Editor’s note: Anyone involved in the high-tech economy is well aware of the challenges facing the telecommunications industry. So when a prominent telecom exec speaks these days, many people are listening. Duane Ackerman, chairman and chief executive officer of BellSouth, delivered one of the keynote addresses at SuperComm in Atlanta this week, and he had a great deal to say. In our opinion, the best way to cover Ackerman’s remarks is to publish the speech as he delivered it. Local Tech Wire today publishes the second part of his remarks.So how do we fix this broken telecom ecosystem?

A.Rational public policy

Let’s look at the natural ways one might consider.

A rational world would begin by removing the rules that are harming the ecosystem. In other words–deregulate. We must create a more natural climate where commercial agreements, not regulatory mandates, govern relationships. Myopic regulation of the wireline segment–at both the wholesale and retail levels–of both price and service–is strangling the whole industry and restraining its ability to evolve. It is dangerous to the ecosystem and the community as a whole.

So we have to keep telling our story– that until the telecom is freed from the unnatural glass bubble of regulation–investment, innovation and the economy will continue to suffer.

But this is not a rational environment and we can’t expect regulation to reform anytime soon. At 100 days and counting, the FCC is still writing the details of a decision it theoretically already made. Policymakers are grinding along at a glacial tempo while the environment is surging forward.

We’ll keep working on it–as we say in the South, we’ll keep praying over it– but regulatory change always takes more time than we expect.

So beyond fixing the rules, what else is out there?

B. Consolidation and bankruptcy: Remove capacity

Another way a rational world might deal with a broken ecosystem is to eliminate the excess capacity depleting the environment. Two natural fixes that are widely talked about are consolidation and bankruptcy…and by that I mean bankruptcy where there is actual liquidation rather than the return of the capacity to the market at a lower cost basis.

Comments by Morgan Stanley analyst, Simon Flannery, are fairly representative. Flannery said: “We believe that the U.S. telecom industry cannot really hope to provide decent returns to investors without a recovery in demand and structural improvement through rationalization and consolidation– Bankruptcies of WorldCom, Global Crossing and others are not eliminating capacity. The industry remains on a path toward increasing commoditization.”

In wireless, the case for consolidation is being made even more strongly–with Merrill Lynch noting– “Like many observers, we started 2002 assuming that the competitive intensity of wireless, allied with heavy capital demands, would lead to at least one consolidation among the six nationwide carriers. However, one year later, those expectations have proved totally misplaced.”

So–a lot of talk about consolidation and bankruptcy as two natural ways for making the ecosystem more rational again. But as much as industry pundits have talked about these fixes, they haven’t happened. The excess capacity is still with us.

Now– if we are working on changing the rules and consolidation is yet to happen–are there any other opportunities out there to keep us innovating in a world with limited capital?

All of us in this room are telecom stewards and we have the power to reshape and renew our ecosystem if we find new ways to work and partner with each other.

What does that mean for us?

C. Stronger partnerships at the horizontal levels of value chain

The starting point is for all of us to recognize that telecom is transforming into a new industry structure. We’re shifting to a horizontally stratified and open environment. And combined with the capital pressures, it means that to heal our ecosystem, we all need to rely on each other more than we ever have in the past. And, perhaps, in ways that we haven’t been comfortable with before.

Picture three layers.

Bottom layer: network infrastructure.

In the middle: the product innovation layer.

On top: the customer relationship/distribution layer.

The major telecom service providers operate at all three horizontal levels of this vertical value chain.

But it’s unrealistic to believe that a single carrier can do it all: One, provide network services from end to end to all customers, and Two, develop all the products and applications customers want, and Three, be the sole, exclusive retail channel to all these customers. That’s what many of the largest telecom carriers have tried to do and they couldn’t make it work.

Unregulated industries that have grown and matured naturally have learned lessons that we’re just starting to apply in telecom. In an ecosystem, the laws of physics rule. Strong, cooperative relationships are essential to driving the necessary scope, scale and utilization that creates value throughout the food chain. Partnerships at each horizontal layer are necessary…to extend network reach, to develop new products and applications and to create new distribution channels. As partners, we’re able to produce greater efficiencies without direct capital investment in every layer.

The most competitive industries in the world rely on horizontal relationships. Take Coca-Cola Enterprises as an example. In the early days of bottling, CCE had plants where you could watch through large windows as the machines filled the bottles exclusively with Coke. If you’ve ever visited the World of Coca-Cola here in town you’ve seen the replica of it. After realizing the basics of scale and utilization, they determined they needed to be more efficient. They covered the windows with bricks and starting bottling other brands. Today, CCE is the #1
soft drink bottler in the world.

Now, if we’re honest with each other–the notion that competitors also can be collaborators is still counterintuitive to our industry. But like other industries before us, we must let go of the mindset that says we can be all things to all customers. Each layer is a different discipline. And, we must find new ways of becoming better partners at each horizontal layer.

How might we do that?

