The future is...

Former Orange CEO Sanjiv Ahuja believes digital convergence will wreak a revolutionary change, but does anyone want it?

by Morice Mendoza, World Business
Last Updated: 23 Jul 2013

In spite of two false dawns and billions of dollars wasted, the telecoms industry has roused itself like a veteran prize-fighter one more time and is gearing up for its next big battle. It is too early to tell whether this time there really will be a surge in consumer demand. In the recent past, the industry has placed the wrong bet twice. The first involved the investment of tens of billions of dollars in fibre-optic cables during the 1990s, but there was no corresponding surge in traffic and the industry crashed. The second time, European telecoms paid more than $130 billion for licences to build 'third generation' (3G) mobile networks in the search for a new revenue stream from data-services. But the take-up of data fell short of expectations and 3G did not make anyone's fortune.

In spite of these setbacks, in the past few years companies have spent heavily on acquisitions to form new telecoms giants, such as France Telecom-Orange, Alcatel-Lucent, NTL-Virgin Mobile and Telefonica-O2. Operators are investing heavily to offer the best package of 'quadruple play', or 'four-play' as Richard Branson dubs it. This refers to the combination of fixed and mobile telephony, broadband internet access and multichannel television. Most operators, with the possible exception of the more cautious Arun Sarin of Vodafone, believe that the 'digital paradise', as France Telecom's chairman and CEO Didier Lombard calls it, is within their grasp at last.

The force that has driven this process is the internet and the wide availability of broadband connectivity. The new operators in the telecoms industry can offer quadruple play because they have all embraced internet technology, which allows them to move packets of data, encoded using internet protocol (IP), easily and cheaply. Wireless technology also means that these networks can be fixed or mobile. The same revolutionary force created the destructive technology of VoIP (Voice-over Internet Protocol), which delivered what was almost a killer blow to the traditional core business of fixed telephony.

A small band of web entrepreneurs from Estonia and Sweden introduced the world to Skype in 2003. It brought to the market a low-cost (and, in many cases, free) voice service. It now has 100 million subscribers and has since been bought by eBay for $2.5 billion, revealing the potential value of the technology. In spite of this, traditional telecoms firms are bullish. Their challenge is to keep moving fast enough in the sense of gaining new revenue from content on mobiles, for instance, and other new services to offset the leakage of revenue from their traditional voice business. They need to keep afloat long enough to reach the promised land of digital convergence.

Orange's former CEO Sanjiv Ahuja thinks this might be five or even 10 years away (at the time of going to press, Ahuja had just relinquished his executive positions at the group; he will remain chairman of Orange UK and an adviser to Lombard). But when it comes, he believes it will have a revolutionary impact. "This change will not happen overnight. It will take half a decade for the change to get done - maybe a whole decade. But by the time it is done, it will be much more profound than any of us anticipated."

But it is possible that the digital dreamers have got it wrong again. So far, take-up of the 'triple-play' bundles of fixed-line voice, broadband and television has been low, according to research consultancy Forrester. By 2006, only 1% of consumers in Italy, 8% in France and 10% in Britain had signed up for the bundles. Does convergence actually solve a consumer problem? This is the question that may come to haunt the optimists. But those that have bet their houses on convergence have to do what they can to make it work.

It is in this context that Orange, now a fully integrated part of France Telecom, is gearing up for what it hopes will be a bright future. Formed in 1994 in the UK, the mobile company rose at a rapid pace under the stewardship of the eccentric businessman Hans Snook, who built a lifestyle brand that is currently valued at $10.7 billion. France Telecom acquired Orange in 2003 and last year decided to leverage the brand more fully across its business, including internet business Wanadoo and business services division Equant.

France Telecom and Orange have been meshing their very different cultures over the past three years. Now Ahuja feels this part of his work is done: "When you have these two very different cultures, it becomes very hard to bridge them because the individual perspective is so different. But if you produce a business that brings the best of those together, you can truly excel. Otherwise, it can be an explosive mix. I think we have done it well. I get a lot of satisfaction from seeing how the two cultures have melded together."

Ahuja joined Orange as COO in 2003, just as it was sold to France Telecom. CEO Solomon Trujillo stepped down a year later and Ahuja took over the top job. On his watch, Orange's customer base has grown from 43 million to 100 million worldwide, and has operations in more than 20 countries. Originally from India, Ahuja has a degree in electrical engineering from Delhi University and a masters from Columbia University in New York. He started his career as a software engineer at IBM, before becoming president of Telcordia Technologies (formerly Bellcore), which provides systems, software and engineering services to the telecoms industry. In 2000, he co-founded California-based technology company Comstellar and was president until his move to Orange three years later.

Ahuja recalls the early strategy talks with Thierry Breton, then CEO of France Telecom (and now French finance minister) when they plotted a course to convergence. "The first time I met Breton, we had a conversation about convergence and integration, and we talked about where we thought the world was headed. The interesting thing is that the technology started becoming real a few years ago, making the whole scenario more practical. So two years ago, we went out and committed our strategy to the marketplace. We laid the strategy out, we were very explicit about it. We set some targets because we thought that the foundation technologies were now ready for us to go and serve our customers in the right way."

The company's latest results show revenue of EUR51.7 billion ($70 billion) for the last financial year, an increase of 1.2% on the previous year. Revenue growth in its mobile business (Personal Communication Services) increased by 5.2% over the previous year, while fixed and broadband (Home Communication Services) and business-to-business services (Enterprise Communication Services) saw a decline of 1.9% and 4.9% respectively, largely due to a decrease in revenue of 14% in the traditional voice and data business.

