The telecoms mega-mergers: Do end users really benefit?

This month saw the announcement of the world's biggest telecoms merger deal - MCI WorldCom's $129bn bid for Sprint.

A few days later at the NetEvents Symposium in Switzerland, IT entrepreneur Robert Madge, chairman of Madge Networks, poured scorn on the deal, saying the US giant had "lost the plot". He went on to accuse Europe's incumbent telcos of trying too hard to emulate WorldCom while neglecting the needs of their customers.

So does he have a point? Are the mega-mergers in the interest of the customer or just the telcos' shareholders?

John Matthews, principal consultant at telecoms consultancy, Ovum, believes there is an element of truth in what Madge said. "Multibillion dollar deals have a buzz about them, and there is a temptation to go on with that and ignore the physical rollout."

Mega-mergers aren't all about increasing stockholder value, though. Matthews argues that it's also about financial clout. "It's about the ability to manipulate the way the stocks are received on the stock market."

This is necessary because it gives companies massive growth rates based not on how many more customers it gains, but on how much buying power it has. A company that spends more time concentrating on providing excellent value added services than on strategic buyouts, Matthews argued, is more likely to be swallowed up in the next few years. But this is not the complete story. Steve Wallage, telecoms analyst at Dataquest, defended the need of incumbent telcos to strike up alliances.

"How can they service multinational companies if they don't have the international connections? For example, L'Oreal in France has branches all around the world. If it doesn't think France Telecom can meet its needs for a single global supplier - with the same level and quality of service for voice, data and mobile communications -because it lacks a presence in somewhere like the US, it will look elsewhere."

Ovum's Matthews agreed that companies do stand to benefit from the mergers. "It is a genuine underlying fact that mega-mergers create economies of scale and globalisation - for example, it increases capacity and lowers costs," he said. Most end users are better off as a result of a deregulated market and more competition. They get greater innovation, a greater range of services and vastly improved quality.

Michael Lawson, telecoms manager at Sun Life of Canada, is one of many telecoms managers who feels more empowered since the European market was deregulated in 1998. "BT still has a stranglehold and a lot more needs to be done, but the market is becoming more competitive and I think we can now take advantage of that."

The last few years have seen a growing trend towards partnerships and alliances between telcos. But the MCI WorldCom and Sprint deal suggests the mega-merger is not going to go away.

In fact, some of the alliances are troubled. One key example is Global One, Sprint's agreement with Deutsche Telekom and France Telecom - it looks doomed in light of the MCI WorldCom deal but never really got onto solid ground in the first place.

The principal reason for this, Wallage argued, is the inherent problem of control. Operators need to have complete control over their international networks so that they are in a better position to guarantee the same levels of service globally - a factor that will become more important as businesses become more demanding.

So there is a genuinely good reason, from the customers' point of view, for an operator to expand and obtain global reach. There is also a good reason for it to be perceived as advanced and go-getting by the stock market. However, with intense competition, no telco can afford to rest on its laurels - and if offering value added services isn't a key part in its strategy, it may well find itself being left behind.