Want Converged Broadband Networks?
No problem. But where are the revenues?
July 1 2005 by Chief Executive
Hanaro Telecom is trying to make a living in a risky environment. The eight-year-old Korean-based company recently completed the installation of a 100-city, fiber-optic broadband network on which it hopes to piggyback data, video, voice, internet access, music and, in time, links to wireless systems. It’s an exciting agenda, perfectly suited, it would seem, to what everyone says consumers desire: the ubiquitous network, or the proverbial “what I want, when I want it, where I want it.”
But as eye-opening as Hanaro’s business plan is, its perils are impossible to ignore. Even in Korea, Hanaro could be facing a muted reaction to its products and services. Its future may be reminiscent of the past in the U.S. when the Internet and telecommunications bubble burst, leaving companies like Qwest, Global Crossing and even AT&T, among many others, holding expensive, sophisticated networks with no place to plug them in.
After all, with no telephone companies anywhere in the world yet making serious money on their Web-focused offerings, how can anyone predict what consumers will be willing to pay for? “Right now, the DNA of [telecom] carriers is that they are connection providers,” Prashant Pathak, a partner at McKinsey, told attendees of the “Wired and Wireless Broadband Network Convergence” panel. “Feed and speed has been their business model. But they have to address supply-side economics; they need a €˜customer back’ perspective to determine the [products and services] that customers will want. Otherwise, there will be a lot of stranded capacity and capital.”
Hanaro’s CEO Chang Bun Yoon understood the skepticism, but noted that the world had changed since the spate of high-speed telecom failures. Digital content, capabilities and networks, especially in countries like Korea, have become so much more interoperable through better standards and a keener understanding that isolated islands of technology are of little use. Further, the world is moving closer to an era of true broadband convergence, says Yoon, a time when voice, data, video, audio and computer animation will be tied together through high-speed Internet access.
That, Yoon adds, puts Hanaro in a privileged position. “Operators are searching for new opportunities of growth in convergence,” Yoon said. “To a telecom provider, convergence can mean the long-awaited chance to go beyond providing just connections. For instance, convergence meets the consumer in home networks and entertainment content; it meets construction in the smart home; it meets retail and financial services in ecommerce.”
The wide gap between Pathak’s and Yoon’s divergent points of view€¦quot;chiefly, a challenge to completely rethink the telecom business vs. the notion that if we build a great network, customers will come€¦quot;was the primary focus of much of the panel discussion.
Only the Nimble Survive
One concern expressed by some on the panel was whether telephone companies are innovative enough or possess a sufficiently nimble culture to take advantage of the potential technological breakthroughs anticipated from broadband convergence. Indeed, just the possibilities of convergence are beginning to change the business landscape. Incumbent telephone companies like Hanaro, KT (the nation’s biggest telecommunications company) and KTF, KT’s wireless subsidiary, may not be the ultimate financial beneficiaries of broadband convergence.
Cable TV companies are already making inroads into home broadband networks with modems that allow them to offer Voice over Internet Protocol, ecommerce, portals, music, games and other services via PC or television set. It’s likely that these companies will align with cellular providers and notebook makers to offer these same services to people on the go. Intel, for one, is leading the charge for the WiMAX standard, which would deliver top-quality broadband to laptops. And cellular phone, PDA and other small equipment manufacturers are adding functions to their devices that enable them to do everything€¦quot;viewing as well as producing photographs and videos€¦quot;that broadband convergence is currently expected to deliver.
With all this activity, and a consumer base that is still inchoate, it’s likely that only the most creative companies will draw significant profits from convergence. “Convergence is a whole set of technologies for allowing competition across platforms,” said John Davies, Intel vice president for sales and marketing. “It’s driving competition across different devices.”
But Davies added that he believes that convergence companies are looking at their potential markets too narrowly. He challenged the telephone executives€¦quot;Hanaro’s Yoon and KTF’s executive vice president Joo Young Song€¦quot;to consider going beyond the consumer market. “I think there’s opportunity to make businesses and industries more effective using this fabulous infrastructure,” Davies said. “What about health care or field service workers? Convergence applications that blend data, audio and video could increase productivity and bring down costs in almost any industry.”
That sentiment, though, was dismissed by KTF’s Song, who spoke enthusiastically about an agreement between his company and Hyundai to provide advanced global positioning systems in all the Korean automaker’s vehicles. “The Korean market is a consumer market,” he said. “We have not found a compelling application for business in terms of wireless convergence.”
Even if that’s true, Pathak said, all the companies now eyeing the broadband convergence arena are going to have to forge partnerships with other businesses. This isn’t a go-it-alone technology; convergence by its definition is a collection of multiple technologies and applications. To offer a convergence product, companies will have to meld their areas of expertise. “Convergence will not be company against company but value chain vs. value chain,” said Pathak. “It’s ecosystem-based competition as opposed to firm-based competition.”
An excellent model of that, Pathak said, is the partnership that began in 2002 between Yahoo and SBC to offer Yahoo content and services over SBC’s DSL lines. Recently, the companies expanded this joint venture to provide video-on-demand, Internet radio and online photos for home-entertainment devices, such as television sets and stereo equipment. In addition, Yahoo-SBC signed a deal with Cingular Wireless to offer multimedia content to the cellular provider’s subscribers. “Companies have to work with companies they didn’t have to work with before,” Pathak said.
Yong Shu, vice president of Asia Pacific region for Riverstone Networks, which provides network management equipment to carriers, service providers and cable companies, offered a dire warning to companies that don’t appreciate the importance of new partnerships. He predicted a period of industry consolidation and pointed to the swallowing of AT&T by Cingular and SBC as an example of how weak companies will fare. “What do you expect? In five years when a customer comes to your shop, what is he going to buy? Will he want 100 Mb/s [broadband service] or Internet TV or certain entertainment applications? [If we don't offer these], we will die.”
And, in an unlikely sentiment from a network supplier, Shu added that telecom providers are probably giving too much attention to the network itself. “We focus too much on technologies,” Shu said.
That brought a sharp rebuke from Hanaro’s Yoon. “If you do not have a strong enough telecom service provider, there is no convergence at all,” he said. “So the infrastructure matters. You can’t ignore that.”
Telephone executives say they’re also trying to adjust as the market changes and be there when it finally settles down. “A carrier like us is continuously evolving,” said KTF’s Song, who demonstrated cell phones that were carrying high-quality broadcasts of Korean soap operas. “We just want to develop a mixture of fixed and wireless convergence to allow the customer to always be connected. Profitability? There is no timeframe for profitability.”
Those are the same famous last words uttered during the Internet boom. Broadband convergence, though, is a much bigger market with much higher stakes. This time, the Korean telecom companies hope, the rules are different enough that massive investment without profits is the right strategy€¦quot;and that they will still be standing when broadband convergence pays off.