Technology media and telecommunications 2010 bcg

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Technology media and telecommunications 2010 bcg

  1. 1. R A  V C RSwimming Against the Tide How Technology, Media, and TelecommunicationsCompanies Can Prosper in the New Economic Reality
  2. 2. The Boston Consulting Group (BCG) is a global manage-ment consulting firm and the world’s leading advisor onbusiness strategy. We partner with clients in all sectorsand regions to identify their highest-value opportunities,address their most critical challenges, and transform theirbusinesses. Our customized approach combines deepinsight into the dynamics of companies and markets withclose collaboration at all levels of the client organization.This ensures that our clients achieve sustainable compet-itive advantage, build more capable organizations, andsecure lasting results. Founded in 1963, BCG is a privatecompany with 71 offices in 41 countries. For more infor-mation, please visit www.bcg.com.
  3. 3. Swimming Against the Tide How Technology, Media, and TelecommunicationsCompanies Can Prosper in the New Economic Reality A  V C R David Dean Dominic Field Ron Nicol Frank Plaschke Daniel Stelter December 2010 bcg.com
  4. 4. The financial analyses in this report are based on public dataand forecasts that have not been verified by BCG and on assump-tions that are subject to uncertainty and change. The analysesare intended only for general comparisons across companiesand industries and should not be used to support any individualinvestment decision.© The Boston Consulting Group, Inc. 2010. All rights reserved.For information or permission to reprint, please contact BCG at:E-mail: bcg-info@bcg.comFax: +1 617 850 3901, attention BCG/PermissionsMail: BCG/Permissions The Boston Consulting Group, Inc. One Beacon Street Boston, MA 02108 USA
  5. 5. ContentsExecutive Summary 4The 2010 Technology, Media, and Telecommunications Value Creators 6Technology: A Sharper Focus on Growth and Margins 8The Innovation Cycle 8The Surge in Developing Markets 10Bright Clouds on the Horizon 10A Renewed Focus on Margins 10Media: Digital Disruption Continues Its March 13Successive Waves of Disruption 13Embracing the Digital World: Naspers and Pearson 14Telecommunications: Searching for Growth 18The Developing Markets: Telecom’s Next Billion 18The Internet Goes Mobile 20Cost Management and Cash Distribution 21Deconstruction Ahead 21Value Creation in Low-Growth Environments 23The Growing Importance of Cash Payouts 23The Growth Paradox 24A Fresh Look at Value Creation Strategy 26Balanced Capital Deployment 27Scenario-Based Strategic Planning 27Ten Questions That Every CEO Should Be Addressing 29For Further Reading 30Note to the Reader 31S A  T 
  6. 6. Executive SummaryT his report builds on the twelh annual report in ◊ The five-year TSR for media companies ranks near the the Value Creators series published by The Bos- bottom, at 2.5 percent. ton Consulting Group. It provides detailed em- pirical rankings of the stock market performance ◊ Companies can chart their own destinies, however. of the world’s top technology, media, and tele- The average five-year annual return for the top tencommunications companies and distills managerial lessons performers in each of the three sectors was betweenfrom their success. We also describe key trends in the global 22 percent and 26 percent.economy and world capital markets and how these trends arelikely to shape future priorities for value creation. Finally, we The likelihood of slow growth in developed econo-share our latest analytical tools and client experiences to help mies has vast implications for value creation.companies better manage value creation. This report address-es the challenges that technology, media, and telecom compa- ◊ Growth will be constrained in developed nations ow-nies face in delivering above-average shareholder returns in a ing to high consumer-debt burdens, limited credit, andglobal economy marked by below-average growth. the winding down of many government stimulus pro- grams.Despite the strong rebound in equity values, globalcapital markets are still laboring under the shadow ◊ Economies such as Brazil, China, and India are grow-of the worldwide financial crisis that began in 2008. ing rapidly but are not yet large enough to carry the global economy.◊ Global market indexes were up roughly 30 percent in 2009 but have largely moved sideways through the ◊ Lower revenue growth and pressure on margins will first three quarters of 2010. likely lead to a decline in valuation multiples and cap- ital gains.◊ The weighted-average annual total shareholder return (TSR) for the 2010 Value Creators database, which cov- ◊ Increasingly, dividends and stock repurchases will be ers the five years from 2005 through 2009, is 6.6 per- larger contributors to TSR. cent. That is considerably below the historical average of roughly 10 percent. ◊ The best performers will find ways to combine in- creased cash payouts with above-average profitableThe technology, media, and telecommunications sec- growth in a more competitive environment. Rogerstors finished in the middle to lower tiers of perfor- Communications of Canada, for example, has managedmance among all industries. to increase sales, improve margins, and manage debt.◊ The five-year TSRs for the technology and telecom sec- Sales growth drove 70 to 80 percent of the TSR of su- tors are in the middle of the pack relative to other in- perior performers in all three sectors—but other TSR dustries, at 6.2 percent and 5.3 percent, respectively. drivers varied by sector. T B C G
  7. 7. ◊ Technology companies demonstrated low growth in The ability of technology, media, and telecom compa- margins (with Apple and Hewlett-Packard being no- nies to develop innovative products and business table exceptions) and low cash-flow contribution. models will play a critical role in creating shareholder value.◊ The media sector’s sales growth was driven almost ex- clusively by the focused Internet players; the sector ◊ Taiwan-based MediaTek has thrived by building good- also had moderate cash-flow contribution. enough chipsets for inexpensive mobile phones.◊ The telecom sector had high cash-flow contribution ◊ Apple has succeeded not just with well-designed gad- but shrinking margins. gets but also with an ecosystem of audio and video content and applications that lock in customers andCompanies from emerging economies were big win- enable premium pricing.ners across all three sectors. ◊ The business model of traditional, integrated telecom◊ Seven of the top ten telecom performers, five of the carriers is breaking down. Operators need to develop top ten media performers, and four of the top ten tech- new strengths in order to succeed. nology performers are based in emerging economies. The future success of these three industries will de-◊ Companies from developing markets are playing in- pend on adaptive strategies that can anticipate, ab- creasingly larger roles on the global stage. sorb, and exploit the fast-moving market.