Utilities and critical infrastructure: The telecom “survivors”

By Forrest Wilhoit, United Telecom Council

As the wreckage of the telecom industry continues to wash up on anxious shores, there is an effective telecom strategy that has emerged with the potential to push and pull the next generation of large-scale industry players in a rebounding sector, utilities and other critical infrastructure (CI) companies, through their commercial telecom units known as UTelcos.

Recent years have seen a global trend of UTelcos entering the commercial telecom space in order to take advantage of market liberalization and to capitalize on a worldwide demand for telecommunications services that, despite the gloomy news in boardrooms and on trading floors, remains strong and sustained.

While the advent of a global commitment to free market economics has coincided with the rise in importance of efficient, well-deployed and maintained communication networks, there has been a worldwide trend toward loosening regulatory restrictions that once hindered utilities’ entry into the telecommunications market space. Policymakers worldwide have begun to promote the deployment of networked communications infrastructure using utilities’ financial strength and networking experience to pull it along.

So how are these firms geared toward diversification into commercial telecom? Quite simply, the “pipes and wires” nature of the businesses are rife with synergy. Being the second-largest market for telecommunications equipment and services, utilities have for decades developed internal communications networks for mission-critical functions, and utilities are highly skilled at deploying and maintaining these systems. By directing core competencies toward a telecom offering, utilities can pursue an integrated commercial strategy that presents greater opportunities to capitalize on sectors that display potential for growth that surpass the generally “slow and steady” growth rates in the utility sector. An efficiently and prudently-managed UTelco business unit can add value to the parent’s bottom line and provide a powerful source of differentiation through reinforcing customer relationships-no small matter in markets that are once again embracing reforms like the state-driven U.S. energy deregulation.

Utilities and CI enterprises are entering telecom in a variety of modes. From low-risk, low-return businesses that lease rights-of-way and tower access through the wholesale provision of fiber-based network services (usually as a “carriers’ carrier”) through the provision of retail telecom services to end-users, UTelcos move down the value chain and approach such cutting-edge innovations as providing bundled services as a multiple-offering “super-utility” that effectively leverages infrastructure as well as established customer bases.

In addition to the hard assets that utilities bring to the telecom market, there is a more understated advantage that may prove as important: utilities have a long history of running efficient, well-disciplined businesses. As a result, they have established experience and the relationships that together create an attractive profile for investors who seek measured growth with a potentially huge upside.

The UTelco business model is most prolifically deployed in the United States, where there exist more than 200 UTelcos. Of these, the wholesale model prevails as the most commonly-used strategy with UTelcos actively operating in metro and long-haul spaces.

While UTelco operators are focusing on metro spaces, many are at the same time expanding the scope of their services through partnerships or even through network buildout-a true rarity in today’s climate. Recently, Progress, Consolidated Edison and Edison Carrier Solutions formed an alliance to market one another’s services, creating a large nationwide footprint. Dominion Telecom and DukeNet have extended the reach of their wholesale networks through network buildouts, and FPL FiberNet has created shareholder value through a strategy of highly directed growth and strategic positioning for a burgeoning Latin American market.

With recent cratering in prices for wholesale services, many long-haul carriers’ carriers have hit rock bottom, and bankruptcies have littered the landscape as operators have found themselves cut off from sources of capital funding that have shifted away from rewarding growth and have demanded a greater emphasis on revenue. The savviest of UTelcos have recognized their advantages and the luxury of strategic maneuverability that is afforded to the telecom progeny of well-financed utilities by entering into the metro carriers’ carrier space, where demand and prices remain much more stable, especially in Tier 2, 3, and 4 markets.

At this point in time, demand for services remains solid, and projections for future demand are consistently optimistic. Today’s UTelco operator must assess that potential upside, keeping in mind that the wreckage of the telecom landscape, namely the assets of troubled or failed telecom businesses, present an attractive opportunity to gain scale and scope with minimal capital outlay. As these assets are brought to bear in tomorrow’s market, UTelcos that are able to make prudent but determined efforts in expansion will truly possess a grand opportunity to emerge as primary competitors in tomorrow’s telecom marketplace.

Wilhoit is a Research Analyst with the United Telecom Council (UTC). He may be contacted at 202-872-0030, or at forrest.wilhoit@utc.org. UTC is a global non-profit association representing the telecommunications and information technology interests of electric, gas, and water utilities; natural gas pipelines; and other critical infrastructure companies and their strategic business partners.

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