[BETA] Fortnightly

 

There are opportunities for utilities despite the telecom market correction of 2001 and 2002.

The benefits gained when electric and gas utilities enter the world of commercial telecommunications services are obvious. Telecommunications services allow utilities to leverage many core competencies, assets, and human capital. Additionally, new entrants enjoy some competitive advantage over operators of older networks; just 70 pounds of fiber optic cable can transmit as many messages as one ton of copper wire and with only 5 percent of the energy needed. Market demand is making possible new revenues from video, data, and wireless services, not to mention such bandwidth-intensive applications as Internet access and application services. Yet the risks for utilities entering telecommunications are real and ever present. A thoughtful strategy of building upon established competencies and achieving incremental advances is the soundest path to manage risks and climb the telecom value curve. From elementary right-of-way (ROW) transactions to complex application hosting, the difference between success and failure in the fast-breaking world of telecommunications technology lies in understanding and mastering each progression in a five-stage continuum.

Naturally, just because a pulp mill is good at producing paper, that is no indication it will succeed in the newspaper business. Yes, it can be done, but it would be essential to develop and match core competencies to support more complex tasks. Similarly, many utilities enjoy a sustainable competitive advantage in managing physical assets such as poles, ducts, and right-of-ways, paving their way for entry into telecommunications. However, success in entering telecommunications services comes from working through incremental advances-building as you go.

The transition of moving from a dark fiber optic lease transaction to a lit fiber managed bandwidth service can mean the difference between $100 per strand mile and $800 per strand mile. But as Chip Smith, president of DukeNet Communications Inc. in Charlotte, North Carolina, warns, "At the retail end, selling to the end user, the competition is murderous." Revenues are richer the further along the telecom continuum, but the risks also increase, sometimes exponentially.

The key to success is to establish competence at each stage of the journey and then leverage that proficiency, experience, and credibility to move deliberately up the curve. The communications value curve can be thought of as a five-stage continuum. The basic stages of progress are outlined below:

1. Real estate transactions (right-of-way)
2. Facilities-based transactions (dark fiber)
3. Wholesale services (managed bandwidth)
4. Retail services (voice, video, and high-speed data)
5. Complex value-added applications and services

ROW Real Estate Transactions

Currently, more than 80 percent of America's largest 100 utilities have entered the telecommunications sector at some level. Virtually all utilities own and operate large and complex private telecom networks in support of their core business. Additionally, utilities have become more telecommunications-dependent for their core business. Mission-critical applications such as sub-station management, energy trading, and demand-side management are dependent upon connectivity. This means a utility's entry into telecommunications is a natural extension of the core business.

Initially, many utilities began their involvement in commercial telecommunications as relatively straightforward ROW transactions. However, the incremental revenues that can be derived from