Nokia, Siemens, Alcatel, NEC and Fujitsu which provide telecoms equipment (including data networking equipment such as routers), and computer companies like IBM, Microsoft, Compaq and Dell that provide servers, computers and software. But the specialist suppliers have not only provided technology. In many cases they have also supplied (willingly or through headhunting) the managers and skilled personnel that the new operators have needed to speed their market entry and make it successful.

The future role of the specialist technology suppliers in the new telecoms industry is further discussed in subsequent Key Questions.

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.