Economists often seem enamored of economic efficiency, honoring its merits while decrying the lost benefits of inefficient outcomes. But really ... what's the harm in a little inefficiency? Well,...
Managing the Telecom Value Curve
various stages of the telecom value curve.
At the lowest end of the risk and return curve-ROW-utilities are decidedly less risky than telecommunications enterprises. Designing, constructing, and managing line extensions, facilities, and rights-of-way are core competencies of the utility industry. In fact, most local exchange carriers and cable TV providers rely on using electric utility infrastructure, typically through joint-use agreements, in deploying their networks.
In this scenario, adding a physical asset-fiber optics-to the utility ROW is essentially an extension of the utility's core competency of managing physical assets. The utility is decidedly less risky than the TSP. Because electric and gas utilities own and control over 80 percent of the ROW, poles, conduits, and ducts in the United States, the utility will enjoy a much higher return than a TSP that must procure easements at market rates.
For those utilities that already manage large private communications networks, it is an extension of this core competence to continue up the value curve by adding optical gear, lighting the fiber, and selling managed bandwidth. Typically, managed bandwidth is sold as a wholesale service to TSPs that provide retail services to the ultimate customer. At this point in the value curve most utilities have achieved their maximum value potential from existing strengths, and prudently managed the business risks. The sustainable competitive advantage at this level of the value curve is about physical access and assets.
From this point forward, there is a point of inflection in the value curve. "Life gets more complicated," says Bruce Hamer, program director for fiber optic enterprises at Los Angeles Department of Water and Power. As retail services are offered, the sustainable competitive advantages shift from physical asset-based to information- and intellectual-based. Dealing with retail customers requires a complex set of operational-support systems, customer-care facilities, and a sophisticated sales and marketing machine. In the area of the curve ranging from ROW to managed bandwidth services, the physical assets can comprise up to 70 percent of the cost of sales. In the retail services and beyond, the physical assets typically comprise only about 30 percent of the cost of sales. Clearly, a utility's advantage is dulled beyond a certain point in the value curve, and the TSP becomes the less-risky and more profitable enterprise.
Complex Applications and Services-Crossing the Point of Inflection
One example of crossing this point of risk inflection was Carolina Power & Light's (now Progress Energy's) venture into telecommunications with its subsidiary, Interpath Communications. Interpath was a successful, but small, wholesale service provider. A new management team was recruited to build Interpath into a more material business. Attempting to establish a first-mover advantage in an emerging market, the new management team took Interpath from the wholesale service space into complex application hosting ().
Irrespective of the fact that the enterprise had distanced itself from any core competence, Interpath was entering a new market space with unproved demand and new frontiers of technology, financial, and market risk. Predictably, the results were unsuccessful and Interpath has since been restructured under a more proficient leadership team, divested of certain