When Bela Lugosi bellowed, “the transformation is almost complete,” he was one of many in a notorious list of soothsayers whose reality never quite met the hype. Today's incumbent telecom companies that are trying to overlay new skills, services and behaviors on top of existing legacy systems and management are about to become the monsters of tomorrow.

Meeting the challenge of the IP marketplace is the new rallying cry. Headlines have heralded how IP is making communications easier, cheaper, more customizable, less reliant on traditional telcos and more wireless friendly. In the process, it threatens to create start-ups that challenge incumbents.

Make no mistake: IP is disruptive and will rock the safe and secure world of telecom companies. IP start-ups not only will trash the incumbents' fat voice margins with simpler calling plans, they will offer hot new PDAs that replace the desktop and softswitches that make the central office obsolete. By 2008, there will be at least $13 billion in annual top-line revenue and $9 billion in EBITDA at risk from new competitors in the U.S. alone. Can the incumbents prosper? To do so, they must convert their entire network and back office to IP while exiting thousands of legacy systems; package, cross-sell and deliver bundles of fixed, Internet, wireless and entertainment services; and deliver next quarter's results.

As with all too many tales these days, there is more hype than substance. The real, slightly less fantastic story centers on basic IP readiness — or rather, the lack of it.

For the dominant telecom players, the solution must be a true revolution. Chipping away at margins, trimming platform complexity, throwing in a calling plan to proclaim a bundle, taking incremental steps to reduce management layers — these are mere lip service, not real transformation. Several otherwise-progressive incumbents have yet to migrate off the archaic X.25 data platform. There's something wrong with this picture, and it could only worsen as M&A creates even more front- and back-office complexities.

Transformation means taking real action. Take the big IP restructuring charge now, rather than brace for the inevitable torture of explaining steadily deteriorating results to stakeholders. Offer “parachutes” to retool the management ranks, and get ruthless on streamlining the business model. Use the faster pace of M&As to increase customer reach and improve positioning against cable companies.

It's time to come out of denial or modern-day Frankensteins will crater beneath their sheer size and complexity. This transformation is not complete — not by any stretch of the imagination.

DOSSIER ALEX LIU

Occupation: Vice president, A.T. Kearney, Communications and Media Practice

Location: Southern California

Favorite destination: San Diego every weekend

Current reading: “A Coach's Life” by Dean Smith, “Winning” by Jack Welch

What's on your iPod: James Taylor, easy-listening jazz, Allman Brothers and Earth, Wind and Fire

Device inventory: Treo 600 and a blackjack simulator game

What's next: Complete addressability, bandwidth and ubiquity