This is part 1 of a series of posts we plan in the coming days about the evolution of the communications industry and the beginning of a period of dynamic change coming on the heels of what will be a decade of struggles by the time we emerge from the current recession.
Our late January reaction to the Bookham/Avanex merger announcement drew a reaction from one reader who suggested that perhaps slicing and dicing of the communication equipment supply chain had gone too far, at least on the optical front and putting some of the pieces back together again would produce a more valuable business opportunity. Those sentiments were echoed by an optical module supplier we met with earlier this week at OFC/NFOEC 2009 and in many respects we agree, but it may be a question of timing.
In other words, we believe there could be some very important communications industry changes that need to get underway in order to give clarity to where the best opportunities exist for putting more vertically integrated companies back together again. The March 23rd announcement of Telefonica and Vodafone of a Pan European collaboration may be the tipping point for the change we are talking about. The agreement calls for the companies to share network infrastructure in Germany, Spain, Ireland and the UK and anticipates cost efficiencies of hundreds of millions of pounds for each company over the next 10 years.
This is a step in the direction of something I wrote about when I was a research analyst back in 2002, where we looked ahead ten years and described a profound change we saw coming in the telecommunications sector. I wrote about the separation of communication services from networks. My thinking was that a company like Verizon would split into two or three companies. For purposes of this example the three might be Verizon Networks, Verizon Communications Services (VCS) and Verizon Wireless (VW). Networks would possess the entire network infrastructure that supports the services provided by VCS and VW. Its first customer agreements would be with VCS and VW. Networks would be free to provide that same network to other service providers at some negotiated rate. In many respects it is something along the lines of what Vodafone and Telefonica have done.
We would expect other carriers to follow the Vodafone-Telefonica lead with similar agreements, but if we were investment bankers at the short list of remaining bulge-bracket firms, one of our business opportunity focuses would be calling on the major service providers with our Verizon break-up story.
