Driving Telecom Growth Through Diagonal Convergence

Consolidation is a good thing in the telecommunications industry – whether you’re a service provider or equipment maker. Combinations like Sprint-Nextel, AT&T-SBC, Verizon-MCI, Alcatel-Lucent and Siemens-Nokia are much needed because they soak up damaging overcapacity and enhance technological synergies.

These partnerships have a great deal more potential and can unlock huge values that go beyond mere cost savings. Bottom-line efficiencies are just the beginning; they are necessary, yet not sufficient. And it will be a shame for shareholders if telecommunications executives do not extract the full financial richness that these tie-ups offer.

The key is to look beyond legacy products and systems. Meshing old technologies from two companies may cut costs, but it won’t turbo-charge revenues or productivity over the long haul – and I define meaningful productivity growth as 10X real GDP growth. So, after a telecom merger, it is essential to look to the future and ask how you can transform the entire newly blended business through innovation. R&D is crucial, and combining next-generation IP-based technologies is an excellent starting point.

Once the merged entity has pooled its intellectual property and developed an appealing and cutting-edge IP-based technology, the next step is monetizing this innovation. The best way to generate significant and recurring revenues is through diagonal convergence.

Diagonal convergence goes well beyond 20th century-style mergers, in which two companies combine vertically to integrate respective product offerings or horizontally to amalgamate revenues and add scale, heft and market muscle.

The 21st century diagonal convergence model encourages a newly combined telecommunications company, for example, to actively shop its IP-based innovation and to form lucrative partnerships with other telecommunications companies willing to license or purchase this state-of-the-art technology.

The new diagonal convergence can only work, however, if it is unencumbered by the rules and regulations of the 20th century. I believe the rate of innovation fostered by diagonal convergence will be inversely proportional to the amount of regulation it is forced to shoulder.

Another twist on diagonal convergence takes place when inter-industry IP-technology sales are consummated. For example, what’s to prevent Verizon-MCI from establishing an alliance with General Motors, which could take the newly formed telecommunications company’s IP-based innovation and install it so that customers can download gaming and entertainment in every GM automobile that rolls off the assembly line?

The revenue from this type of diagonal transaction could help Verizon quickly pay down the cost of its merger with MCI and stimulate the freshly minted entity’s revenues in a big way. For its part, General Motors could begin to differentiate itself from the competition and sell more vehicles without entering into an old-fashioned vertical partnership with foreign automobile makers.

The telecommunications industry – both service providers and equipment makers – has a unique opportunity to consolidate in a new and more enlightened way if it can move beyond the still important notion of bottom-line management and toward innovation-driven mergers focusing on IP.

If it can do this, it will be able to fully exploit the IP sextuple play, which will bring voice, data, video, wireless, gaming and sensory technology to consumers and companies in an effective and easy-to-use-way. And that, in turn, will help generate strong revenue and productivity growth that will benefit the global economy.

Dr. Eslambolchi