◊ While Indian IT players are well known for their inter- ◊ Scale, size, and market position matter less than they national ambitions, telecom players are also spreading once did. their wings. For instance, Bharti Airtel’s recent purchase of Kuwait-based Zain Telecom’s African business made ◊ Experimentation and the ability to recognize and cap- Bharti the world’s fih-largest mobile company. italize on opportunities matter more than ever.The digital revolution has affected all three sectors, About the Authorsfor better and worse. David Dean is a senior partner and managing director in the Munich office of The Boston Consulting Group and a◊ In the media sector, many of the big winners, such as former global leader of the Technology, Media & Tele- Google and Tencent Holdings, are new entrants that communications practice; you may contact him by e-mail embraced the power of the Internet to aggregate and at dean.david@bcg.com. Dominic Field is a partner and distribute content. managing director in the firm’s Los Angeles office and the U.S. leader of the media sector; you may contact him by◊ A few established media players, such as Pearson, have e-mail at field.dominic@bcg.com. Ron Nicol is a senior thrived by shiing their business lines to digital mod- partner and managing director in BCG’s Dallas office and els—but most have struggled to adapt. the global leader of the Technology, Media & Telecom- munications practice; you may contact him by e-mail at◊ Media companies might find new growth through con- nicol.ron@bcg.com. Frank Plaschke is a partner and sumers’ rapid adoption of tablets and e-readers. managing director in the firm’s Munich office and the Eu- ropean leader for value creation strategy; you may con-◊ Telecom companies are trying to reorient their strate- tact him by e-mail at plaschke.frank@bcg.com. Daniel gies and operations to accommodate the rapid growth Stelter is a senior partner and managing director in of mobile data. Some will successfully turn mobile BCG’s Berlin office and the global leader of the Corporate data into a new source of growth. Development practice; you may contact him by e-mail at stelter.daniel@bcg.com.◊ For both technology and telecom companies, cloud computing may offer a chance for superior growth.S A  T 
  8. 8. The 2010 Technology, Media, and Telecommunications Value CreatorsT he 2010 Value Creators rankings cover All three sectors posted returns below the global average shareholder performance from 2005 five-year annual return of 6.6 percent. The technology and through 2009. We analyzed 126 companies telecom sectors returned 6.2 percent and 5.3 percent, re- across three sectors: 36 technology compa- spectively, while the media sector returned only 2.5 per- nies, 52 media companies, and 38 telecom- cent. (See Exhibit 1.) This relatively poor performance re-munications companies. We also analyzed the perfor- flects the steep global decline in stock prices in late 2008.mance of each sector relative to other sectors and ranked The market only partly rebounded in 2009. (Historically,the top ten companies within each of the three sectors. TSR across all industries has averaged about 10 percent.) Exhibit 1. Technology, Media, and Telecom Were Middling Performers Value Fundamental Valuation Cash flow creation = value + multiple + contribution 1 Sales Margin Multiple Dividend Share Net debt TSR (%) growth (%) change (%) change2 (%) yield (%) change (%) change (%) Mining and materials 18.0 10 –4 11 3 –3 1 Chemicals 12.0 6 –1 5 3 0 0 Machinery and construction 11.7 9 3 –1 2 –1 0 Consumer goods 9.5 6 1 1 3 0 –1 Utilities 8.6 9 –4 2 4 –2 0 Technology 6.2 8 –1 –3 1 1 0 Telecommunications 5.3 5 –1 –2 4 1 –1 Retail 4.2 8 0 –5 2 0 –1 Automotive and supply 3.9 1 –6 10 2 –3 0 Transportation and logistics 3.8 5 –1 –1 2 –2 0 Pharmaceuticals and medical technology 3.5 9 1 –6 2 –1 –1 Media 2.5 5 1 –5 3 0 0 Multibusiness 0.3 7 –2 –4 3 –1 –2 Travel and tourism –0.7 5 –2 –1 2 –4 –2 Pulp and paper –1.7 –1 –1 0 3 –2 –1 Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis. Note: Decomposition is shown in percentage points of five-year average annual TSR; any apparent discrepancies in TSR totals are due to rounding. 1 Five-year average annual TSR (2005–2009) for the weighted average of the respective industry sample. 2 Change in EBITDA multiple. T B C G
  9. 9. The technology, media, and telecommunications sectors ($2 billion for media companies and $12 billion for tech-are among the most unpredictable and fast-moving of all nology and telecommunications companies).industries. (See Exhibit 2.) Still, individual companies canescape the tyranny of averages and outperform their in- The overall rankings track performance from 2005dustry. Over the past five years, for example, the top ten through 2009, but we also show returns for the first threetechnology firms posted an average annual return of 23.3 quarters of 2010. In addition, we break down TSR into itspercent; the top ten media performers, 26.2 percent; and six component parts to show their relative contributionthe top ten telecom performers, 22.9 percent. to stock returns and assess how a company is creating value. (See Exhibit 3.) The first two elements—revenueCompanies from developing economies dominate the growth and changes in profit margins—reflect a compa-technology, media, and telecom rankings. Of the 126 com- ny’s change in fundamental value. Combining these withpanies analyzed, 81 are based in emerging markets—64 the third element—the valuation multiple—establishespercent of the total. Seven of the top ten telecom per- the change in a company’s market capitalization. The lastformers, five of the top ten media performers, and four of three elements—cash dividends, share repurchases, andthe top ten technology performers are based in emerging debt repayments—track the distribution of free cash floweconomies. to investors and debt holders and determine its contribu- tion to a company’s TSR.To arrive at the sample of 126 companies, we requiredcompanies to be publicly listed for all five years, with at The next three sections of this report explore the perfor-least 25 percent of their shares public traded. We also set mance of the technology, media, and telecom sectors ina minimum market-capitalization floor for each sector more depth. Exhibit 2. The Technology, Media, and Exhibit 3. BCG’s Model Allows a Company Telecom Sectors Are Unpredictable and to Identify the Sources of Its TSR Fast-Moving High Communications Semiconductors equipment Soware Fundamental Value Computers and Internet Office peripherals and electronics Revenue growth catalog 3.8% Electrical retail Media equipment Margin change –0.5% Diversified Electronic equipment telecom- munications Profit growth 3.3%Unpredictability and instruments(Average error in Wireless telecom- munication services earnings per share forecasts Internet + Change in valuation multiple 3.2% soware over the past and ten years) services = Gain in market cap 6.5% Cash payouts Dividend yield 3.4% IT services Share change 2.3% Low Long Industry rate of change Short Net debt change –2.3% (Time needed to move up or down one quartile) + Free-cash-flow yield 3.4% = TSR 9.9% The cost of being wrong (Difference in gross margin between 10th- and 25th- percentile performers) High Medium Low Sources: Thomson Reuters Datastream; Thomson Reuters Sources: Thomson Financial Datastream; Thomson Financial Worldscope; Bloomberg; annual reports; BCG analysis. Worldscope; Bloomberg; annual reports; BCG analysis. Note: Based on ordinal rankings along each dimension; does not Note: This calculation is based on an actual company example; the include marine, transportation infrastructure, or water utilities contribution of each factor is shown in percentage points of average industries. annual TSR.S A  T 
