Many untapped lines to new revenue

We discussed last month the prospect of splitting WorldCom into two companies: communications services and networking. Since that time, we have received several reactions, most of them coming with an open mind to the WorldCom idea. The most frequent reservations focus on the sufficiency of the opportunity for the services company. That's principally because we tend to think of service providers strictly in terms of the services they sell us today, and that's how most service providers think of their opportunity. That's why we think separating the service business from the networking activity will transform the industry and begin to alleviate many of our problems.

Just as Walmart has built a dominant position in discount retailing and providing outstanding service, carriers could improve their financial performance just by taking better care of the customer. But that is only a first step in what is possible for a network services provider.

We first want to focus on the residential customer, because we often hear how the retail business is the least attractive of the carrier opportunities. Despite service experiences that tend to be less than satisfactory, consumers still tend to trust their carrier. Even though these carriers have been moving slowly on the broadband services front, they increasingly have been placing broadband pipes into our homes. The revenue opportunity that most carriers perceive is the monthly nut they can get for just delivering that pipe. That is too limited a view of a network service provider's addressable market.

Leveraging their connection to the home with their name recognition represents a terrific channel to market for the products and services of many other companies. That becomes particularly true as carriers deploy broadband. Why can't they become a paid channel for software content distribution? We seem to go through waves of computer viruses. Why haven't carriers that offer broadband services already worked a deal with Network Associates to push antivirus and security applications at those moments in time when customers are most nervous about the problem. Carriers could then get paid for those impulse buys, getting dollars for commerce transacted with their customers instead of flat-rate fees for broadband access.

If service providers think their only revenue opportunity is the bundle of communications services that consumers buy, they will constantly be faced with the problem of commoditization of the service since prices must be driven lower and lower to win the next customer. Alternative business models that leverage carriers' service fulfillment infrastructure are also viable. Home security is a service that carriers enable today through narrowband connections that will be enhanced as broadband becomes more widely available. It is a service that could have been brought to us by our phone company. Online banking is another service that could have been delivered to us by our phone company. As these services expand and are enhanced through broadband, there is a new opportunity for service providers to become partners in the growth of these services.

The music industry still grapples with how to handle the Internet and unpaid use of music. Carriers sit there today, providing the pathways for this flow of media. At some point, the music recording industry will come to conclusions about how to tap the appetite for music through this channel. Carriers should be working with the music and video industries to find a solution in which their connection to the customer is leveraged for the benefit of both industries. Our bet is that carriers will manage to avoid getting paid for any of that commerce.

Telemarketers are annoying, and we don't want our phone company to take on that role. But through cleverly taking advantage of name recognition, the phone bill we receive each month, substantial service organizations and infrastructure, and multiple connections to our homes, phone companies have an opportunity to participate in a much broader spectrum of the communications commerce conducted each day and in so doing building a more indispensable relationship with their customers. The incremental revenue from services will drive better financial performance that will in turn generate the cash necessary to fund an increased number of broadband connections from the independent network companies we have described.

In the realm of business services, we can't help but think, what if StorageNetworks didn't have to build a network, per se, and instead could have gone to a network provider like the company we proposed in the split of WorldCom? StorageNetworks could have focused more of its near-term energy on winning customers rather than convincing them it had a robust network. It might have managed to become a dominant provider of this capability in a relatively short period of time. Instead, it never fully realized the merits of its business proposition as a result of facing copycat services from the major carriers.

In our concept of service delivery, much as we see in the retail industry, very hot ideas could get on a quick enough roll that a company might become a category killer. In this approach, the network provider kills itself to execute flawlessly in support of its remote storage services customer so that every other network provider misses out on the opportunity. In our example, the remote storage services company focuses solely on delivering all of the latest and greatest applications that customers want and becoming as pervasive as possible.

Our suggested solution for today's communications industry problems is far from simple. It does, however, better align business motives with those of consumers and the desire of our nation to remain on the cutting edge of technology and competitiveness...

Kevin Slocum is a managing director and head of communications research at SoundView Technology Group (Greenwich, CT). He has more than 20 years of financial industry experience, including institutional equity research sales and analysis, and has been named to the Wall Street Journal's prestigious "Home Run Hitter" list two consecutive years. He can be reached at 203-321-7200 or kslocum@soundview.com.

SOUNDVIEW CONFLICTS
Important information about SoundView's conflicts can be found at www.soundview.com/Research/ConflictDisclosure.

More in Earnings Statements