Economist.com | Telecoms and airlines

THERE'S no business like show business, supposedly—but might there be a business like telecoms? It has become fashionable to suggest that there is, and that valuable lessons can be learned by comparing telecoms, a turbulent industry beset with crisis and opportunity, to another business also in turmoil: air travel.

Both industries consist of carriers serving routes on a global network. Both were dominated by state-owned monopolies that have now mostly been privatised, but remain sources of national pride.

In both cases, market liberalisation has let in new entrants. The incumbents jealously guard their inherited access rights—local-loop copper lines in the case of telecoms and landing slots for airlines. Airlines, like telecoms firms, can concentrate on local or long-distance routes, or appeal to specific markets, such as cost-conscious consumers or business customers. And in both industries there is massive overcapacity on some routes, with empty seats on planes and fibre-optic cables unused.

Another striking parallel is evident in Europe's mobile-phone industry, now organised into three camps, like airline alliances. These groupings want to provide easier roaming between mobile networks in different countries—equivalent to airline “code-sharing” partnerships.

The analogy is not perfect, of course. Henry Elkington of Boston Consulting Group points out that telecoms networks are fixed to the ground but planes can be moved to a profitable route. Quite so. But the analogy is strong enough to be useful. After years of relying on specialist consultants, says David Newkirk of Booz Allen & Hamilton, “we are now seeing the telecoms market look outside itself for lessons”. And it is often to air travel.

The two industries do differ in one crucial respect: the incumbent airlines have been undermined by a new wave of “low-cost carriers”, such as Southwest Airlines, that are now more profitable and valuable. These airlines are innovative: selling tickets online, using a single aircraft type to cut maintenance costs and scrapping assigned seating. They also open up new markets.

Some observers believe the telecoms industry could be ripe for a similar transformation. “The telcos have yet to face competitors with a disruptive power analogous to the low-cost air carriers,” says Vasa Babic of Mercer, a consultancy. “I believe there is scope for such disruption.”

What might a low-cost telecoms carrier look like? One example, suggests Mr Babic, is Telmore, a Danish mobile operator. Like many low-cost airlines, it offers a basic service and primarily deals with customers over the web. It has no high-street shops, nor does it own a network; it resells airtime on a network owned by TDC, Denmark's incumbent. Customers check their balances via text messages. There are no subscription fees or paper bills. Since its launch three years ago, Telmore has captured 7% of the Danish market with a model so potentially threatening that TDC bought a stake in the firm earlier this year.

Incumbents could also be undermined by operators, such as Vonage and Net2Phone, which offer low-cost calls routed over broadband internet connections. Vonage, for example, provides unlimited calling within America and Canada for $34.99 per month. It keeps costs down by handling billing, voicemail and other services online, and by outsourcing and partnering where possible.

The difficulty for would-be low-cost telecoms firms, says Andrew Heaney of Spectrum, a consultancy, is that the incumbents still own the wires that run into homes and offices. Low-cost airlines got around the lack of landing slots by flying from secondary airfields. Telecoms incumbents are supposed to provide access to their local loops to competitors, but most find procedural, legal and technical reasons for being slow about it. So telecoms regulators need to do more to ensure equal access for new entrants, says Mr Heaney.

Meanwhile, the new mobile-telephone alliances hope to learn from airline alliances as they shift from national to international competition, says Mr Newkirk. The bifurcation of the air-travel industry, between low-cost online sales to consumers and high-end consultancy services for business, might also provide a model. “There's no single way to apply the analogy,” he says. Perhaps it will inspire a new breed of telecoms firms. But it is also possible that, having been made aware of the threat, the telecoms incumbents will avoid the fate of their airline counterparts.
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