  10. 10. Technology A Sharper Focus on Growth and MarginsT he technology sector is diverse—covering by ever-more-versatile soware running on ever-more- everything from semiconductors, handsets, powerful chipsets. In Innovation 2010: A Return to Promi- and PCs to soware and IT services—and nence—and the Emergence of a New World Order, a BCG re- historically, companies in this sector have port based on a global survey of global executives, four generated shareholder value through of the top five most innovative companies are technologygrowth. Over the past five years, 17 percentage points firms: Apple, Google, Microso , and IBM. (See the sidebar(70 percent) of the 23.3 percent total return of the top “Innovation: A Return to Prominence.”)ten technology firms came from revenue growth. (SeeExhibit 4.) In the future, innovation-led growth may be harder to find. Consumers and businesses alike are more reluctantThis year’s top-ten group is truly global. Six Asian compa- to spend on the latest hardware and soware, in part be-nies made the list. Three of these are Indian IT-service cause they’ve been able to live and work just fine withcompanies, propelled by the use of outsourcing. existing technology. A few new products, such as Apple’s iPad, may hit a sweet spot, but the environment is gener-But while the top ten technology companies excelled, the ally inhospitable, especially for large companies thatrest of the pack fared much worse. Several factors ac- need massive markets, not niches, to fuel double-digitcounted for the middling 6.2 percent return of the tech- growth.nology sector overall, which ranked sixth of the 15 indus-tries analyzed. Companies below the top ten were much At the high end of the market, successful innovation willless successful at generating revenue growth. Their mar- likely depend not just on great products but also on newgins and price-to-earnings (P/E) multiples also declined, business models—what we call business model innovation.reflecting heightened price competition and investors’ Apple, the leading technology value creator, with a totaldim view of future growth prospects. five-year annual return of 45.6 percent, has innovated on both fronts. Its well-designed gadgets and elegant inter-In the future, as in the past, revenue growth will drive faces are legendary. But its iTunes and App Store ecosys-shareholder value in the technology sector. The corner- tems lock customers in to Apple products and allow thestones of that growth will likely be innovation, developing manufacturer to charge premium prices. Apple’s strongmarkets, and emerging technologies such as cloud com- five-year showing was built around both superior reve-puting. Improving margins will play a supporting role. nue growth and margin expansion. At the low end, innovation will likely be aimed at achiev-The Innovation Cycle ing cost and scale advantage. Taiwan-based MediaTek, the second-leading technology value creator, with a five-For decades, revenue growth in the technology sector has year annualized return of 32.0 percent, manufacturesdepended largely on successive waves of innovation, from “good enough” chipsets. Its rapid product cycles have his-the minicomputer to the PC to the mobile phone, spurred torically allowed MediaTek to stay ahead of the pack. T B C G
  11. 11. Exhibit 4. The Top Ten Technology Performers, 2005–2009 1 TSR Decomposition Market Sales Margin Multiple Dividend Share Net debt 2010 TSR2 value3 growth change change4 yield change change TSR5 # Company Location Industry (%) ($billions) (%) (%) (%) (%) (%) (%) (%) Computer 1 Apple United States 45.6 189.6 37 35 –21 0 –3 –2 34.6 hardware Semicon- 2 MediaTek Taiwan 32.0 19.0 24 –1 8 5 –2 –1 –16.5 ductors Computer 3 Infosys Technologies India 21.2 32.6 32 0 –11 2 –2 1 17.4 services Computer 4 Hewlett-Packard United States 20.8 121.8 8 12 –2 1 4 –2 –17.9 hardware Hon Hai Precision Electrical 5 Industry Company Taiwan 20.2 40.9 28 –5 –1 2 –3 0 –11.8 equipment (Foxconn) Tata Consultancy Computer 6 India 18.9 32.1 28 –2 –10 2 0 1 25.9 Services services Telecom 7 Research In Motion Canada 16.6 38.8 60 3 –46 0 –1 –1 –29.5 equipment Congnizant Computer 8 United States 16.5 13.5 36 –1 –17 0 –2 1 42.2 Technology Solutions services Semicon- 9 Samsung Electronics South Korea 13.3 91.2 11 –5 2 1 1 3 –2.1 ductors Computer 10 Wipro India 12.9 21.8 30 –1 –16 1 –1 –1 10.6 services Top ten average6 23.3 17 4 2 1 –1 0 7.4 Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis. Note: Sample included 36 companies. 1 Contribution of each factor shown in percentage points of five-year average annual TSR; any apparent discrepancies in TSR totals are due to rounding. 2 Average annual TSR, 2005–2009. 3 As of December 31, 2009. 4 Change in EBITDA multiple. 5 As of September 30, 2010. 6 Weighted-average TSR for the ten companies listed. Innovation A Return to Prominence Innovation is back. In BCG’s April 2010 report, Innovation The two greatest barriers to innovation, according to sur- 2010: A Return to Prominence—and the Emergence of a New vey respondents, are a risk-averse corporate culture and World Order, 72 percent of all survey respondents (71 per- lengthy development times. Few respondents identified a cent of respondents in the technology and telecom sec- shortage of great ideas as a major hurdle. tors) said that innovation was a top-three priority at their company, compared with 64 percent in 2009. That is the Technology companies should be placing part of their in- highest reading in the survey’s seven-year history. novation bets in developing markets, which offer talent, growth, dynamism, and increasingly demanding con- Innovation pays off. The TSR of the most innovative com- sumers. panies, as identified by survey respondents, was 12.4 per- centage points higher than that of their industry peers for the three-year period ending in 2009. Over ten years, the margin was 2 percentage points.S A  T 
  12. 12. Innovation, however, is tough to institutionalize over sev- respondents planned to increase their product-develop-eral economic or product life cycles. In 2010, for exam- ment investments in developing markets.ple, MediaTek began facing stiff competition from Qual-comm, Spreadtrum, and other chipset producers. Itsrevenue and TSR declined over the first three quarters Bright Clouds on the Horizonof 2010. One budding trend that could create or destroy value for technology companies is the rise of cloudThe Surge in Developing computing—on-demand access to aMarkets The cloud could shared pool of computing resources. Most reshape entire organizations are just starting to exploitThe importance of developing markets is the opportunities afforded by the cloud toreadily apparent in the ranking of top tech- industries, just as the reduce costs, make business processesnology value creators. Three of the top ten Web did in the 1990s. more efficient, and accelerate time tofirms are India-based IT service providers market.riding the wave of outsourcing: InfosysTechnologies, Tata Consultancy Services, and Cognizant The cloud could reshape entire industries, just as the WebTechnology Solutions. More important, they have built did in the 1990s. For instance, the cloud can knit togetherglobal operations, created world-class hiring and training multiparty ecosystems, as Apple and Google have beensystems, and demonstrated an ability to quickly enter doing to upend the media industry. It can also facilitatenew businesses. asset-light business models: in India, dozens of commu- nity banks rely on Tata Consultancy Services’ “bank in aTheir success shows that many developing markets are box” cloud offering to automate