The rumour mills were buzzing for the last two weeks about BT being on the cusp of an important strategic acquisition. But as it turned out, they took over Cara instead. Cara is basically a hardware and software reseller with a services arm. It has been kicked around from owner to owner over the last ten years.
As far as I’m concerned, BT buying Cara is a bit like buying an ice cream while you watch your house burn down.
All that it will do is tie up capital and add extra complexity to BT’s operation. It will undermine BT’s existing relationships with other partners. It will upset customers by encouraging salespeople to try to sell them services they simply don’t want to buy from Cara or BT. It will allow BT Ireland manage to convince themselves that they are becoming more customer-centric, when in fact all they are doing is justifying their own existence and driving up the cost base.
Most of all, it will serve as a distraction to the serious business of getting ready for the big changes that are coming rapidly down the track for old-style telecommunications companies in Europe.
It’s more of the old ‘big company’ non-sequiturs. Customers aren’t buying enough, so we’ll put the prices up. We’ll make our service more complicated (’sophisticated’) so that customers will pay more. We’ll make our regular customers carry around little plastic cards tied to an expensive computer system, so that the staff will know they’re regular customers.
So if this is so stupid, why is BT doing it? Well, because some consulting boutique came in and told BT’s management that traditional telecomms were going down the tube, and that if they wanted to maintain margins, they would need to ‘add more value’ by providing extended services to customers.
It could work. The problem that the consulting boutiques never seem to see is that managing an IT sales and services business is very different from managing a telecomms business. At the same time, the net margins in this business aren’t all that great. You need a lot skilled technicians and salespeople to keep the show on the road, and there are few benefits of scale.
It’s not clear at all that customers actually want a broader range of IT services from their telco. From what I can see, most of them just want quality basic telecomms services, and they are happy enough to put the rest together for themselves from independent vendors that understand their sectors’ needs.
They might like to buy their email and domain name services from the same company that they buy the broadband connection from but they don’t want to buy their computers from the telco. Even if they do, what happens if the telco’s price on PCs becomes uncompetitive with Dell? Will the result be that the core telecomms business will be lost as well?
There is an alternative to the ‘value-added model’ that I think telcos should seriously consider. You could call it the ‘low-fares’ model. The principles behind this model would be as follows:
Cut costs by using automated web customer services and pre-pay systems, building out no-maintenance fiber-optic technology and radically reducing the number and complexity of products offered,
Reduce capital expenditure by replacing brand-name telephone exchanges with commodity servers and DSLAMs. This type of use of technology is what gives Eircom its edge. VoIP now provides a viable alternative means of providing telephone service, which will be far easier to scale up and far cheaper to buy and run.
Build massive scale with low prices. You can’t be in the telecomms business in a small way. You have to be big, to cover your fixed costs and build sufficient economies of scale in your field operations. To build that scale, you have to make the product cheap enough so that every single home and every single device and appliance of any importance can eventually get wired up.
As a result of doing this, you can provide a fabulous return on capital employed to investors (and loads of cheap bandwidth for customers while you’re at it). The telecomms business is an opportunity to prosper on the strength and growth of the Irish economy. By keeping costs low, and having a lot of scale, shareholders can get a great return. They also have the confidence that they are invested in a company that can’t be supplanted easily and which has a cost-base aligned with the future of telecommunications.