Tuesday, 27 July 2010

The common errors of Telecom CEOs

With a recent spate of Telco CEO's complaining about the evil deeds of Google and Apple and some other stupidity, I start to wonder how hard it is to be a Telco CEO. So sit back and enjoy the rant. :-) Let's look at some of the errors of most telco execs.

Error 1. Lack of basic managerial skills and telco knowledge
Of course Richard Obermann of Deutsche Telekom got me irritated, when he said he wanted to charge Apple and Google. However Maxime Lombardini, the CEO of (my beloved) Free.fr, made the exact same mistake. A mistake Ed Whitacre, then CEO of AT&T had made years before and which gave me my opener on a primer on peering and transit. The main reason this viewpoint irritates me is; they complain about their underinvestment in their network. They then point at two companies who are very visible, but don't really matter in the equation. If Apple hadn't existed, someone else would have come with a bandwidth hogging device in a matter of 0-2 years. If Youtube hadn't existed, Dailymotion and Facebook would have existed and would have delivered the goods. What I mean to say is that user behaviour wouldn't have changed and somewhere between 2010 and 2013 we would have hit the exact same limit as now.

You think a Telco CEO would know that his companies projections about network growth were completely off and that his team doing network planning should be sacked. However, the painful thing is, these guys seem to believe their own stories. They actually don't know what pays for their network. They don't understand peering and transit. They can't extrapolate growth models and they don't know consumer behaviour. Hullo, anybody home? Those are the things a CEO should keep track of!

Error 2. Google and Apple Envy
Whenever you hear a telco exec speak about other companies, it  mostly is Google and Apple. Google and Apple is what they are afraid of, are envious of, that they blame, that have caused the world to change, that have made them miss a target, it's all Google and Apple's fault etc etc. Worse still, they compare themselves to these global giants and then alude to how they will compete with them, because competing with Google and Apple will let the halo of Jobs and the colors of Google shine upon them and will make them somehow worthy of the enormous pay they get and compensate the lack of charisma they generally have.

Google and Apple are great examples to look at if you like reading Forbes, Harvard Business Review and Wired. They are less interesting to look at when you are a telco exec. There are no similarities between their company and a telco:

  1. They are global companies competing on a all continents with varying success, telcos are masters of a local business, literally rooted in the soil of their home country and some countries they acquired. Telcos wouldn't know what to sell in Nigeria, whereas Apple and Google need to consider how to monetize Nigeria, as it is a 160 million people market,  that is already actively using their products. 
  2. Apple is as dependent upon blockbusters as Pixar and MGM. A telco will report steady flows of capital. A bad year is a couple of percentage point less revenue than projected. Apple can only mess up so many times and everyone leaves them. They know, it happened in the nineties. 
  3. Google is in a constant state of flux, running the world's largest computer and changing it, while it remains operational. If it messes up, people move to Bing. So change in the face of uncertainty is essential to its business.  A telco can plan for a major transition 3 to 10 years ahead and the planning department should be able to get everything right with a maximum of 2 years difference. 
  4. Both Apple and Google value brilliance and excellence more than anything. They need to stand out. A telco, weirdly enough, doesn't need that. It needs consistency and dependability. A couple of small field trials solve more problems than brilliant people. 
  5. The valuation of Google and Apple may be through the roof, but it rather pales compared to turnover and profits for telcos. Google's yearly turnover is slightly less than the EBITDA of Deutsche Telekom, which is 20 billion euro or 25 billion dollar. Google has to conquer the world for it's money and Deutsche Telekom is safe in its empire. Apple is twice Google, but still only half of Deutsche Telekom's revenue. Apple is however  a consumer electronics company who had a very good last 10-13 years, but just ask Sony and Philips, how hard it is to keep that lead. Oh, and both Apple and Google don't pay dividend, Telco's do. It may be old fashioned, but as a shareholder I would like that. 
So where should telco execs look? At other utility companies of course. However that is much less sexy.

Error 3. Infatuation with delivering services
Ever since someone coined the term service economy, everyone wants to offer a service. It is better than being in agriculture or manufacturer of products. But instead of just naming their network a service, telcos have looked at services to be delivered over their network. For a while they bought content and services companies like Endemol, Time Warner, Plaxo etc. And we all know how that ended. So now almost no one in the Telco industry is in real internet service and content companies. 

But still, they don't learn, so they invest in IT-services, where everything is much more murky. And let's be honest, nobody believes the telco exec is cooler than a movie mogul, but he is stil cooler than an IT-services exec. Several telcos have bought or grown IT-service companies. KPN bought Getronics, BT has BT Global Services, Deutsche Telekom has T-Systems and last week NTT bought Dimension Data last week. There is never an explanation why, other than that services are the wave of the future and customers demand it. I doubt both highly. Furthermore, given how much money they pay for these companies, I doubt it is beneficial to the shareholders too. 