deposit and loan proc-moving beyond their status as primarily a source of cheap essing.labor. Increasingly, the BRICI nations (Brazil, Russia, In-dia, China, and Indonesia), the Middle East, and other re- The implications for various IT providers are profound.gions have become important markets in their own right. The revenue models of soware companies could moveIn 2009, the BRICI countries represented about 45 percent from licensing and service contracts to monthly pay-as-of the world’s population and about 15 percent of global you-go arrangements. Subscale IT-services companiesGDP, and had some 610 million Internet users. By 2015, may have trouble competing against Google, Amazon,these countries will have more than 1.2 billion Internet and Microso , which are investing billions of dollars inusers—well over three times the number of Internet users data centers.in Japan and the United States combined. (See The Inter-net’s New Billion: Digital Consumers in Brazil, Russia, India, Because of the uncertainty about how cloud computingChina, and Indonesia, BCG report, September 2010.) will play out, many technology companies are hedging their bets by moving into several layers of the cloudSome rapidly developing regions have become important stack—infrastructure, platforms, applications, and socenters of technical innovation. India and China, for in- on—oen through acquisitions. (See the sidebar “A Quickstance, produce huge numbers of engineering and com- Guide to the Cloud.”)puter science college graduates who earn less than theirWestern counterparts. This combination of rising localdemand and a steady supply of technical talent has led A Renewed Focus on Marginsmany larger technology companies to establish R&D cen-ters in developing markets. Improving margins is a potential source of value creation for technology companies. Margins declined an averageIn BCG’s Innovation 2010 report, for example, 54 percent of 1 percent annually over the five-year period for the 36of survey respondents at technology and telecommunica- technology companies in the Value Creators database, astions companies said that they would increase their in- the recession took its toll on profits. Most other industriesvestments in China. Across all industries, 62 percent of experienced similar declines. T B C G
  13. 13. A Quick Guide to the Cloud The cloud provides opportunities for value creation at Process Transformation. The primary benefits here are high- three levels in large enterprises: the utility level, the proc- er efficiency, closer collaboration, and superior integra- ess transformation level, and the business model innova- tion and coordination across processes. Avon Products, tion level. (See the exhibit below.) for example, is starting to rely on the cloud to coordinate communications with its sales leaders. Utility. CIOs see tangible opportunities to save 10 to 50 percent in costs and to go to market more quickly with Business Model Innovation. At this emergent level, the cloud new applications and upgrades. Most organizations are can power new strategies built around ecosystems and currently focused on infrastructure and are moving stan- supported by massive computing power and scale. dard applications, such as e-mail and other productivity tools, to the cloud. Cloud Computing Offers Three Levels of Value Description Select opportunity areas Lowers costs and increases ◊ Utilization of equipment and facilities agility through elastic ◊ Self-serviceability Utility computing resources and ◊ Scale pay-per-use models ◊ Agility Improves integration and ◊ Process standardization and composition collaboration by leveraging ◊ Streamlined handoffs and integration Process common assets ◊ New insights from data intensity and data transformation sharing ◊ Enhanced virtual teaming around specific processes Creates new business ◊ New services through integration across customers, models and ecosystems partners, and suppliers Business through linking, sharing, ◊ New insights through data analytics by integrating model innovation and combining capabilities and aggregating data across channels and enterprises among enterprises ◊ New asset-light business models that can be rapidly scaled to meet market needs Source: BCG analysis.Even among top performers, margins came under pres- the company with lower multiples. In the middle of thesure. Among the top ten technology performers, margins decade, the company’s margins began to improve evenrose by an average of 4 percent per year, but most of that while multiples continued to contract. In 2009, cash pay-increase came from Apple (through premium pricing) outs also became an important part of total return.and Hewlett-Packard (through astute cost managementof acquisitions and ongoing operations). There are limits, however, to the punch that margin en- hancement can provide. It typically runs its course aerH-P’s journey shows how a company can create value in several years, and companies have to reposition them-several ways. In the early 1990s, the company achieved selves for new growth. Finding growth in the face of un-most of its returns through growth; in the late 1990s, certainty and disruption is the central challenge for tech-through multiple expansion. (See Exhibit 5.) In the first nology companies. The group of top TSR performersfew years of the 2000s, growth remained strong but mar- could look very different in five years.gins narrowed and cash payouts fell. Investors punishedS A  T 
  14. 14. Exhibit 5. Hewlett-Packard Has Moved Through Different Phases to Deliver TSR Average annual TSR, December 1990 through September 2010 (%) 10,000 H-P 15 1,000 S&P 500 9 100 10 Strong growth Multiple Strong growth offset Margin Cash expansion by multiple improvement, flow compression and multiple strength heavy use of cash flow contraction 1 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Total Annualized TSR (%) 41 30 –13 16 10 15 TSR decomposition1 Revenue growth (%) 19 8 14 10 3 12 Margin change (%) 6 –7 –10 15 6 1 Multiple change (%) 15 26 –12 –11 –3 2 Cash payout change (%) 1 3 –5 2 4 0 Sources: Compustat; Bloomberg; BCG ValueScience Center; BCG analysis. Note: Indexed to 100 on December 31, 1990; the y-axis is in log scale. 1 Contribution of each factor shown in percentage points; any apparent discrepancies in TSR totals are due to rounding. T B C G
  15. 15. Media Digital Disruption Continues Its MarchT he media sector’s average 2.5 percent TSR Music piracy has weakened the willingness of consumers over five years was among the worst of all to pay for digital content, and the inertia of content own- industries and would have been worse still ers contributed to the decline of businesses that were without the strong showing of a handful of once highly profitable. Record labels have allowed Apple companies. The sector ranges from news- to define the pricing, usage rules, and economics of thepapers to music labels, television networks, movie stu- digital-music business. Newspapers have allowed aggre-dios, Internet search engines and portals, and business gators such as Google and Yahoo! and bloggers such asand educational publishing. Huffington Post to break apart their content and weaken their business models. Internet companies are now dis-Most of these companies have fallen out of favor among rupting the television, movie, and book industries by sell-investors. If investors had stayed neutral on the sector ing online works at discounts to their offline counterparts,and awarded it