Most energy and telecommunications companies have become involved in the convergence of the two industries within the last few years, and more consolidation is anticipated over the next few years, according to a recent survey conducted by consulting firm KPMG LLP. Respondents cited the sharing of infrastructure as the number one reason by a large margin that companies within the two industries are coming together.

“This demonstrates how prevalent the coming together of the industries has become as energy and telecommunications companies compete heavily for right-of-way ownership of transmission lines and cope with strong regulatory requirements — major issues driving the movement toward convergence,” said William F. Kimble, KPMG’s national industry director-Energy & Natural Resources.

Secondary reasons given by respondents for the industries’ convergence included bundling of opportunities and gaining experienced people. Additionally, the survey revealed that Internet access/broadband was ranked the “most likely” electrical service that companies will offer over the next one to two years. Cable service ranked second.

Kimble said convergence activity could heat up in the next year, in particular, with energy companies taking advantage of the recent downturn in telecommunications. “With the low price/earnings ratios of many telecom company stocks, we are going to see energy companies at the convergence forefront, buying their way into the telecom market through acquisitions,” he said. “That would be an easy route for them to get into the business to offer new products and services.”

Jerry Borowick, a partner in KPMG’s communications practice, said that while acquisitions would give energy companies the proper infrastructure to compete in telecom, companies must also have the proper mindset. “In order to jump into the communications space — and profit from it — energy companies will also need to fully understand the regulatory and cultural issues surrounding the industry,” Borowick said. “Whether energy companies are transforming themselves through acquisitions or creating their own telecom business from the ground up, there will be considerable challenges to address.”

KPMG’s survey polled 31 senior-level executives representing the two industries, providing insight into the dynamics changing their industries’ evolution, including how energy and telecom companies are teaming up to provide new services to customers, reasons they need to join forces, and the time frame in which they see the industries becoming more closely intertwined.

Of the 52% of respondents who said their companies were already involved with some form of convergence, 23% said that they had already joined forces and 13% said they expected an alliance or merger within one to three years. However, 55% of survey respondents said they were not confident that their companies are prepared to meet the convergence challenges they face to. “All of a sudden, it’s a new business model for these companies, so a large part of their answer probably reflects that they haven’t done anything like this before,” Kimble said.

Among respondents, 71% said the most important business challenge during the next two years involves regulatory changes. Also cited was technology proliferation, mergers and acquisitions, industry consolidation, and enhancing shareholder value.

Kimble said that he thinks there is only a small window of opportunity for the convergence of the industries. “The way the telecom industry is changing, energy companies interested in convergence should implement their plans now,” he said. “Utilities have been very capital intensive and now have the money to invest in telecom convergence. Today, they can leverage their assets and end up with other income strength.”

The survey was conducted at KPMG’s Energy and Telecommunications Convergence 2001 conference held in February in Amelia Island, FL.

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