Key questions of a scenario planning after recession.
In these fast-changing and turbulent times, businesses are facing an uncertain future and conventional business models may no longer be viable. Many management teams will need to re-assess their operations and consider a number of possible scenarios.
As explained before in several articles in this blog, mmC Group thinks nobody can predict what is likely to happen to the overall economy, or indeed, the impact the current downturn may have on the telecom (or any other) industry or on a particular corporate. There are likely to be a range of outcomes, but to survive, management teams need to plan for the potential eventualities.
Managing in a downturn is all about being flexible, anticipating and reacting quickly to changing circumstances. This helps mitigate risks, while also positioning companies to seize any opportunities which arise. Investing management time in planning for different scenarios is not a luxury – given the volatility of the current economic environment, it is a necessity.
We’ve been recently supporting a “Scenario planning” department within a telecom operator in a Assessment of an economic downturn scenario and its impact in their group operations in Europe. This group required business intelligence on the external environment and an objective assessment of internal situation across countries. A common assessment of the divergent scenarios help the operator identify the actions to be taken today in order to mitigate the negative impact or take advantage of the opportunities offered in the future.
The work was done for the CEO that came to us asking: What questions should I ask myself? Here are some of our suggestions:
- How will the telecom business be impacted by an extended economic downturn?
- What geographies in which the company operate in will be impacted most? What are the likely repercussions for the industry and geographies?
- To what extent have we stress-tested our forecasts to account for changes in performance and outlook?
- Have we stress-tested forecasts over different time periods to reflect a potentially extended economic downturn?
- How good are management reporting and information systems at highlighting potential issues?
- What areas need to be monitored carefully?
- What are the key vulnerabilities in the operator’s business model? Is my model flexible enough to allow us to adapt quickly to a new environment?
- What is my long-term financial position? How significant would a material loss of revenue be?
- What are my competitors doing and are there opportunities for organic growth in the sector?
- How bad should performance get before we face a covenant/facility breach?
- Am I appraising the board regularly on performance and scenario planning/management?
I won’t share the final outcome of the project but I would like to share some relevant slides related to the market and the general impact on some major telecom KPIs. Enjoy the reading.
CVA. Happy Thanksgiving weekend to all!
Portugal Telecom revenues drop 2.3%, net profit down
Once during this year, I was really impressed by one of the PT executives who just before starting a meeting told me: crack, if you are coming to the meeting to show me off charts populated with the data we publish in our site, you can directly go by that door. I was not even sit in the meeting room when he kindly received us with this comment, (we just wanted to discuss the top 3 strategic issues that we believed were in the top of his mind) but since that day, I apply that insightful comment in most of our presentations.
However, in the management consulting and advisory industry, it’s more than important to be regularly updated on the financial KPIs and performance of the operator to identify, address and suggest strategic solutions to those problems that appear every quarter after the figures speak. We normally follow the top 1st tier operators in the world and although PT is not within this set, I always remember this fruitful meeting and see how are they performing. For those interested, here’s the update on the last quarter.
Portugal Telecom reports revenues of EUR 1.742 billion in the third quarter of this year, decreasing 2.3 percent year-on-year, due to lower MTA fees. At the same time, the EBITDA dropped 2.7 percent to EUR 656.8 million in the third quarter and the net profit dropped by 36.2 percent to EUR 115.9 million, due to lower MTA fees and rising financial and depreciation costs after investment in new networks and equipment.
The capex dropped 7.6 percent to EUR 307 million, but the capex for the first nine months increased by 17.7 percent year-on-year to EUR 812.8 million, due to large investments in FTTH and set-top boxes and modems for Portugal Telecom’s extending base of triple-play customers. For the third quarter, Portugal Telecom reports a free cash flow of EUR 128 million compared with a negative cash flow of EUR 42.1 million in the third quarter of 2008.
