Hamish McRae: Giving people what they want is the key to telecoms success

Railways were the boom industry of the 1840s, yet few made much money for shareholders

Most telecommunications companies are on the sick list, having over expanded in the euphoria of the internet and mobile phone boom. They now find themselves squeezed between piles of debt and plunging prices for calls. Most of the rest are dead: they have collapsed and had their business taken over. But one notable company, Cable & Wireless, is financially very healthy, having sold many of its internet interests at the top of the market. The trouble is that it cannot think of any way of spending its cash and so is handing it back to its shareholders.

Most telecommunications companies are on the sick list, having over expanded in the euphoria of the internet and mobile phone boom. They now find themselves squeezed between piles of debt and plunging prices for calls. Most of the rest are dead: they have collapsed and had their business taken over. But one notable company, Cable & Wireless, is financially very healthy, having sold many of its internet interests at the top of the market. The trouble is that it cannot think of any way of spending its cash and so is handing it back to its shareholders.

It is an extraordinary contrast. On the one hand the industry is facing a continuing boom in demand. It has new technologies on hand, including the next generation of mobile phones, that customers seem to want to buy despite the slowdown in the world economy. It is also experiencing a plunge in costs as the fibre-optic revolution enables signals to be flashed around the world at a tiny fraction of the cost of even a couple of years ago. It is blessed with innovative customers who figure out new ways of using these technologies – from the commercial applications of the internet to 'texting'. We even invented a new word to describe that. But despite all these benefits, advantages that most industries would love to have, the telecoms find it very hard to make money.

One of their troubles is that there are too many of them. The background to this is shown in the two graphs: booming internet demand on the left and booming numbers of players on the right. We all know about the numbers on the left because most of us have relatively recently joined the 150 million community that now uses the Net. But few of us are aware of the figures on the right: that six years ago there were only 367 companies carrying telecom signals around the world but that last year this had risen to 2,805. That is a lot of carriers.

Yet this contrast is not new. It has happened to many hi-tech transport industries in the past and it will doubtless happen again. The railways were the boom industry of the 1840s, yet few made much money for their shareholders. Most of the pioneers among the motor and aircraft manufacturers have disappeared. The airline industry has shrunk the world almost as quickly as telecoms yet it too has found it almost impossible to make money on a consistent basis.

In one sense the telecom companies are in a similar position to these – in the early stages of a technical or commercial revolution lots of firms are seduced by the surge in demand and pile into the market. They squeeze down the charges (which in turn boosts demand further) only to find that charges fall so low that even they cannot make money.

However the telecom revolution differs in two ways from other transport revolutions. Many of the most important players were established long before the revolution took place. There were no motor manufacturers before 1885 because there were no cars. As a result new entrants ran that industry. But there have been phone companies for more than a century. That has given the industry a stable base but also created a bias against over-rapid change. The incumbent telephone companies were bound to use their dominant positions to ensure that they had a future in the reformed industry, which meant holding charges up wherever possible and using these cash cows to finance their expansion into new areas. The new entrants, contrast, could build on the experience of the incumbents, yet undercut them by running leaner operations.

The second way in which telecoms are different is the thrust of regulation. With railways, the motor industry or airlines, regulations had the effect of reducing competition. Railways were given franchises for particular routes, while cars and planes had to be designed to meet safety standards. This either lifted entry costs or indeed made entry impossible. With telecoms, however, much of the regulation is designed to encourage competition, for governments feel quite rightly that there are general benefits to society from cheaper communications.

The result is that an industry that was always going to find this transformation tough has found it even tougher. Not an industry you want to throw money at – so solid companies in it like Cable & Wireless decide to hand it back.

Yet the recovery from what looks like becoming a global recession will turn, more than anything else, on telecommunications. Look around and what else is there? We are not going to spend much more money on travel and we may even spend less. Demographic pressures do not point to a boom in consumer durables: the number of people setting up home is falling in most developed countries and that is when most people become new purchasers of consumer kit. The only obvious technology that might be able to create new products or services for us to buy is telecommunications, all the 'e's – entertainment, education, e-commerce. Yet the industry that will deliver these signals is a dog.

Or so it looks now. My guess is that in five years' time the telecom industry will be having another burst of success. By then two technical advances will be widely available: high-speed links to the home and the next generation of mobiles. Europe in general and Britain in particular have been very slow at getting high-speed lines into ordinary homes. But this is already changing fast as the two technologies, ADSL and cable, compete with each other. And the next generation of mobiles, the so-called 2.5 G, is here this autumn. Wait another 18 months for services that use these technologies to develop and telecoms will take another leap forward.

No, we don't know what those services will be. Predicting what human beings want from technology is an art rather than a science.

My three best guesses would include, first, mobile services that include a payment. For example we might pay for parking (and have automatic entry to parking lots) on our mobile phone. The second would be enhanced text and email messages so that we can send and receive messages in whatever form and on whatever kit we want. And third would be high-quality streaming video.

But we do know that the delivery mechanism is there when we figure out what we want. When that happens, quite suddenly, the telecommunications industry will become fashionable again.