Common carriers' entry into multimedia services

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Abstract

This paper addresses theoretically and empirically two main issues: whether telecommunications common carriers possess (some of) the assets and competencies required to provide multimedia services and how they can develop lacking key resources. To this aim, common carriers' entry in service provision is examined in the light of a hybrid approach which combines arguments from neo-institutionalist, evolutionary and resource-based theories of the firm. We contend that common carriers are equipped with some of the specialized assets and distinctive capabilities required to be successful in service provision, notably in the technological and marketing spheres. We also claim that cooperative agreements are in most cases more effective than autonomous investments, mergers and acquisitions, and arm's length relations to develop the remaining lacking resources. We provide empirical evidence from the MOSAICO database relating to the initiatives undertaken by common carriers in multimedia in the period 1990–'95. The findings of the empirical analysis document the growing interest of common carriers in service provision. They also show the widespread use of inter-industry (both equity and non-equity) joint collaborations.

Introduction

Multimedia telecommunication services comprise a set of services, both for private and business users, characterized by the contextual presence of a variety of information types, that is data, voice, sounds, images and graphs.1 The provision of multimedia services typically requires a collection of diversified tangible and intangible assets to be assembled, relating to different stages of the multimedia value chain: terminals, equipment, transportation and access networks, software, service provision, and information content and applications.

Business enterprises have recently shown a growing interest in multimedia services; this is witnessed by the surge in the number of joint ventures, alliances, mergers and acquisitions, and greenfield investments mentioned by the international financial press. Such strategic moves concern firms originating from different, though converging industries: equipment manufacturers, mainly in the data processing, telecommunications, and consumer electronics industries, software producers, entertainment and media giants, cable and satellite network operators, and telecommunications common carriers (TCCs). In this paper, we focus on this latter group of firms. More specifically, relying on the evolutionary, resource-based and neo-institutionalist theories of the firm, we analyze the strategies followed by TCCs to enter into the infant multimedia business.

We contend that TCCs aiming to exploit the opportunities offered by multimedia face a fundamental strategic choice. On the one hand, they can decide to concentrate on the network operation function, by improving their traditional strengths and deepening their existing routines (Nelson and Winter, 1982); in accordance with such strategy, they would sell a commodity type input (i.e. the transportation and distribution of digital signals) to other firms which would be responsible for realizing multimedia services and retailing them to final consumers. On the other hand, TCCs can also integrate downstream by internalizing the service provision function; actually, this stage of the value chain is crucial for the development of the multimedia industry, due to its interface role, and promises substantial rents in the medium–long term. In this paper, we examine the characteristics of both strategies. We explain that they have quite different implications for the behavior of TCCs in the various stages of the multimedia value chain, especially as regards service provision, software and information content. More importantly, we claim that the choice of a service provision strategy is compatible with and can efficiently hinge on the collection of firm-specific resources developed by TCCs in their core businesses, relating to both the technological and managerial spheres. Nevertheless, in order for such strategy to be successful, TCCs should also invest in a cumulative learning process aimed at building a new set of distinctive competencies. This requires their own specialized assets, routines and competencies to be combined with the complementary ones possessed by other firms, mainly in software and information content. For this purpose, we expect the ability to design, set up and manage a network of alliances to play a key role in determining competitive success.

The paper provides extensive empirical evidence on the initiatives of TCCs in multimedia in the '90s. The empirical section takes advantage of a new database named MOSAICO, developed by CIRET-Politecnico di Milano and Centro Studi San Salvador-Telecom Italia. MOSAICO records in a standardized format news concerning the communication industry which appeared in the international financial press. The data from MOSAICO document the interest of TCCs in the service provision stage of the multimedia value chain, and, to a more limited extent, in software and content. In accordance with our theoretical approach, they show that choices of governance modes to coordinate activity do depend on the stages of the value chain; furthermore, in the service provision, software and content stages, TCCs turn out to make extensive use of equity and non-equity joint collaborations.