Infrastructure Layer … Standards

At the infrastructure layer, we know we must have interconnection and interoperability while creating a climate for innovation. We can’t get there without standards.

Through standards set by Cable Labs, the Cable industry moved fast in developing its DOCIS standards in record time, and has gained a competitive edge on its telecom competitors.

The wireless industry in Europe adopted one common standard…GSM…and wireless services boomed. In the U.S., we have four different wireless standards. I wonder what the impact has been on innovation?

We can no longer afford to have different vendors develop incompatible solutions. And as we’ve seen with DSL, when we agree to build to the same technical standards across the industry, we can eliminate redundancies, use resources more efficiently, and deploy new technologies faster.

While you could argue that our industry has been more democratic and open in its approach to standards, I think we would all agree that our model lacks the speed of Cable Labs. If we want to win the race against cable, we must move at the speed of business today. We have to move faster…together.

Another problem at the infrastructure layer is the enormous fixed cost required to deploy new network architectures. In telecom, we might explore a “pay by the drink” model, where equipment suppliers provide functionality rather than the hardware itself. The industry could gain some real benefits…a more variabilized cost structure, greater scale advantages, and the ability to control obsolescence periods.

I know that concept might push some comfort zones, but this is about being creative in using capital more efficiently across the industry.

Product Innovation Layer … New Industry Models

At the product innovation layer, the high cost of R&D is a barrier, along with the risk that no single carrier will have the scale to profitably deploy the new product or service. So how does one drive new products and applications with extraordinarily tight capital markets?

Let’s think briefly about a different business model. For example, a combination of two or three major carriers, a systems integrator and a financial company could together develop a product like–say Voice over IP– and make it available through all carriers and all distribution channels. And, do so more quickly and efficiently than any single company could have done because of the aggregated demand or scale that can be applied to the development.

These new alliances would represent a shift from the traditional insourced approach to an outsourced, open innovation model, and we see it as a way of financing and driving a wide range of next-generation products and services in a marketplace where capital is a scarce resource.

Some might argue this is a bad idea because it may complicate a company’s ability to differentiate itself. I would counter that the situation we face in our industry should drive us to use common technologies resulting in decreasing costs. We’ll differentiate ourselves through our offers, our service, and unique bundles we provide to our customers–often including components from partner companies.

And if you are an equipment manufacturer, differentiating yourself through quality, reliability, and cost is typically more important to BellSouth than a unique feature that you may have implemented in your product.

I encourage you to be creative–to consider concepts like these or similar initiatives of your own. One way or another, now’s the time for careful consideration of where your product, and your company, fits in with the new and emerging industry structure. We must be the drivers of technology, applications and standards, and for now, we must do it with less capital.

Customer Layer…Serving customers through partnerships

On the retail services level, it’s all about strengthening the relationship with the customer. And none of us alone can deliver all the services or capabilities customers need. By partnering with allies, we can naturally extend our individual strengths.

BellSouth and Cisco just announced a new strategic relationship to deliver advanced data managed services to business customers in the Southeast. Earlier this year, BellSouth and IBM agreed to collaborate on the delivery of hosting and network services to business customers.

BellSouth has led in customer service for a decade according to the ASCI Survey done by the University of Michigan, but everyday we look at this vast opportunity and we know there is so much more that can be done, especially with new partnerships and alliances. We’ve just begun to tap into the possibilities.

Across the industry we are all exploring many other ideas for evolving our ecosystem. You and I know that there is no one single solution–there is no quick fix. We have to work on all these fronts–from getting the rules right–to dealing with the excess capacity –and while we’re working on those fronts, we have to find new ways of doing business together.

Conclusion: To everything there is a season

My message is this: The telecom ecosystem as we have known it is broken, but I believe in our industry’s ability to evolve–to innovate– and to break through the barriers that are holding us back.

Let’s recognize that we are all part of this evolving ecosystem. Let’s move with boldness beyond the traditional industry models into news ways of doing business. Let’s shatter the glass dome of irrational regulation. Let’s move with speed and focus. And let’s keep driving innovation even in our capital-starved world.

Biosphere 2 still stands out in the Arizona desert. Columbia University has been trying to turn it into a research lab to learn from an ecosystem run amok. It stands as a cautionary tale to remind us that nature always has the last word. That’s why we have to stop and listen to nature–stop and listen to the logic of our markets and our networks. Because unlike the founders of the Biosphere, we can’t just declare this experiment as over.

To every thing there is a season,
A time to be born, and a time to die;
A time to break down, and a time to build up.

Those of us in this room are the stewards of a vast telecom ecosystem where everything has its season. And now is the time to build a new and stronger industry.

We must not accept a declining growth curve for our companies or our industry. Regardless of the rules–the disruptive technologies, it’s the leaders of this industry that history will hold accountable. We must find the way to evolve our ecosystem, and as do we will see new lights of growth for the communication industry in the 21st century.

Part One: www.localtechwire.com/article.cfm?u=4377