Core Competencies and Horizontal Disaggregation

On Friday, Telecom Ramblings was pleased to welcome a guest post by Steven Parrott of Sprint Nextel (NYSE:S, news, filings) and The Seamless Enterprise on the subject of core competencies and network operators.  His take was not solely in the context of Sprint’s recent deal with Ericsson for the outsourcing of network operations but in general as well.  The argument he makes boils down to one I’ve heard before, but which has become somewhat endangered in the carrier space:  that the industry is best served by horizontal disaggregation, with each participant focusing its efforts on the layer it does best and leaving the layers it doesn’t to others who do.  In a previous incarnation from the last bubble, it was an unfulfilled dream of many from wholesale carriers to the many fiber-free CLECs, each of which hoped to dominate a niche in a horizontal market.

The trend went in the opposite direction of course, with the reassembly of Verizon (NYSE:VZ, news, filings) and AT&T (NYSE:T, news, filings) as vertically integrated industry titans as the prime example, and the near extinction of the pure wholesale carriers and fiber-free CLECs over the past decade as a result.  Sprint’s new move of course is not quite the same as those earlier dreams, Ericsson is not a wholesale carrier.  However, outsourcing network operations to a third party who could very well run your competitors’ networks too someday still implies that while the network may remain a core competency, it is not and will probably never be where you expect to demonstrate differentiation from that competition.  In other words, at that level the network is a commodity:  one that must be done right, but one that you can’t afford to let distract you from the part of your business where you do expect to differentiate yourself.  Steven’s article points to the shaping of the customer experience as the main focus of Sprint’s business.

There are obviously some drawbacks to a horizontal market structure.  When a fiber gets cut or some other issue arises within the network, there are more and more layers of responsibility between the customer and the repair.  In an ideal world where communication is perfect, it gets fixed faster and better.  Too often in reality it is the blame that gets shifted effectively.  But every business has its challenges, the vertically integrated behemoth may not shift blame, but as the only game in town they don’t have to hurry either.  I have to admit, despite my skepticism that outsourcing network operations is the right way to go for any carrier (can an engineer feel any other way?), I would much rather that the industry move toward a more horizontal structure.  I really do want to see Sprint able to leverage partners to take on AT&T and Verizon again in a meaningful way, because it would shake things up and we need that.

But is this the moment?  Is the pendulum ready to swing back from horizontal to vertical?  Or is this something that is being forced by Sprint’s other troubles, and won’t be reproduced elsewhere?  Regardless, the move is gutsy on Sprint’s part, because a horizontal market only works well if it has a healthy ecosystem, and while in Europe things are more healthy if a bit crowded, in the US the market is a bit dysfunctional.  I don’t think anyone expects AT&T or Verizon to follow in Sprint’s footsteps unless forced, which means that further challenges to the status quo would need to come from the rest of the industry.

I do get the feeling that the industry is in flux.  Along with Sprint, we have Qwest, Level 3, Global Crossing, XO, and everyone else jockeying for position in a reshaped industry that nobody yet understands but which all sense is coming.  I wonder what it will all look like next year…

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Categories: Internet Backbones