Axxent Communications will soon become the latest casualty in Canada’s competitive communications industry, following in the footsteps of C-1 Communications, Cannect, Maxlink and Riptide. Some analysts, and even litigious lawyers, have charged that these casualties are due to the evaporation of the communications capital markets over the past 10 months, coupled with jittery vendors holding much of the carriers’ debt load. While it may be technically accurate to blame the foreclosures on now fickle equity markets, in reality all that may have happened is an acceleration of the inevitable failures of flawed business assumptions. No doubt, the carriers’ business plans had called for years of losses before turning cash flow positive, but we believe that none of the failed carriers were able to create, let alone pursue, a sustainable competitive advantage over the incumbents or the other new entrant carriers.
Regulatory Arbitrage
In the case of DSL providers and carriers dependent on telephone company collocation, their business cases depended on what may be termed “regulatory arbitrage.” The companies used telephone company local loops, telephone company buildings and applied technology that is readily available and used by the incumbents at an even lower cost due to better volume discounts. The competitors had a higher cost structure and yet sold their product at a lower price in order to build market share. Their pricing advantage could only be sustained as long as the incumbent chose not to seek regulatory relief. For example, Axxent had become vulnerable to re-pricing by the incumbent, by focusing for too long on resold Centrex and resale of telco loops.
Although Axxent had sought suitors by recruiting financial advisors, it was late in discovering that its customers were too geographically dispersed to be cost optimized and thereby be of value to other new entrants. Further, Axxent had attracted customers that simply were not attractive enough to any other companies. Even the incumbents recognized that there was no need to pay for a customer base that would soon come home on its own.
Blame the regulator?
The regulator is often seen as a convenient scapegoat for the woes of the competitive industry. In recent months, the CRTC has ruled in favour of competitive industry interests in virtually every decision, including its removal of the so-called “Sunset Clause” for near-essential facilities (see our update of March 1, 2001). The change in the collection mechanism for the universal service fund (Contribution) gave wireline carriers a significant windfall. The CRTC’s failure to accept and understand the real cash flow concerns affecting RSL Canada during the transition period (see CRTC Order 2001-300) is among the few black marks on a regulatory scorecard that otherwise has recently been creating an increasing number of opportunities for new entrants to succeed.
Technology versus Service Based
Too many of the failing companies focused on specific technologies instead of the services enabled by these technologies. Riptide sold DSL access technology; Maxlink focused on wireless access; C-1 was primarily an IP play.
Maxlink’s wireless focus, like that of Winstar in the US, created too little flexibility in servicing their customers. In each case, the companies lost sight of the fact that customers don’t buy technology, customers buy services. Technology is an enabler and should only be seen as one of the tools in the solutions kit. Voice over Internet Protocol has often been cited as a service that customers are demanding. No customer really wants VOIP any more than customers are screaming for DSL or cable modem based service. This is the same trap that carriers fell into when trying to sell ISDN in the past decade.
Customers want low cost, reliable voice communications and high-speed data access. VOIP, DSL, Cable Modems and ISDN are methods for delivering service – they are not services themselves.
Since local competition was opened four years ago, the CLEC industry has professed to be targeting the so-called “under served small and medium enterprise market.” The small and medium business market is hardly under served: it is sorely under serviced. Yet the focus has typically been based on price, not service. It is a real challenge to launch a broad geographic marketing campaign while promising to overwhelm customers with personal service.
Success Factors
Management pedigrees are simply not enough. Losing sight of customer centric services and focusing too much on technology and unprofitable revenue has brought down communications carriers on both sides of the border. Companies such as Group Telecom are building value through construction of tangible assets and customers that are served on its own facilities.
Norigen has pulled together a complete communications portfolio, and its alliance with Compugen signaled a focus on being able to put together a complete servicing strategy for its clients. Through its building-centric focus and technology agnosticism, Norigen is building a concentrated and well-bundled customer base. Its primary challenge will be to survive on the backs of its private equity backers until the markets are ready to face a communications industry Initial Public Offering.
Successful companies will avoid the seduction of reporting top line revenues at any cost. In the long run, demonstrably building a sustainable difference and profitable business will be rewarded by both the customers and the financial markets.