the same multiple as five years ago, the and relative newcomers such as Facebook are pushingsector would have reported a more respectable 7.7 per- the boundaries even further by blending user-createdcent TSR. A slight increase in revenues and dividend yield and professional content.accounted for the sector’s modest improvement in TSR. Many media companies are still struggling to adjust toThe performance of the media sector is a tale of two seg- these new realities. The movie studio Metro-Goldwyn-ments: traditional companies and relatively new Internet Mayer, for example, recently filed for bankruptcy protec-players. Many of the big winners among the top ten per- tion, wounded by slowing growth of DVD sales and theformers are new entrants, such as Google and Tencent rise of online streaming of video content.Holdings, that developed Internet businesses aggregatingand distributing content. Tencent’s QQ instant-messaging The recession magnified these longer-term trends for me-platform in China, for example, offers games, virtual pets, dia companies, which rely heavily on advertising. Adringtones, and other forms of entertainment. The top ten spending has historically tracked GDP, but it has becomeperformers posted an overall average TSR of 26.2 per- decoupled from the broader economy since the end ofcent, the strongest of the three sectors. (See Exhibit 6.) the recession. Many companies are permanently shiing marketing dollars “below the line” and away from tradi- tional media outlets. They are maintaining their ownSuccessive Waves of Disruption Web sites and engaging in both offline and online promo- tional activities.Long-brewing digital developments and the global eco-nomic downturn created a perfect storm for the media Media companies willing to make a break from the pastsector. For the past decade, the Internet has been eroding and fundamentally shi their business models have athe power of media companies to generate adequate re- fighting chance to succeed, but they must act both deci-turns from content. Disruption moved in successive waves sively and experimentally. (See the sidebar “Tablets andthrough different corners of the media sector. E-Readers: Another Chance to Master Digital Content.”)S A  T 
  16. 16. Exhibit 6. The Top Ten Media and Publishing Performers, 2005–2009 1 TSR Decomposition Market Sales Margin Multiple Dividend Share Net debt 2010 TSR2 value3 growth change change4 yield change change TSR5 # Company Location Industry (%) ($billions) (%) (%) (%) (%) (%) (%) (%) 1 Tencent Holdings Hong Kong Internet 106.3 39.5 70 4 37 1 –1 –6 0.9 South Broadcasting and 2 Naspers 33.3 15.1 16 4 19 1 –7 –1 14.5 Africa entertainment Net Serviços de Broadcasting and 3 Brazil 30.3 4.7 27 0 3 0 –11 12 –7.9 Comunicação entertainment United 4 Google Internet 26.3 197.0 44 5 –21 0 –4 2 –15.2 States Modern Times Broadcasting and 5 Sweden 17.8 3.3 16 4 –2 2 0 –2 43.0 Group entertainment Shaw Communi- Broadcasting and 6 Canada 17.7 9.0 11 –1 0 3 2 3 8.0 cations entertainment Luxem- Broadcasting and 7 SES 13.5 10.7 9 –1 0 4 4 –3 21.1 bourg entertainment Broadcasting and 8 Grupo Televisa Mexico 12.8 11.9 10 1 4 3 –5 –1 –7.7 entertainment Beijing Gehua Broadcasting and 9 China 12.5 2.2 16 –4 3 1 –3 –1 –4.5 CATV Network entertainment United 10 Pearson Publishing 11.8 11.4 9 4 –7 5 0 1 14.7 Kingdom Top ten average 6 26.2 22 4 –2 2 –2 2 –7.4 Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis. Note: Sample includes 52 companies, including Internet content providers. 1 Contribution of each factor shown in percentage points of five-year average annual TSR; any apparent discrepancies in TSR totals are due to rounding. 2 Average annual TSR, 2005–2009. 3 As of December 31, 2009. 4 Change in EBITDA multiple. 5 As of September 30, 2010. 6 Weighted-average TSR for the ten companies listed.Embracing the Digital World: Naspers Africa, Brazil, China, Central and Eastern Europe, India,and Pearson Russia, and Thailand—locations frequently overlooked by media giants.A few traditional media companies are making strongmoves to protect their core businesses while building suc- Naspers developed expertise in choosing the right play-cessful digital franchises. Let’s look briefly at Naspers, the ers in local markets and in helping them to become evensecond-leading media company at creating shareholder more successful. It recognized that strong niche operatorsvalue over the past five years, and Pearson, the tenth- in regional markets can build protective barriers. Amongleading media value creator. Both companies have its successful acquisitions are Allegro—an e-commerce,thoughtfully expanded into developing markets and built classified ad, and price comparison portal in Eastern Eu-digital businesses, while also—at least in the case of Pear- rope—and Sanook!, the leading local portal in Thailand.son—making tough choices about shedding lower-poten- In 2001, Naspers had the foresight to acquire a 46.5 per-tial businesses. cent stake in Tencent Holdings, the leading media value creator.Naspers: An Expanding Footprint. Naspers has evolvedfrom a traditional newspaper and magazine publisher Naspers has also taken a gradual approach to expansion.based in South Africa to a leading electronic-media com- For example, it has invested in e-commerce and transac-pany in many developing markets. Since 2001, Naspers tion platforms to monetize new offerings. It has also con-has acquired Internet and mobile-content companies in verted existing TV customers to digital services in order T B C G
  17. 17. Tablets and E-Readers Another Chance to Master Digital Content Tablets and e-readers, spurred by the successful launch who read print publications will own tablets within three of Apple’s iPad and Amazon’s Kindle, are poised to be- years, assuming that prices decline to the $130–$200 come as popular as VCRs and portable audio players range, far less than the current low-end model of the were in the 1980s or digital audio players in the early iPad, which retails for $499. 2000s. A recent BCG survey of nearly 13,000 consumers in 14 countries revealed remarkable underlying demand: The survey offers guarded good news for content provid- 28 percent of all respondents plan to purchase an e-read- ers. (See the exhibit below.) In the United States, for ex- er or tablet in the next year; over three years, 49 percent ample, consumers appear willing to pay $2 to $4 for a plan to do so. While intent always overstates actual pen- single issue of an online, interactive magazine—compa- etration, BCG projects that 25 percent of U.S. consumers rable to the cost of a print version—and $5 to $10 for a Consumers Will Pay for Content on E-Readers and Tablets ($) Willingness to pay for a digital book 20 17 15 13 13 13 13 12 12 12 10 Kindle book bestsellers: $9.99 10 9 6 5 4 3 8 2 7 7 7 7 7 7 7 5 6 3 3 2 1 0 Norway Spain Finland France United Japan India States Italy Austria Germany Australia United Korea China Kingdom ($) Willingness to pay for a single copy of a digital magazine 8 7 6 5 5 5 5 4 4 4 Newsweek Kindle: $1.99 4 3 3 3 3 2 2 4 1 3 3 3 3 3 2 3 2 2 0 1 1 1 1 Finland Spain Norway United Korea Germany China States Italy Japan France Australia United Austria India Kingdom ($) Willingness to pay for a monthly subscription to a digital newspaper 20 19 15 WSJ: $14.99 15 14 13 13 12 12 11 10 10 8 USA Today: $11.99 7 5 4 12 2 2 7 8 11 7 5 7 5 5 5 4 1 1 1 0 Spain United Australia Austria United Korea China Kingdom States Italy France Germany Japan Norway Finland India Sources: BCG survey of 12,717 consumers; BCG analysis. Note: Respondents currently own a tablet or e-reader or are interested in purchasing one within three years. Van Westendorp’s Price Sensitivity Meter method was used to calculate the optimal price.S A  T 
