Nikkei Global Information Summit - March 2002 - Keynote Speech
Hello everyone and thank you for allowing me to address this conference, on the Global Information Summit. I am particularly pleased, as this is an area I have been involved in for some time on a personal level.
I was a member of the group set up by the European Union in the early 1990's to address the issues around the information society; and we had extensive links into the U.S. on this subject. This work was one input that supported market liberalisation of the European Telecom market.
I have also been heavily involved with the European Round Table addressing the issues of the information society and knowledge management as it relates to European competitiveness. And now just about all-European countries have said they want to lead the world in e-enablement. As has the Japanese government, and the U.S.A The race is on! And it's a big race!
I have called my presentation "The Networked Information Society is Alive and Well" - but you may well think that I am too optimistic, as today, just about all companies in the communication and T.M.T sector are in relative difficulty. But to be an optimist you have to have a good view of the future, and anybody who looks to the future must understand the past, and learn from history.
I believe that if we look at the recent events in the history of communications then we see three unique events which occurred more or less simultaneously that totally changed an industry. But the good news is that each was totally unique, a one-off not to be repeated, against an overall positive growth trend.
We don't have to go far back in history for my first unique event. The main telecommunications markets were opened up to competition for the first time. As you recall the UK was first in 1984. but the rest of the world was much later. Europe only opened for competition in voice products on 1st January 1998. This is recent history! In the USA following Judge Green's break-up of AT&T they followed a different route which actually restricted full competition until about 1997, after the 1996 Telecoms Act, and the birth of the alternative carriers. Here in Japan the idea of full competition took off over the last two or three years as the market finally liberalised, across the board.
Our history lesson shows that as a result of market liberalisation a huge dam was broken and many players, banks and other companies from different sectors jumped into the still turbulent water. You could start a telco from scratch, you could buy a telco in another country, you could use telco stock to buy into other industries such as media. The result was a boom in stock prices riding on the back of the dot com era and this boom in stock prices brought in truly massive investments, or truly massive over-investment.
Everybody thought they could easily take 10% of market share from the old slow incumbents. The internet would drive huge growth in data traffic and the mobile world was driving huge growth as well. Companies with zero revenue were suddenly worth billions of dollars; mention that you were going to put in 96 fibre pairs of flibre optics in the ground and the stock market priced your stock at three times invested capital. Earnings were old-fashioned; it was the era of EBITDA.
Everyone believed, or were told, that the info society had arrived and that the dot com, boom would absorb all of this new capacity. Then the dot com bubble burst in the first half of 2000. And it burst very quickly. When a structure is built on sand it collapses fast!
The decline in market capitalisation was as dramatic as the rise. Many companies saw their stock fall 95% in 6 months. The overall telco sector saw 50% declines in little more than 9 months. This was from boom to bust on a large scale and it was world-wide. Was this the end of the information society dream?
In retrospect, from our history lesson, it is clear that my second unique event occurred. A truly massive over-investment in fixed infrastructure which was not sustainable with a normal business model but which was sustained by "financial engineering". The resulting collapse in prices and margins drove many companies out of business completely or into Chapter 11. The US alternative carriers, some in the UK, Global Crossing. The list is a long one, and again world-wide - big and small companies.
This had a very serious knock-on effect to equipment suppliers, many of whom had realigned their resources away from incumbents with perceived low growth towards these high growth hotshot new entrants. The result was radical downsizing across the industry, that supplied equipment, or components. Inventory rapidly built up, so the new entrants dramatically and quickly slashed spending to conserve cash as the banks withdrew facilities.
It was about this time that my third unique event occurred, to rapidly compound the problems. The European main governments auctioned the spectrum for mobile data. The famous 3G licences. Each government took a different approach but the result was a cash outflow from the industry of approximately $110 billion in 12 months. This immediately compounded the debt profile of many companies as it was cash upfront for a 15/20 year licence.
The credit rating agencies downgraded companies' ratings which pushed up the cost of servicing debt and all companies reviewed their capital plans with further reductions brought in, which again doubly compounded the pain of the equipment suppliers and their suppliers in the semiconductor industry. And the IPO market stopped dead in its tracks early in year 2001.
If I can now move from the general to a specific case and that is BT as I was CEO there for 6 years until the end of January. In late 2000 I announced that we would as a priority reduce debt and further streamline the company by spinning off part of our wireless company. However by April of 2001 it was clear the IPO market was not going to recover and if our priority was to reduce debt we needed an approach that would work even in adverse market conditions. I announced a plan in May that we would demerge our wireless company totally, do a Rights Issue to enable debt repayment, dispose of a string of assets where we thought long-term we could not control them, continue to streamline the company by going to a very small HQ and running the operations by Line of Business with fewer people and shorter lines of command. And that the priority was do it quickly so that we could concentrate on the future growth areas such as Broadband, and also so it would not have a negative impact on employee morale. A major issue in any company reorganisation.
We went at it hard. The objectives were quickly achieved. Debt was reduced by 50% in 9 months. Within 7 months the wireless business was 100% demerged as a new company with a new Board and no forward involvement from BT. We unwound our joint venture with AT&T and reduced cost and increased flexibility. We did all this and improved the morale of our employees. The company is thus well positioned for the next phase.. I expect other companies may pursue a similar approach. But what will be the next phase? Will the information society prosper?