You see, I work for an IT services/consultancy company.  I know the nature of the business. IT-services companies are the construction companies of the digital age. IT companies are just like your local builders. They are lying, thieving, unprofessional, shoddy bastards you can't do without. Everything would be better if you could Do It Yourself, except that you don't have the time and the expertise and you've seen too many DIY projects fail horribly. So you hire a bastard IT-company (builder). Really there is no difference between a construction company and an IT company. Both make life hard for the customer and the supplier. An IT company is always faced with a customer who underestimates the work, but who still rather pays someone else to do it, than do it themselves. So whoever the customer chooses, it is generally the one with the second lowest price. This is the guy who didn't calculate all the contingencies well, but was at least able to name some to comfort the customer, who knows there will be contingencies. Then the customer and the supplier set of on a perilous journey of over expectation for both the end product and end profit. Half way through they know the journey is impossible and neither are going to get what they want. For the remainder of the journey they fight over all the extra work that needs to be done. In the end neither is happy, both claim they paid too much and got too little etc. So low margins, high hassle. And this is the market telcos want to get into, because somehow it fits their high margin business...

Error 4. Overvaluing the retail business over the wholesale business
It is amazing how many telco CEOs have fallen for this trap. The only one I know who avoided it is Ad Scheepbouwer. LightSquare and Reggefiber are based on a wholesale model, but I hardly would consider them traditional telco.  In most telcos it's the wholesale business that brings in the margins. Regardless of whether it's their own retail business that sells the line or a retail competitors. This is clear in the DSL market which is often regulated to support unbundled local loop and wholesale broadband access. But also in the business market the incumbent wholesale network organization will service competing retail organisations, because its much more efficient to use networks that are already present at a customer, than build a new network out. However apart from Ad Scheepbouwer, I've never heard of CEO's actively supporting open access networks. It's probably because services sound sexy instead of being a plumber. 

So if these basic elements are so often misunderstood and people can still become CEO of a telco, what is going wrong in the industry? Why is this so hard to communicate to shareholders and the media? Is it maybe that we want to be deluded into believing there is a grand future for telcos in GoogleLand? Or is everyone, the CEO and the shareholders included just dead scared of the grey future of commodity infrastructure that pays a nice guaranteed return?


  1. his team doing network planning should be sacked

    And here's the thing: each telco probably outsourced that. No leverage, no accountability. What's a telco going to do after having chosen Nokia Siemens Networks or SonyEricsson as strategic partner for network design and deployment, dump them because they turn out to be clueless consultants in suits?

    (No offence to the clued working at said companies. The other 99% kind of spoil it for you, though.)

    I think telcos started with services because otherwise in the post-monopoly market there's no way that a sane person would buy anything from them if they can avoid it. By offering services in a larger part of a vertical market they can sometimes bamboozle execs into believing in their version of the integration fairy.

    I disagree with your assertion that wholesale brings in the big monies. KPN is big in both ADSL and mobile with its own brands. And I firmly believe that its interest in Reggefiber is only to prolong the myth that its copper network is worth something to justify its stock pricing.

  2. Your comments remind me of the meeting between BP's CEO and Barack Obama about fixing the Deep Horizon oil leak. The biggest things they had in common was that neither could tell an oil rig from an electricity pylon and neither had a clue about what was involved.

    However, they do share a number of attributes in common with Telecom CEOs.

    1) They understand shareholder value.
    2) They know the uses of publicity.
    3) They are buzz-word savvy.
    4) They can talk with analysts who know less than they do.
    5) They can follow the stock market trends.

    The idea that CEOs should understand the basics of the business they are running is seen as dangerous nonsense (by many CEOs at least).

  3. To NB's last paragraph:

    Read today's KPN quarterly results, Slide 31 of:


  4. Hmm, does this suggest that regulator CEOs should also be paid as if they are civil servants running regulation of the utility...?

  5. @NB what Yves said. You might also want to look at the margins BT is making on Open Reach.

    @Yves, thanks

    @Chris What I know of it, is that the Dutch Telco regulator isn't getting seriously more pay than the head of the energy chamber of the Dutch Competition Authority. But I have no idea what it pays to be head of Ofcom :-)

  6. Two people have suggested that the answer lies somewhere in Christensen's Innovators dilemma. There is certainly alot of truth to it, so please read up on it. http://en.wikipedia.org/wiki/Disruptive_technology

  7. Good rant!

    I'm afraid what's wrong with the telecom business is wrong with every other business. As Anonymous pointed out above, Shareholders and C-Levels executive actually think it's good that they are not engineers and do not understand the business they operate in.

    Another aspect to add is the increasing short-termism of business perspectives: CEOs know they're only there for a few years and have financial incentives to leave with the stock as high as it possibly can be. That means leaving big investment decisions and big transformative strategies to the next guy...

  8. Very good - sometimes the truth is best told as a rant as opposed to an objective piece of analysis.

    I have included this article in my background material for our next Board Strategic Planning session :>

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