According to France Telecom's annual report, the expansion of its broadband services (especially in France) compensated for the downward trend in traditional telephone services in France, Poland and Spain. The number of Liveboxes, which feed digital services into the home, more than doubled and the number of customers for VoIP services tripled. Much of the increase in the mobile business came from emerging markets - in particular, Egypt, Romania, Senegal and Jordan - which recorded a 13.7% increase in revenue.

Although overall growth is modest, the company has run a tight ship and has continued to plough cash into improving the delivery of key digital services. It is also preparing to replace its old copper landlines with fibre-optic cable. Scott Morrison, a research director at consultant Gartner, says it has managed to get significant revenue from selling content - about EUR400 million per year, mainly from mobile but also from fixed broadband customers. The number of mobile broadband customers more than tripled to 5.8 million at the end of last year, up from 1.6 million the year before.

In 2006, France Telecom announced plans to reduce its headcount by 17,000 by 2008 to reduce costs, and is almost halfway there. In the long run, it will reduce the company's exposure to employing staff on "rigid civil service contracts (a legacy of the company's origins as a state-owned firm)", says Morrison. He adds: "The company is doing other clever things to keep capital expenditure low, such as its 3G network-sharing project with Vodafone in Spain, in which they share each other's infrastructure." Although competitors such as Iliad continue to take market share, France Telecom "ended 2006 with 9.7 million retail broadband subscribers, making it one of the largest broadband providers in Europe".

However, one of the group's weaknesses, says Morrison, is its lack of mobile presence in Asia and the US, but Ahuja is more upbeat about business in the emerging markets. "Our Africa and Middle Eastern business is over 20 million subscribers, so it's a very big part of our business. There are 10 million in Egypt. It's correct that the APRU (average percentage of revenue per user) is lower than in the developed markets, but the technology they get is very good. You can get a lot of data services even on a low APRU basis."

Although the group is managing to keep to its strategic course, there are signs that some of its new products are not getting enough customer take-up. Orange launched the company's new FMC (fixed-mobile convergence) service, Unik, last year. In spite of a blast of marketing fanfare, it has sold only 100,000 units. Vincent Poulbere, an analyst at consultancy Ovum, says this is an example of the problem companies face.

"FMC has not made the impact with consumers that it should have. It is still niche. The company still has a lot of work to do to make such products appeal to a wider audience."

With the current low growth rates and the threat to traditional voice revenue, telecoms companies do not have forever to make this happen. Although growth in the emerging markets is important, the big spenders are in the West and in the short term at least France Telecom will need to get more money from these markets to get the growth figures it needs. Says Poulbere: "The problem is that mobile content is growing too slowly. Some fear it may not compensate for the decrease in fixed-voice revenue. Revolutionary new services such as video are all done well with a big bang, but they are so reliant on revenue from voice and SMS that when the price for voice decreases it is hard to compensate."

However, Ahuja says that Orange has often been the first to come to market with new innovations. "We were the first service provider in Europe to offer television on mobile and the first place we launched it was in Romania. We learnt rapidly from our experiences in Romania, applied them and launched multi-channel TV in France and the UK. We were the first to launch full track music in the UK, and we were the first to provide mobile blogging and the first to experiment with user-generated content."

Understanding the customer is everything: "Any successful business has to listen to customer needs and wants, and serve those well. But it also needs to step out there and say, 'we think this could be good' and see how the customer reacts. We're always at the forefront of new things. Some of them work and some of them don't."

The joining together of France Telecom and Orange might one day be seen as a perfect marriage. Orange is all about the brand; it stands for simplicity, honesty and straightforwardness. France Telecom, on the other hand, is all about the technology. The outcome of four years of what Ahuja calls "bridge-building" between the two very different cultures is that France Telecom drives the innovation and Orange provides the branding that leverages all its products.

The Orange brand is undeniably strong; indeed, Ahuja considers it to be the key differentiator for France Telecom, as it squares up for the bloodiest fight yet in the global telecoms market. "It's our brand that distinguishes us. And the brand is not just the customer experience; it's the fundamental foundation. Brand is how our people live their lives. You go to Orange people and there is an Orange way of living, an Orange way of working and an Orange way of interacting with others. I think that is what makes us unique in the marketplace."

He claims to be anything but complacent and says he "dreads the day" that Orange would ever forget how important the brand is. In the medium term, shareholders may look to see how successful the company is in capturing high-spending customers and reaping new revenue streams from selling them content. In this light, customer satisfaction will be a key issue.

In March, Orange was shamed as the worst broadband services provider in the UK in a BBC customer satisfaction poll. Ahuja says that this was not the "proudest moment" for him or his UK broadband team. "Our customers should expect us to be there. They should expect much more from us than they get from anyone else. That's our responsibility. That's our brand promise and we're here to deliver." The brand value is inextricably tied to customer satisfaction: any dip in that department and it could become damaged.

The next few years will show whether France Telecom gets a lead over its rivals in this highly competitive market. The rest will depend on whether consumers want quadruple play.

CONVERGENCE RULES
Country 2005 2006 CAGR %
2007-2011
France
Triple-play subscriptions (m) 1.27 2.09 14
Fixed-line revenue (dollars bn) 19.63 19.33 -3
Mobile revenue (dollars bn) 26.42 28.30 -2
FMC revenue (dollars bn) 0 .01 73
Spain
Triple-play subscriptions .59 .78 18
Fixed-line revenue 12.10 12.93 1
Mobile revenue 19.77 21.54 1
FMC revenue 0 0 239
UK
Triple-play subscriptions 1.60 2.16 21
Fixed-line revenue 21.41 21.66 -1
Mobile revenue 31.93 34.18 1
FMC revenue 0 .02 51
Poland
Fixed-line revenue 4.09 3.85 -5
Mobile revenue 5.81 6.67 1
Source: Pyramid Research

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