  18. 18. Tablets and E-Readers (continued) monthly online newspaper subscription. Although this player in the market is conceivable. Media companies amount is less than the cost of a print subscription, a would have multiple buyers for their content, which digital version is cheaper to produce—and, of course, the would encourage innovation in products, pricing, and price is much higher than the free versions that most con- business models. sumers now read. ◊ An open market would be competitive but not necessar- It is likely that one of three scenarios will unfold in this ily comfortable. Consumers would be able to buy con- market: tent from multiple retailers whose products are in stan- dard content formats. Media companies would have a ◊ A single closed ecosystem, such as iTunes in the United wide range of outlets for their digital content and a high States, could take root. Content creators would be forced degree of pricing freedom. This explosion of choice to sell to a single buyer that has an extremely strong might be a mixed blessing for consumers who have position. The experience for consumers would be a grown accustomed to one-click purchasing. mixed bag, as they would have a unique, easy experi- ence but less choice. While Apple has set the bar high, No matter how the market evolves, media companies will it is unlikely that the tablet market will benefit from the need to make deals with device makers to protect their tight integration of device, soware platform, and ag- assets—something that music labels and newspapers, in gregation that characterized the success of iTunes. Too particular, did not do effectively during the past decade. many other companies have a stake in seeing a more They must also build business models and standards that open system, which is also what consumers want. meet the unique characteristics of the digital environ- ment and are thoughtfully positioned relative to their an- ◊ Several ecosystems with a few large players could create alog, Web, and mobile businesses. These new business their own rules and offerings to attract different con- models will almost certainly challenge key beliefs about sumer segments, as demonstrated by Microso , Nin- how value is created in their traditional businesses and tendo, and Sony in the game console market. For digital require working together with a wide set of partners. In content, Apple and Google are already starting to define other words, companies will need to become digital na- ecosystems, and the emergence of a third or fourth large tives.to sell premium programming. When entering new mar- tomers. Its FT Group subsidiary generated 73 percent ofkets, whether by acquisition or organically, Naspers has revenues from digital sources in 2009, up from 28 percentmaintained a local approach in its content, management, in 2000. This expansion has more than offset the declineand partnerships. in advertising-driven revenues. Across all of Pearson’s businesses, revenues from digital sources reached 31 per-Pearson: Old-School Panache in New Worlds. Pearson, cent in 2009, up from 21 percent in 2005.the London-based owner of such venerable brands as theFinancial Times and Penguin Books, and half owner of the Educational products and services in North America re-Economist, has an old-school pedigree. But it has been main Pearson’s largest business. Sales and profits haveanything but fusty in its willingness to go digital and to grown 8 percent annually over the past five years. Pearsonpursue global expansion. Since 2001, the company has achieved this growth by branching out from its roots as aradically overhauled its portfolio by making $6.3 billion publisher of educational materials and a provider of as-in acquisitions, oen in digital businesses, and by dispos- sessment services to invest heavily in digital learning. Bying of $4.1 billion in legacy assets, such as Les Échos in combining online-education modules with existing printFrance. content, Pearson has outperformed the generally flat ed- ucational-publishing market. For example, Pearson’s mar-Pearson may be the most successful of the traditional ket-leading engineering-mechanics textbook, Statics andpublishers in migrating to digital services. It has built suc- Dynamics, 12th edition, by Russell C. Hibbeler, gained fourcessful business lines in market intelligence, valuations, percentage points of market share in 2009 on the strengthand market indices targeted to premium business cus- of a new digital-learning and assessment product. T B C G
  19. 19. Pearson has leveraged its strength in North America to dividends. At Penguin Group, despite a restructuring andbecome the global leader in education publishing and re- annual revenue growth of just 2 percent over the past fivelated services. International education is the company’s years, profits have improved an average of 5 percent an-fastest-growing business segment, with sales increasing nually. Pearson has also increased its dividend nearly 617 percent annually over the past five years. It has grown percent annually since 2000.both organically and through acquisitions. For example,it absorbed Wall Street English, a chain of premium Eng- The experiences of Naspers and Pearson show that ven-lish-language training centers in China, in 2009. erable media companies can reinvent themselves by find- ing pockets of customers willing to pay for digital infor-Unusual among media companies, Pearson has posted mation that is useful and timely and through thoughtfulstrong revenue growth while maintaining margins and and determined expansion into high-growth segments.S A  T 
  20. 20. Telecommunications Searching for GrowthT he telecom sector’s 5.3 percent TSR over ◊ Cost discipline and margin maintenance are increas- the past five years puts it firmly in the mid- ingly important in all markets, not just mature ones. dle of the pack among industries. Sales growth contributed 5 percentage points ◊ The traditional model of an integrated, monolithic, all- and dividends contributed 4 percentage segments-all-activities carrier is becoming obsolete, aspoints to the industry’s overall return, with falling mar- suggested by the presence on our top-ten list of Amer-gins and weakening multiples pulling down the final ican Tower, the owner and operator of wireless andresult. broadcast towers.Seven of the top ten telecom performers are from emerg- Let’s look at each of these developments in more detail.ing markets, where strong growth helped power TSR. Ofthe top ten’s 22.9 percent TSR, sales growth contributed17 percentage points. (See Exhibit 7.) Within the full sam- The Developing Markets: Telecom’s Nextple, telecom companies operating mostly in developed Billioneconomies generated a meager 2 percent TSR, whilethose operating in developing companies generated an Telecom in many developing economies has experiencedimpressive 21 percent TSR. strong, steady growth, especially in mobile services, which have attracted hundreds of millions of new subscribersThe telecom world, however, is not so easy to divide into each year. This growth has helped produce total returnsdeveloping markets characterized by growth and oppor- exceeding 25 percent for América Móvil, China Mobile,tunity and developed markets where carriers are focused and Bharti Airtel, the top three telecom performers.on cutting costs. There are at least four layers of complex-ity in today’s telecom market. Consumers in developing markets have quickly embraced mobile phones for communication and entertainment.