The domestic mobile customer base has grown 5.2 percent year-on-year to 7.084 million on 30 September of this year, adding 104,000 during the third quarter. The number of fixed telephony lines decreased 3.8 percent to 2.76 million and ADSL customers grew 19.6 percent year-on-year to 812,000. Portugal Telecom’s IPTV service experienced a huge growth from 211,000 on 30 September 2008 to 505,000 on 30 September of this year.
Best, CVA.
ONO revenues fall 6.2% to EUR 371 mln in Q3
Reading today ONO’s performance indicators of the last quarter, I wanted to share some of this info in this post.
The Spanish cable operator reported third-quarter revenues of EUR 371 million, down 6.2 percent from EUR 396 million in the year-ago quarter. The decline was mainly as a consequence of the reduction in telephony and variable consumption and the reduction in the residential cable customer base in line with the strategy of acquiring quality customers implemented during the last year.
The EBITDA decreased 0.8 percent year-on-year to EUR 178 million and the EBITDA margin improved 2.6 percentage points to 48 percent. The gross margin grew to 78 percent from 76.7 percent previously. The company moved to a net profit of EUR 15 million from a net loss of EUR 4 million in the same period of the last year.
NOC optimization in the telecom industry.
A Network Operations Center, or NOC, is the primary workspace engineers utilize to monitor, manage and troubleshoot problems on a telecom network. The Network Operations Center offers oversight of problems, configuration and change management, network security, performance and policy monitoring, reporting, quality assurance, scheduling, and documentation by utilizing sophisticated network management, monitoring and analysis tools.
The NOC provides a structured environment that effectively coordinates operational activities with all participants and vendors related to the function of the network. The NOC technicians typically provide support twenty-four hours a day, seven days a week. Typical daily processes include:
- Monitoring operations of all backbone links and network nodes.
- Ensuring continuous operation of servers and services.
- Providing quality support for network users.
- Troubleshooting of all network and system related problems.
- Opening tickets to track and document resolution of problems.
- 24 hours a day, 7 days a week supervised operation by network and system engineers.
There are currently two hot topics related to NOCs where we have been involved: 1) NOC’s O&M efficiency and 2) NOC’s Energy management. As we have recently finished one assignment related to the 1st topic I wanted to share some relevant info for those executives working for telecom operator and willing to improve their O&M NOC processes and procedures.
Most of the CTOs in the telecom industry are under pressure to cut costs while raising network service levels. It is therefore key identify the best strategy towards cost optimization, starting with efforts that will result in returns in six months or less. These returns are then re-invested to drive longer-term, transformational projects. Network automation initiatives are among the projects with the fastest return, often in less than two months.
Unregistered prepaid clients switch off? No business sense.
It is coming the day when the Spanish telecom operators will have to disconnect all pre-paid mobile cell phones unless the owners are registered. Just for those that are unaware of this, let’s explain a little bit the policy: In an attempt to prevent terrorists and criminals using anonymous prepaid mobile phones for communication, the Spanish government issued a decree to disconnect any un-registered phones in the operator’s networks.
The campaign was called “Identifícate” and intended to get the country’s estimated 20 million prepaid mobile phone users to register. The deadline is November 7 2009, after which phone operators will be instructed to switch off service to those who have not provided proof of identity.
It’s not clear what will really happen; According to the Spanish publication “El Mundo”, there are still 9 million subscribers pending registration. Let’s make a simple calculation of what does this mean: according to MarketResearch.com the Spanish monthly average ARPUs will continue to decline across operators. The industry average monthly ARPU will fall from €29.62 in 2008 to €20.05 in 2013 so we can roughly assume that the ARPU in 2009 can be positioned in the €25. Considering a total amount of 8 million clients stopping consumption in November, that means that the Spanish operators will stop generating 200 million Euros / month in November and so on…
Will operators accept loosing this relevant amount of money? How are they going to replace this revenues? How will prepaid users coming from other countries to visit Spain be treated? Does this really make business sense?
I had a similar case when we were working in Sudan for one of the mobile players. The government also required the deactivation of the unregistered prepaid clients for security issues. It was clearly stated that this requirement significantly hurt our client that strictly followed the policy affecting to near a 40% of their base. I have to say that we recommended not doing so, as the financial and market-repositioning impact was so big that we would require no less than a year to recover.
