Risk of technology obsolescence

By
The Financial Express writes:

VSNL’s acquisition of Teleglobe’s global carrier network, covering 80 submarine cables and five earth stations connecting 240 countries around the world for just $239 million, seems like a steal. And to some extent, it is. Consider. Teleglobe has over 1,400 wholesale customers in its network, including over 400 mobile operators, and has sunk about $2 billion into the business to date. A greenfield project of this nature would be 7-8 times the cost and will take decades to roll out. Add to that the customer acquisition and advertising costs and this deal clearly gives VSNL a headstart in the global wholesale voice and data transmission business.

But there is a flip side that explains why VSNL has bagged this business for this price. Like any other technology-intensive business, this too is fraught with the risks of obsolescence. The $1 bn Teleglobe incurred a net loss of $21 mn in 2004. Its Q1 loss this year is $8.4 mn, against $2.4 mn last fiscal. Moreover, Teleglobe is a 50-year-old organisation. It has legacy infrastructure which has its minuses. At the time this network was set up, submarine transmission technology was possible only in gigabits. New cable networks are being set up in tens of terabits.

We are in an era in which technology obsolescence and global demand-supply dynamics are playing havoc with the fortunes of multinational corporates. A lot of big lucre chased bigger dreams in the 90s and bet heavily on certain technologies. It’s only now that the net effect of those bets is evident. The global submarine cable business was one such, the Iridium satellite phone service was another. While Iridium went bankrupt, surging growth in telecom and internet saved submarine cables, in which an estimated $55 bn has been sunk worldwide. The business went through a tumble in the 90s, when overcapacity crashed carrier rates and caused a lot of global organisations to go under. Teleglobe, too, went bankrupt in 2002 and was acquired by two US-based investment firms for a measly $125 mn.

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