◊ Profits remain elusive for many carriers in developing There are currently about 1.8 billion mobile-phone sub- markets, where competition can drive prices down to scriptions in the BRICI countries, compared with fewer rock bottom, as it has in India and Indonesia. than 400 million in the United States and Japan. (See Ex- hibit 8.) Among these countries, Russia has the highest◊ Mobile data will change the nature of the game. Data mobile-penetration rate, followed by Brazil, Indonesia, traffic now exceeds voice traffic in many markets China, and India, which still have plenty of room to grow. and is expected to continue rising sharply, spurred by strong demand for smartphones and Internet ser- Affordability and availability are driving adoption in the vices. As companies such as Apple and Google solid- BRICI countries, especially in India. Rates for voice calls ify their hold in the telecom market, operators in are currently as low as $0.006 per minute in India, and all markets must reassess their strengths and weak- price promotions are abundant. Not surprisingly, the mar- nesses. gins of Indian operators are under pressure. T B C G
  21. 21. Exhibit 7. The Top Ten Telecommunications Performers, 2005–2009 1 TSR Decomposition Market Sales Margin Multiple Dividend Share Net debt 2010 TSR2 value3 growth change change4 yield change change TSR5 # Company Location Industry (%) ($billions) (%) (%) (%) (%) (%) (%) (%) 1 América Móvil Mexico Mobile telecom 27.1 75.6 22 5 –5 1 3 1 11.2 2 China Mobile Hong Kong Mobile telecom 26.0 188.5 19 –3 3 4 0 3 13.2 3 Bharti Airtel India Mobile telecom 25.6 27.3 44 –1 –18 0 –1 1 11.6 South 4 MTN Group Mobile telecom 23.6 29.3 34 2 –10 2 –2 –1 10.0 Africa China United 5 Network Com- China Mobile telecom 20.4 22.6 17 –4 7 2 0 –2 –29.6 munications 6 Telekomunikasi Indonesia Fixed-line telecom 18.6 20.3 14 –2 1 4 0 1 0.6 United 7 American Tower Telecom equipment 18.6 17.4 19 1 3 0 –11 7 18.6 States Rogers Communi- 8 Canada Mobile telecom 17.6 18.7 16 4 –9 2 –1 7 21.0 cations Nether- 9 Koninklijke KPN Fixed-line telecom 17.1 28.0 3 –1 3 6 7 –1 2.2 lands Turkcell Iletisim 10 Turkey Mobile telecom 15.1 16.1 12 –1 –3 4 0 2 –3.7 Hizmet Top ten average 6 22.9 17 –1 1 2 1 2 9.0 Sources: Thomson Reuters Datastream; Thomson Reuters Worldscope; Bloomberg; annual reports; BCG analysis. Note: Sample includes 38 companies. 1 Contribution of each factor shown in percentage points of five-year average annual TSR; any apparent discrepancies in TSR totals are due to rounding. 2 Average annual TSR, 2005–2009. 3 As of December 31, 2009. 4 Change in EBITDA multiple. 5 As of September 30, 2010. 6 Weighted-average TSR for the ten companies listed.Several Western European carriers have begun to invest com players that are based in developing markets un-in developing markets, but their success has been mixed. derstand the challenges of operating in prepaid,Telefónica, with its strong position in Brazil and Argen- low-tariff markets. But these markets may be harder totina, has done well, but others carriers have struggled to enter in the future as prices decline and penetration in-adapt their businesses to a very different environment. creases. In 2009, India added 200 million mobile sub- scriptions—some of them undoubtedly second or thirdOn the flip side, several companies from developing phones—but mobile revenues grew by just 2 percent.markets have started to expand abroad. Early in 2010, Being even the fourth or fih carrier in a market such asIndia’s Bharti Airtel acquired most of Kuwait-based Zain India’s will be challenging, let alone the eighth orTelecom’s African business for $10.7 billion. The deal ninth.has made Bharti the world’s fih-largest mobile opera-tor with operations across 18 countries. In late 2010, Price competition is a benefit for consumers in the shortRussia’s VimpelCom, which is partly owned by Nor- term but not necessarily in the long term if it preventsway’s Telenor, and Weather Investments, the majority telecom operators from investing in future technologies,owner of Egypt-based Orascom Telecom, announced a quality of service, or customer relationships. Given the$6.5 billion merger that would create one of the largest importance of telecom operators to the economic growthmobile-telecom operators. and social development of many countries, governments will be under pressure to play a larger role in establish-Scale is less important than skill and knowledge in en- ing regulations that ensure adequate returns and afford-tering developing markets. Bharti Airtel and other tele- ability.S A  T 
  22. 22. Exhibit 8. BRICI Mobile-Phone Subscriptions Vastly Outnumber Those in the United States and Japan Number of mobile-phone subscriptions, 2006–2015E Number of SIM cards (millions) 1,400 7 1,200 1,151 11 1,000 13 953 800 769 50 600 534 1 5 507 5 9 3 6 372 400 20 9 34 235 214 274 233 279 5 200 150 175 152 197 166 101 69 100 115 140 0 China India Brazil Russia Indonesia United States Japan 2009 57 41 86 1411 66 88 92 penetration (%) 2015E 84 75 113 155 107 115 112 penetration (%) 2006 2009 2015E Compound annual growth (%) Sources: Economist Intelligence Unit; CIA World Factbook; BCG analysis. Note: Mobile-phone penetration is the number of SIM card subscriptions divided by the population. 1 Mobile-phone penetration in Russia is believed to be less than 100 percent; there is a tendency for users to own multiple SIM cards, a large number of which are inactive.The Internet Goes Mobile cations. Many operators, especially in the United States, have managed to offset the decline in voice revenueFaced with a dramatic reduction in average revenue per through mobile data. Creating long-term shareholder val-user (ARPU) from voice traffic and tariffs, operators need ue through mobile data, however, may be challenging un-to find new sources of growth in order to generate higher less operators can wean their customers away from un-shareholder returns. One way is to encourage customers limited-data plans.to sign up for mobile-data services. Even in the BRICImarkets, consumers are increasingly accessing the Inter- In South Korea and Japan, for example, carriers pioneerednet through their handsets, especially when fixed-broad- innovative services such as mobile banking and payments,band costs are high or availability is limited. winning global accolades for the innovation. They have been less successful, however, in creating shareholder val-Bharti Airtel, for instance, has publicly said that it aspires ue. Intense price competition, open platforms, and regula-to become a “lifestyle enablement company.” It recently tory policies have created a challenging environment.was granted the first license to offer mobile-payment ser-vices in India. Safaricom has moved beyond traditional In other developed markets, mobile broadband is attract-communication services in Kenya through its M-Pesa ing powerful players—notably Apple and Google—frommobile-banking service. Vodafone, a part-owner of Safa- other industries. Google is building an ecosystem aroundricom, has introduced similar services in Afghanistan and its Android mobile-phone platform, developing enhance-Tanzania. ments to its Google Voice offerings, and investing in data centers for its cloud services. As Google, Apple, and otherIn many markets, revenues from mobile-data services are prominent brands expand into telecom markets, carriersgrowing rapidly, spurred by the spread of mobile-broad- need to carve out distinct roles that will allow them toband services, smartphones, and the availability of appli- create and capture value. T B C G
