Does recovery depend on the 'C' word? Consolidation is held by many to be at the root of most, if not all, prospective recovery strategies for the sector

There was marked enthusiasm--perhaps even jubilation--when Cable & Wireless announced in August it would be buying UK competitor Energis. Media reports trilled with the prospect of the sound of cash changing hands, giving Energis' senior managers a capital windfall that few might have expected. Some commentators went on to say that 'even' telecom could be back in vogue in a mini-boom M&A in Europe; praise indeed for a sector that has been the investment pariah of the business world for four years now.

But one swallow does not make a summer. This was after all a relatively small transaction between the No. 2 and the No. 3 fixed-line players in a single national market. But the transaction did seem to make financial sense at least in terms that one player was expanding and acquiring the business and customers of the other player. It may be a useful signal for the rest of the telecom community too.

The media optimism was based on the premise that some much needed industry consolidation was finally occurring. This 'c' word is held by many to be at the root of most, if not all, prospective recovery strategies for the sector. Reduce the number of players, this thinking goes, and you have a situation where the remaining suppliers can begin to accommodate the size of market and even gain some pricing power. Never mind, in fact, that in the heat of all this summer enthusiasm, even Cable & Wireless' CEO, Francesco Caio, was quoted as saying something along the lines that 'we are price takers, not price givers'--a clear reference to the continuing weakness of the market.

If this does in fact prove to be the case, then it is relatively clear that there has to be much more consolidation before prices can be 'given' again. I find myself wondering if even a single entity or, failing that, an outright duopoly in fixed-line infrastructure (if that does prove to be the final destination here) would really be any better. It's a bizarre thing to suggest because it is precisely these sort of commercial structures that are supposed to dictate to the market. In telecom, though, we've been so used to massive under-pricing that it's arguable that the customer has gotten used to low prices forever.

In the same period, other media reports suggested that if you want to charge ever higher prices, the best businesses to get into are auto insurance and hairdressing. Both these sectors have seen massive price hikes well above the rate of inflation over the past decade. The strange thing is, both of these sectors are held to be extremely competitive insofar that there are many players supposedly vying for customer business. And alongside that, neither of these sectors is what you might term a difficult-to-understand marketplace. There is little technological sophistication, although there might be rather more marketing sophistication and customer understanding than appears in telecom.

So, we must see what course telecom continues to take. Consolidation might well be the answer, but in the fiefdoms of national incumbents around Europe and Asia, there has been relatively little move to consolidate (only Telia and Sonera seem to have actually done so in Europe). There might be activity on the mobile front but fixed-line strategies seem to be unfolding at glacial rates. Only the airline industry with its protected flag carriers seems to resemble telecom, and perhaps there are more than a few parallels between the two sectors.

Don't hold your breath for any quick changes in the landscape. But, in the meanwhile, hairdressing looks a good option for a stable career.

Stephen McClelland, editorial director, Telecommunications[R] International

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