Why Telcos are Endangered Species

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Why Telcos are Endangered Species

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Why Telcos are Endangered Species

  1. 1. Why Telco’s are Endangered Species Presenter: Vishal
  2. 2. Table of ContentsTelco’s – Endangered SpeciesIndustry Evolution, Structure, StatusGrowth Continuum, M&A6 Growth Areas, VAS OpportunityTelco’s – Operating ModelAppendixTelco’s – NGOSS for IT StrategyTelco’s – Sweet Spot
  3. 3. Telco’sEndangered Species December 2011 ―The Future Of Telecom: Strategies To Move Off The Endangered Species List‖
  4. 4. Telco’s Industry Today Future Higher Growth & InvestmentExpanding Integrated Online & Telco Svcs. Horizontally Integrated With Many Players Connectivity Service Dominate Revenue Vertically Integrated with few players Clash of Giants Generative Market Comm Services Dominate Revenue OTT Coexist with Ntwk Content E2E Telco packaged servicesAddressable Market Open Connectivity Survivor/Consolidation Market Shakeout Consumers opt for OTT ContentDeclining Multiple Single Svcs & Tools Lower Growth & Investment Vertical Industry Structure Horizontal Source: IBM’s 2015 Scenario for Telco Industry - 2011
  5. 5. The Double Helix: Industries Movebetween Horizontal toIndustry Structure Vertical StructuresEvolution - Horizontal vs Vertical Horizontal Industry Structure Vertical Industry Structure Characteristics: Characteristics: • Modular Components • Integrated Components • Standardised • Proprietary Interfaces Interfaces • High Barriers to entry • Low Barriers to entry • All or Nothing • Mix and Match Maturing Product Mkt. Emerging Product Mkt. Emphasis: Emphasis: • Price • Performance • Flexibility • Functionality • Customisation • Convenience Source: Clock Speed – Charles Fine
  6. 6. Handset OEM’s Moves 2x as fast as Network OperatorsIndustry StructureEvolution - Horizontal vs Vertical Horizontal Industry Structure Vertical Industry Structure Network Operators Handset OEM’s • 30 - 50 Years/Cycle • 15-25 Years/Cycle Characteristics: Characteristics: • Slow Moving • Agile • Rigid • Fragile Source: VisionMobile, Mobile Megatrends 2010
  7. 7. Telco’sEndangered Species Media Horizontally Integrated Operating Condition High Attributes Industry Telstra Revenue in Billions by 2011 24.97 Hazardous Rollercoaster (Size) Revenue Volatility Profit in Billions 3.89 Growth (2%) (CAGR% 2006 -2011) Expected Revenue (2016) Stagnant Blue Chip Expected Revenue Growth (CAGR% 2012- 2016) Low Share of Economy (%) Low 5 Year Annualised Growth High Vertically Integrated
  8. 8. • Top 11 Telcos (Rev. based).Industry • • 7 out of 12 Telco’s have Beta less then 1 Div stocks only, no capital gains (growth)Status Check140.0 50.0% Revenue vs EBITDA120.0 40.0%100.0 80.0 30.0% 60.0 20.0% 40.0 10.0% 20.0 0.0 0.0% AT&T Verizon Telefonica China Vodafone Deutsche France NTT Teleocm Sprint BT Group Telstra Mobile Telekom Telecom Italia Nextel Rev (Bn.) EBITDA (Bn.) Margin EBITDA Mragin Beta 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 AT&T Verizon NTT Deutsche Telekom Telefonica Vodafone France Telecom China Mobile Teleocm Italia Telstra Sprint Nextel BT Group Source: Google Finance
  9. 9. • 7 out of 12 in zone of trouble Industry Status Check Dividend 12.0 AccentureHigh High IBM BT Group 10.0 Apple Rising Stars Falling Stars Cognizant 8.0 Rising Stars Infosys Falling Stars Wipro Tech TCS Microsoft TelstraP/B P/B 6.0 Recovering Firms Telstra 4.0 Telefonica Cisco Yahoo -5.0 0.0 China 5.0 10.0 15.0 Verizon 20.0 25.0 30.0 HP Mobile 2.0 Dogs AT&T Dogs France Low VodafoneLow NTT Telecom Teleocm 0.0 Recovering Deutsche Qantas Italia Firms Telekom -2.0 Low P/E High Low P/E High Undervalued Source: Google Finance