  23. 23. Cost Management and Cash Distribution ed States with its TracFone prepaid-mobile-phone sub- sidiary.In the face of all these challenges, operators in maturemarkets are understandably pulling levers other than América Móvil has benefited from population growth ingrowth to maximize shareholder return. They have sev- Latin America and a strong presence in Mexico, a countryeral options. They can reduce churn and take other steps with high tariffs. But chairman and major shareholderto manage the customer base in order to maintain reve- Carlos Slim has also earned a reputation for tight financialnues or at least slow the decline of voice ARPU. They can management. Margin change contributed 5 percentageaggressively reduce costs by sharing networks with com- points, the highest among the top telecom performers.petitors and deploying low-cost technologies. They canalso improve cash flow in order to increase cash distribu-tions to shareholders. These levers represent a continu- Deconstruction Aheadous-improvement approach that is consistent with manybusiness models. Since deregulation in the 1980s and the emergence of the commercial Internet in the 1990s, the telecommunica-Koninklijke KPN and Rogers Communications have each tions industry has faced a rolling set of disruptions. Thegenerated substantial value despite operating in devel- stock market has punished most large carriers while rich-oped markets. KPN, the leading provider of telecom ser- ly rewarding companies in competition with telcos. Sincevices in the Netherlands, also serves mobile subscribers its IPO in 2004, Google’s market capitalization has risenin Germany and Belgium and provides business network to almost $200 billion, while the value of most operatorsservices and data transport throughout Western Europe. in developed markets has fallen. The U.S. telecom indus-It ranked ninth among telecom firms in shareholder re- try has lost more than 100,000 jobs in the past five yearsturn by taking a disciplined approach to costs and cash and more than 400,000 in the last decade.management. Most of KPN’s 17.1 percent TSR came fromshare buybacks (7 percentage points) and dividend distri- Cost cutting alone, however, will not be enough for carri-butions (6 percentage points). ers to compete when game-changing forces—such as cloud computing and “voice for free” services—are warp-Rogers Communications, a diversified communications ing the industry.and media company in Canada, has managed both togrow and to adroitly manage cash. Sales growth contrib- As demonstrated by the successes of Google, Apple, anduted 16 percentage points of Rogers’s 17.6 percent total others, tremendous opportunities abound in the broaderreturn for an eighth-place ranking among telecom players. technology and telecom space. In order to capture theseAs a cable provider, Rogers is not saddled with the univer- opportunities, carriers need to make hard choices aboutsal service and other regulations borne by traditional tele- strategy and business models. Most, however, are sufferingcom carriers. Still, the company’s early investments in from the “curse of the conglomerate”: when their wirelinemobile and a high-speed network have paid off. business went into decline, they were able to turn first to mobile voice and then to mobile data, but now they haveAt the same time, Rogers has increased its focus on man- run out of businesses that can generate adequate returns.aging costs and margins. Its change in profit margins con- With no more cash cows le to milk, carriers must buildtributed 4 percentage points to total return, and lowering new sources of competitive advantage. (See the sidebarits debt load contributed 7 percentage points. (A narrow- “Five Ways to Play the Telecom Breakup.”)ing of its multiple, however, subtracted 9 percentagepoints.) The pace of change in telecom technologies is accelerat- ing, but despite the wealth of opportunities in developingAmérica Móvil, the top-performing telecom company, markets and in mobile broadband, only a few telecomwith a total return of 27.1 percent, also has successfully operators have successfully generated long-term share-focused on growth and cost discipline. From its base in holder value. To win in the future, operators will need toMexico, it has built a portfolio of companies across Latin choose their business models, offerings, regional markets,America and the Caribbean—and it has entered the Unit- and customer segments carefully.S A  T 
  24. 24. Five Ways to Play the Telecom Breakup Because of the turmoil in telecom, the business model customer-relationship-management (CRM) service. To of traditional carriers is breaking apart. In this decon- pursue this approach, operators would need a strong in- structed world, operators will need to be both selec- novation pipeline. tive and aggressive in building businesses out of the fragments of their former selves. Five strategic options Platform Provider. Platform providers could supply specific are likely to emerge, of which operators can probably functionalities to other companies. Amdocs Limited pro- pursue two or three simultaneously. (See the exhibit vides CRM, billing, and operations support for mobile below.) operators. To pursue this model, carriers would need to develop efficient state-of-the-art global operations. One-Stop Shop. Many consumers and small enterprises are looking for trusted sources to help them sort through Network Developer. Operators could choose to build net- new services and products. Operators could become their work infrastructure for other operators, as ReggeFiber is partner of choice through enhanced retail capabilities doing in the Netherlands. This model would require strong and a broader footprint. project-management skills and a knowledge of local mar- kets and municipalities. Best-Practice Network Operator. Carriers could sell their net- work-operations capabilities to other operators. Bharti To thrive in the next phase of telecom markets, carriers Airtel, for example, has partnered with equipment maker need to focus on those businesses that create value and Ericsson to manage parts of its mobile network in India. excise those that do not. And because today’s innovative Such arrangements could serve as models for larger-scale services are developed at warp speed and exist in “per- developments that take advantage of scale, standardiza- petual beta” while the kinks are worked out, they will tion, and offshore operations. have to introduce Silicon Valley–type development capa- bilities. Global End-User Service Provider. Operators could develop global services such as salesforce.com, a cloud-based Operators Can Choose a Combination of Strategic Options Develop Build Operate Integrate Sell Serve Main strategic options Content 1 and 1 One-stop shop for customers communities Devices and local 2 Best-practice network operator networks 3 2 End-user services and 3 Global end-user service provider applications Platforms 4 Platform provider 4 Networks 5 Network developer 5 Data centers Traditional telco model Source: BCG analysis. T B C G

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