I anticipate that after the very large over-investment and growth in new companies there will be a period of consolidation and restructuring as lenders and bondholders try to recoup some of their investments. This will be among smaller companies first but may extend to more established players in both fixed and wireless. It may be many years before growth in demand absorbs excess capacity on some routes or products like webhosting.
So if I am right in my assessments that liberalisation, overinvestment in a bull market and 3G licence payments were all unique events that happened close together and caused major disruption, but will not be repeated, then there is still room for long term optimism. I believe that communications is still a long-term growth opportunity. And I totally believe in the importance of the information society.
Prices continue to fall, making consumer and business use more affordable. Business needs excellent low cost communications to drive the next wave of productivity gains; and consumers have a continued desire to communicate, and retrieve information and infotainment more and more interactively. The digital world allows all this at ever decreasing prices. A magic combination.
The, challenge for many in our industry is how to get everything truly digital and away from circuit switching. How to get everything broader band and away from narrow band. And how to solve the security and ease of use problems which still restrict many applications - particularly security.
To build the next phase of the networked information society the network will become the unseen workhorse.
In BT we began to attack this from the traditional strengths of a telecommunications company under the banner of ''I before e' Infrastructure before e-enablement. Recognising that just as the "visible" infrastructure - transport, housing and industry - serves to feed and sustain society, the information infrastructure serves to inform and entertain society, stimulating efficiency and growth.
This approach calls for a radical change in the way you engineer the network and the demands it places on the end-to-end management of the customer experience. Software controls all the elements from customer to router to content where a multi vendor environment is the norm and traditional IT disciplines of scalability, resilience, performance, and security are combined with the power of bandwidth and a rapidly maturing internet as the delivery vehicle open to all.
The opportunities and indeed the challenges are extended further through mobile access, 3G, wireless LANs in addition to fixed networks.
The driver for the infrastructure is information. Fast, secure and flexible access to the right information through the appropriate customer end device is the key to growth and enriched business-to~ business and business-to-customer transactions.
The University of California recently observed that the amount of data generated so far in mankind's existence will have doubled by the end of 2003!!
At BT our understanding of the dynamics of this infrastructure and the benefits it brings to business have been enhanced through recognising the efficiency we derived from an internal infrastructure executing 400 million transactions a day (at Gartner World number 1 levels of efficiency) remotely managing some 4,000 plus UNIX and NT servers and protecting the company and its customers from 40 million unauthorised access attempts and known virus signatures.
The traditional telco approach concentrated mostly on transport and access. This is still critical and as I said earlier prices continue to fall, as this will be the commodity end of the business. So everybody will now fight for the top two thirds of the pyramid, new convergent products and services. It is here that the traditional telco approach will be challenged by the new wave companies. Who will win in security? Will it be Microsoft with its built-in "passport" security or will it be telcos or a mixture? As consumers want more ease of use at the data device - maybe a PC or a smart phone - will all the value add go into the software in the device or in the software in the network? In many areas these debates will echo the early debates in the computer industry : Is it central or distributed? Is it client/server? Where is most of the client control information held? How much can be bundled? Who would own or use client information? These are currently being hotly debated particularly around the Microsoft case, set top boxes and log on security. My view is that the industry will continue to move towards multi vendor and away from the classic vertical integration of the traditional telco and this trend will not be reversed. So the telcos must respond or they will be intermediated by the other industry players, who will be driving and setting their own standards on security user interfaces and so on.
So my approach at BT was to move up the pyramid but in partnership with other players drawing on each other's strengths. Some are shown on this chart. This is particularly true in the security and intelligent infrastructure layers.
Now moving up a layer to business convergent solutions the content drives the opportunity within the networked information society. From a business perspective the e-enablement of the corporation offers intranet e-applications such as claims, pay cheques, HR, communications, mail video streaming all enabled via the infrastructure. In BT I made the investment call and said this is the way we will work around here. Having set the framework our people fully embraced it and the efficiencies and opportunities came rolling in.
Opportunities in E-trading - because your web presence is your business, trading hubs, that automate requests for quotes and purchase agreements with no human involvement, secure c-billing and e-payments, with fully automated end-to-end processes operating across company boundaries. Fully enabled multi media contact centres, voice, video person-to-person remotely managed and controlled. Integrating other businesses into your business for a single customer view. The CRM hype has run its course, knowing your customers and anticipating their needs with an automated supply chain requires networked enabled integrated solutions.
From a customer / consumer perspective we need to turn to the youth of today to whom internet applications are second nature.
Today's customers are naturally demanding - they want their information at their convenience, when they want it, where they want it, on the device of their choice. Personalisation of the information is vital, as they want to get to the right information without drowning in a sea of information. The triple play challenge of voice data and media (video) will drive demand in an information rich society.
The next phase of the evolution of the networked information society will be driven by an information enabled secure IP infrastructure, generating opportunities for growth in the IT and telecommunications sectors. Growth in enabling technologies, growth in access technologies and growth in distribution of information and entertainment. The currency will be information.
So in conclusion, I think the current stock market concerns will continue for some time as companies adjust to the shocks of the last two years. Debt reduction will continue, and capital expenditure will be constrained. But the trend towards the traditional telco model changing towards an information enabled IP infrastructure will continue. The next battleground will be around who controls the customer. Is it the access provider or the content provider, or the security standards provider or a mixture? But the good news is that if you look at what today's 15 year olds do now, you can see the true potential of the information society. It is alive and well despite a tough few years on the stock market.