  10. 10. • 6 out of 12 has no or –ve Brand Equity Industry Status Check Enterprise Value vs Brand Value300.0 300.0250.0 250.0 59.5200.0 200.0 43.6150.0 150.0 44.0 72.8100.0 191.1 100.0 178.0 142.4 42.6 50.0 113.2 45.3 50.0 77.5 44.0 11.8 -8.4 40.5 41.6 14.8 37.8 20.0 14.7 22.6 0.0 0.7 6.8 0.0 AT&T Verizon NTT Deutsche Telefonica Vodafone France China Teleocm Telstra Sprint BT Group -50.0 Telekom Telecom Mobile Italia Nextel -50.0 -47.0-100.0 -100.0 Market Cap (Bn.) IBL- Cash (Bn.) Brand Value in (Bn.) Rev (Bn.) Brand IBL- Name Price/Sales Rev (Bn.) EV (Bn.) Market Cap (Bn.) Beta EV/Rev EV/EBITDA Value Cash AT&T 1.4 124.3 237.5 178.0 0.6 1.9 6.1 51.1 59.5 Verizon 1.1 106.6 157.2 113.2 0.5 1.5 3.9 -2.6 44.0 NTT 0.0 53.8 -7.6 0.7 0.3 -0.1 -0.4 -88.3 -8.4 Deutsche Telekom 0.6 60.4 83.0 37.8 1.4 4.8 -7.6 45.3 Telefonica 0.9 84.5 150.4 77.5 1.1 1.8 5.2 23.6 72.8 Vodafone 1.9 73.0 186.0 142.4 0.7 2.5 8.1 76.6 43.6 France Telecom 0.7 60.0 83.2 40.5 1.1 1.4 4.3 -6.8 42.6 China Mobile 2.4 79.9 144.1 191.1 0.2 1.8 3.7 24.2 -47.0 Telecom Italia 0.5 38.8 64.0 20.0 1.1 1.6 4.0 5.7 44.0 Telstra 1.6 25.5 53.4 41.6 0.21 2.1 5.8 15.0 11.8 Sprint Nextel 0.2 33.3 21.5 6.8 0.1 0.6 3.8 -28.4 14.7 BT Group 0.8 30.2 37.4 22.6 1.2 1.2 4.7 -7.9 14.8 Infosys 4.4 6.6 25.5 29.2 1.0 3.9 12.3Source: Google Finance
  11. 11. GrowthContinuum Partnership Maturity Transactional Strategic Joint M&A Agreement Partnership Venture • Access, readily • Create shared • Combine assets to • Assume available value through establish a ownership of capability combined risk, separate business company’s IP, Goal through a funding and entity capabilities , contract with 3rd resource contrib. resources and party talent • Minimal Collab. • Long Term • Long Term (but • Permanent legally Characteristics • Specific Goals Commit. finite) Commit. binding agreement • Finite Commit. • Reciprocal • Each company • One organisation Relationship maintain its own formally cedes • Shared Strategy business ops and control to the other continues to exits apart Example Low Cost: Legal & Integration Complexity High Source: Frost & Sullivan
  12. 12. • Over the past century Six waves for M&AM&A • If no M&A, Future trend is to create low cost playersSix Waves Post WW-1, Tech Changes Telco Oligopoly Merged Source: BCG Brave New World of M&A 2007
  13. 13. • Creating low cost players instead of M&A is a trend driven by lower successM&A • rate in M&A and high associated risks Vertically Integrated players or premium segment players to employ low7th Wave cost player strategy • Portland Acquisition EV/Sale >= 1 (Strange ?) Costs Synergy Leakage Net synergies Minimum control premium Negotiating Range Standalone value Value to acquirer
  14. 14. Telcos6 Growth Areas Own Brand Vertical Industry Solutions Core Services Over The Top • Energy • Social Networking Apps • Improvement of Core • Healthcare • Access independent Product Portfolio • Education communications services • Redefine Customer • Transport • Other app and appstores Experience • Government • M2M Service Enablement • Leverage online • Entertainment • Engaging Marketing B2B Enabling Services Embedded Infrastructure Services (3rd Party) Communications • Data Centre Capabilities • Identity & Authentication • Communications enabled • Mobile Offload • Marketing & Advertising business processes • Payments • Voice and messaging • Customer Care with games • M2M and Embedded mobility connectivity Source: Stlpartners, Roadmap to Telco2.0
  15. 15. Telco’s Return ROIC vs RiskHigh • M&A in a matured and commoditised market (?) Valuation Criteria Telco Valuation Criteria Revitalise Core B2B EV/Sales ARPU Messaging Services Distribute Products EV/EBITDA EV/ No. of SubscribersExpected ROIC to Upstream P/E EV/ Line Installed P/B Subscriber Acquisition Cost Vertical Beta Coefficient Subscriber Retention Cost Infrastructure Play OTT Access Access • What is capital in ROIC • What is Enterprise Value M&ALow Do Nothing Harvest Cash Flows Low Anticipated Risk High Source: Stlpartners, Roadmap to Telco2.0, E&Y Valuation Drivers in Telco
  16. 16. • Consistent Benchmark for Operating Margin or ROCEGrowth • Consistent Benchmark for ROEBenchmark Low Return Low Cost Current Liabilities Wt. Avg. R.O.R Net Working Capital Long Term Debt WACC Operational Assets Shareholders Equity High Return High Cost Goodwill & Other Intangible Assets ROCE - Operations ROE – Cap. Structure
