Tuesday, 12 November 2002 8:30 am
While over the last two decades the computer industry was busily evolving from vertically integrated companies to a network of specialized players, the telecommunications industry was not.  Today, both the telecommunications carriers and their equipment vendors are still heavily vertically integrated, attempting to do as much as possible themselves. 

On the carrier side, management attention and shareholder’s capital has been focused in recent years on increasing vertical integration – AT&T attempting to integrate with cable companies, baby bells attempting to integrate everything from internet access to broadband services to long distance services into their local voice networks, and long distance voice carriers attempting to add local voice service, internet access, internet backbones, and wireless services. This has resulted in a set of very large companies offering increasingly undifferentiated services, competing completely on price, and thus driving the whole industry into simultaneous insolvency. In other words, competition at its worst.

When an over-capacity situation develops in a healthy competitive market, the weakest players go out of business and reduce the total capacity, allowing the stronger players to return to health.  In the telecommunications carrier market the failure of the weakest players (e.g. WorldCom) will probably not reduce total capacity at all.  There are two possible scenarios of what will happen with WorldCom. In the first scenario, WorldCom emerges from bankruptcy without its debt load.  In this scenario, it will instantly be more cost competitive than its competition, who will have no choice but to seek bankruptcy reorganization themselves in order to dump their debt loads.  In the second scenario, WorldCom ceases operations and liquidates its assets.  In this scenario, the long distance capacity will be bought by others (e.g. Warren Buffett via Level 3) for bargain prices, and put back into business as cut-rate competition to the other carriers, who will of course have to seek bankruptcy to compete.  So everybody goes bankrupt, regardless.  As I said, competition at its worst.

In the telecommunications equipment business, things are not much better.  At the current stock and bond prices that investors have assigned to them, it is already assumed that all of the big traditional players (e.g. Lucent, Nortel, Alcatel, Ericsson) will go bankrupt, more or less simultaneously.  So almost the entire telecommunications industry is cleverly structured for self-annihilation, and is busily working at carrying it out!

Vertical integration has failed miserably on both the carrier and the equipment vendor side.  At present course and speed, almost everyone dies, followed by successor companies and a few survivors who will rise out of the ashes as a network of specialists, each focusing on specific aspects of the business. The survivors and successors will survive and prosper by offering superior services and products in their particular niches, as their counterparts in the the computer industry do.