The organization of the paper is as follows. In Section 2, the main activities underlying the provision of multimedia services are briefly presented. The theoretical framework for analyzing TCCs' strategies in multimedia is put forward in 3 Core competencies and common carriers' entry strategies in multimedia, 4 The (static and dynamic) efficiency of different organizational arrangements in the service provision stage. Section 5describes the data set used in the empirical analysis. A set of operational research hypotheses suggested by the theoretical analysis is specified in Section 6. Empirical evidence on such hypotheses is shown in Section 7. Some final remarks in Section 8conclude the paper.

Section snippets

The multimedia value chain

Experts in communication technologies generally agree that the multimedia value chain can be broken down into at least five macro stages corresponding to different technological functions. It is commonly held that in order for a multimedia communication service to be provided, one would require at least a source of information (telephone conversations, teleworking, data bases, film archives, electronic news, etc.), an access, storage, presentation and distribution point for information content,

Core competencies and common carriers' entry strategies in multimedia

In choosing their strategies in multimedia, TCCs presently face a fundamental option. On the one hand they can follow a conservative “network operator” (NWO) strategy. By relying on their customary routines, they can specialize in the transportation and distribution of digital signals, be they voice, data, images, or whatever. Accordingly, they will invest in the upgrading and expansion of the network infrastructure, both in the long distance and local access sections of the network.

The (static and dynamic) efficiency of different organizational arrangements in the service provision stage

A firm's core competencies mainly are the result of the learning from experience and routinized problem solving activities of the firm. As they are built cumulatively through trials, errors, and iterative modifications of firm's choices, they largely are context-specific, path-dependent and of tacit nature. In addition, they constitute organizational capital, which cannot be reduced to the sum of individual or group skills (even though individual and group skills of course constitute an

The data set

The empirical section of this paper relies on the MOSAICO database. The present release of MOSAICO records news relating to the communication industry which appeared in the Financial Times and the Wall Street Journal US and Asian editions in the period 1990–'95; news events are classified in a standardized format so as to allow statistical elaboration. Initiatives surveyed by MOSAICO comprise (a) greenfield investments, (b) mergers and acquisitions, (c) acquisition of minority interests, (d)

NWO vs. MSP strategies

Should TCCs' moves be confined to a NWO strategy, one would find a concentration of initiatives in the communication equipment and network stages of the multimedia value chain. As regards the type of initiatives, one would expect internal investments in network infrastructures and arm's length transactions aimed at selling a commodity type service to other firms, to prevail. Renewal investments should also trigger quasi-market (mainly subcontracting) agreements with equipment suppliers. In

NWO vs. MSP (hypotheses 1 and 2)

The evidence provided by MOSAICO on the behavior of TCCs in multimedia in the '90s, supports hypothesis 1 (see Table 1). Out of the 2674 initiatives (of which 760 were in multimedia) surveyed by MOSAICO, 277 concern the service provision stage; this represents more than 10% of the total number of initiatives (and 36% of the initiatives attributed to multimedia). The data also document a non-negligible interest in software (108 initiatives). Instead, TCCs' involvement in the content stage seems

Concluding remarks

In this paper we have analyzed the behavior of telecommunication common carriers (TCCs) in multimedia, from both a theoretical and empirical perspectives. We have opposed a MSP (multimedia service provision) strategy, which implies the internalization of the key service provision function in order to offer differentiated services to final customers, to a NWO (network operation) strategy, focused on the development of the network infrastructure and the sale of commodity type intermediate

Acknowledgements

Discussions with participants in the 2nd Annual Conference of the Consortium for Research on Telecommunications Policy, the 11th Biennial ITS Conference and seminars at WIK, MERIT and DRUID on earlier versions of the paper are gratefully acknowledged. We would also like to thank Bent Dalum, Dieter Elixmann, Godefroy Dang-Nguyen, Bruce Heinman, Robin Mansell, Sergio Mariotti and Antonio Perrucci for helpful comments. Financial support has been provided by Università di Pavia 1996 FAR funds and

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