  17. 17. ChallengesTelco’s • • Network Engineering and Technology Lead Business Structured along Product LinesOperating Model • Inherently Efficient • New Kids on the block • Non traditional suppliers from adjacent sectors – Service Convergence Traditional Model Under Widely Used Threat Vertical Partnership Established Model – Telstra, BT, TNZ, Owns, Operates Vodafone And Manages Horizontal/ Disaggregated Specialised Indian Mobile Used by VNO, Operators like Not Widely Used MVNO, Bharti RSP’s Source: Forrester, New Business Models Emerge for Telcos
  18. 18. • Century old Model built on High Barriers to Entry is Under Threat as Telco Model • World has become Flat (Europe dominates) Mindset 1 size fits all and big is not necessarily Agile Vertically Integrated • Integration of the operation from front to back using IT • Move from an interaction to transaction based model Name Own Operate (control) Manage Value Lever Identified Customers IT NetworkLegend: Yes No Source: Forrester, New Business Models Emerge for Telcos
  19. 19. • Recognises No longer can do everything Telco Model • Half Baked and Cherry Picker Partnership Name Own Operate (control) Manage Value Lever Identified Customers IT NetworkLegend: Yes No Source: Forrester, New Business Models Emerge for Telcos
  20. 20. • Specialise and Reject the rest Telco Model • Structure along the horizontal lines – Breaks up the silo’s and move towards transactional mode - MVNO, RSP’s (BT, Virgin Mobile) Horizontal/Specialised • Reveals 3 Value Generators - Network, IT, Customers Name Own Operate (control) Manage Value Lever Identified Customers IT NetworkLegend: Source: Forrester, New Business Models Emerge for Telcos Yes No
  21. 21. • Mostly By Indian Companies like Bharti Telco Model • • Telco’s have choice to Own, Operate, Manage Easy to find partners and leverage economies of scale Disaggregated Name Own Operate (control) Manage Value Lever Identified Customers IT NetworkLegend: Source: Forrester, New Business Models Emerge for Telcos Yes No
  22. 22. Telco’sIT Strategy - NGOSS Process Linking & Core Processes Key Customers Shared Data Automation NGOSS (Linked & Standard) (TAM) (SID) Technologies Lifecycle (eTOM) (TNA) Automating Technologies Linking Technologies Outcome Data Key Customers Business Process NGOSS Lifecycle
  23. 23. Questions Thank you Source: http://www.flickr.com/photos/yggg/774488265/sizes/o/in/photostream/
  24. 24. Appendix
  25. 25. SalesComplexityVendors vs Buyers ―Technology Buyer Insight Study: Defining The Gap Between Buyers And Sellers‖ – Oct 2011
  26. 26. SalesLong Term View Selling is not about relationships Its not because relationships no longer matter rather, what the data suggests is what matters is the nature of the relationships. Challengers win by pushing customers to think differently, using insight to create constructive tension in the sale. Relationship Builders, on the other hand, focus on relieving tension by giving in to the customers every demand. Where Challengers push customers outside their comfort zone, Relationship Builders are focused on being accepted into it. They focus on building strong personal relationships across the customer organization, being likable and generous with their time. The Relationship Builder adopts a service mentality. While the Challenger is focused on customer value, the Relationship Builder is more concerned with convenience. At the end of the day, a conversation with a Relationship Builder is probably professional, even enjoyable, but it isnt as effective because it doesnt ultimately help customers make progress against their goals. This finding — that Challengers win and Relationship Builders lose — is one that sales leaders often find deeply troubling Source: HBR – Challenger Selling
  27. 27. IndustryStatus - Brand Spectrum House of Endorsed Branded Subbrands Housed Brands Brands Master No Shadow Co Same Different Brand as Connect Endorser Drivers Identity Identity Driver Product Product Corporate Corporate Product Corporate Ease of Operation Role of Corporate Brand Infosys TATA Accenture IBM TATA IBM WIPRO Accenture T S Source : Brand Relationship Spectrum by David Aaker & Erich Joachimsthaler

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