April 9, 2008

3 Min Read
The Executive Exodus: Is Convergence to Blame?

By Paula Bernier

April has been a big month for top-level management change at the tier 1 service providers. Qwest Communications International Inc. last week announced the resignation of executive vice president and CFO John Richardson. Then, this week, BT Group CEO Ben Verwaayen and Level 3 Communications’ Brady Rafuse, who heads the carrier’s European business and content distribution effort, both resigned, while AT&T’s CTO Chris Rice was reassigned.

What’s going on here?

While some of this action could just be new leaders installing new teams (I’m thinking Richardson’s resignation in this case), at least some of these changes may indicate the extremely challenging environment in which telco executives now operate. In addition to potentially stronger oversight of executive performance these days, and what looks to be a weakening economy, leaders at the telcos are being pushed to embrace new technologies and deliver and monetize next-generation services, all without a strong sense of what customers will be willing to pay for and sometimes limited funding to support new service launches.

Stéphane Téral, principal analyst, service provider VoIP, IMS and mobile infrastructure at Infonetics Research, said, low single-digit revenue growth at many of the large telcos and the resulting capped capex environment means the money available to launch new services is limited, so these telcos want to put in place the management they believe will best be able to deliver new services with a minimal amount of capital. “That’s the environment we’re living in, and that’s going to stick around for a while,” Teral said

Téral added that Chris Rice is being replaced by what the Infonetics’ analyst called an “Internet” guy – John Donovan, who previously was executive vice president of product, sales, marketing and operations at VeriSign Inc., which provides Internet infrastructure services, such as security offerings. “In the press release, [AT&T] made it clear that they wanted someone from the Internet world, someone who knows what works and what doesn’t work in the Internet because they are still transitioning lots of customers onto U-verse,” said Téral. “So that’s away from the PSTN onto the new Internet world. So I think that is clear.”

Rice told me today that Donovan is no more an Internet guy than he is, but he added that Donovan’s appointment to CTO does represent the fact that AT&T is putting more emphasis on convergence. Rice added that Donovan brings to AT&T valuable wireless experience from his time at wireless consulting group inCode Telecom Group Inc., the company at which he was chairman and CEO before it was purchased by VeriSign, and Deloitte Consulting.

In any case, this may be an indicator of the struggle tier 1 telcos are undergoing to get a handle on this thing called convergence.

“There’s a lot of hype around all of the new technology,” said Donna Jaegers at JANCO Partners. “One thing I’m not sure investors realize is that the old technology was very profitable, and to migrate to a new technology doesn’t always mean that you have the same sort of profit structure. Obviously BT has made a big push with their 21st Century Network; that hasn’t exactly yielded huge financial benefits. So I think there’s pressure for the executives in charge of these companies to stay on the cutting edge of technology, but the cutting edge of technology isn’t profitable until you have those networks in place and you can leverage the fixed costs on them.”

Indeed. I was in Washington, D.C., last month meeting with the CTOs of AT&T, BT, Qwest and Verizon. When I asked why service providers want convergence, they talked about the financial benefits of breaking down service silos, an idea that is well understood but seems difficult to quantify in terms of savings – at least for this reporter. But my ears pricked up when I heard Mark Wegleitner’s answer to the question.

“The correct answer here is we think we want convergence because our customers want convergence,” said Wegleitner, Verizon Communications’ senior vice provider and technology and CTO. “… but we have no proof yet that customers will want that.”

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