Now the personal part. I know that the law is the law, but I guess that no-one in the government level have dedicated one single minute to think seriously about this. This move will doubtless please the authoritarian “nothing to hide, nothing to fear” brigade, however it’s another major blow against the right to privacy and the presumption of innocence. Yes, cellphones can be used by criminals and terrorists. As can the postal service and – for example in London – public buses. Should letters only be delivered if an authorised sender id is attached? Should we have to provide identification every time we board public transport?
Taking out the more-than-relevant financial issues that all players will suffer as a result of such a decree, a move such as this is not only a direct threat to privacy, it reverses any assumption of innocence. If you don’t register your phone you must be up to something so you’ll be cut off. At the moment this is purely a Spanish issue, but how long will it remain so? The British government in particular have a record of justifying attacks on privacy using the fear of terrorism and the argument that “Everybody else is doing it”. Watch out for something similar coming soon in legislation near you…
Fixed line and BB market review: Spain 2009
It’s impressive to see how the Spanish industry has changed in such a short period and, as written before about the net adds battle, it’s amazing to see the huge difficulties that all the operators have to beat the incumbent, Telefónica, and increase their revenues’ share of the market. A market where fixed lines represent the majority of the value although the source of revenue growth lies in broadband. Some interesting figures:
- Fixed market revenues account for ~3€ Billion, of which Fixed line revenues comprise 55%. Yet the fixed line contribution is declining by -6.7% GAGR from 2007-2009
- Broadband fuels fixed revenue growth by stimulating line numbers and revenues by over 10% CAGR in the last 3 years
- Future broadband growth potential remains positive with the possibility of providing BB service to the 3.9 Million PC-equipped Spanish households with only dial-up or no internet access
- Decreases in Telefónica’s wholesale prices resulting from regulation, has allowed for the faster proliferation of higher speed connections by making them more affordable to end customer. Wholesale price reductions have reached up to 74% in some cases, yet have not fully been translated into customer savings
- The price decreases have thus allowed operators to capitalize on revenue generation through cheaper offers and better margins from lower costs
We will soon deliver our yearly broker report on the telecommunications situation in Spain, but I wanted to publish an executive summary of it (embed presentation) and highlight some interesting facts and insights with our blog readers so that you can clearly understand the fixed and broadband market situation:
Fact 1. The Spanish fixed market is in decline. While broadband is the only growth source it still falls behind Fixed-lines as the main contributor of revenues
- The economic downturn appears to have impacted the fixed line market. Previously growing at 10% from ’07-08 then slowing abruptly to 0.2% from `08-´09
- Broadband continues to grow and while the ceiling has not yet been hit, there are initial signs of slowdown
- The Pay TV market has been stagnate for the last 2 years and has suffered a significant revenue erosion of ~30 million € since 2008
Fact 2. Over the last three years, market players have undergone consolidation in an effort to challenge Telefónica’s dominance. Unfortunately for the challengers, Telefónica is far from being even worried.
- Since 2007, Ono acquired Auna, Orange bought Ya.com and Vodafone took over Tele2
- Ono and Jazztel may represent residual opportunities for further buy-outs although current valuations are too high for any player to consider a potential merge or acquisition.
Fact 3. The Spanish market is characterized by an increasing appetite for bundled offers and higher speed Broadband (BB) connections.
- Currently 68% of the BB market includes bundling. While players such as Orange already offer Pay TV in their bundles, others like Vodafone may find it increasingly difficult to compete without a pay TV platform
- The majority of BB connections lie in the 3Mb to 10Mb interval, with the highest concentration of offers at 6Mb. Telefónica consistently has a premium over other competitors offers, Orange has some of the cheapest offers
- The Spanish Telecom Regulator is supporting connection speed increases through wholesale price reductions. Additionally, it is encouraging further price reductions in the market by allowing Telefónica to offer naked DSL
Fact 4. Despite aggressive pricing efforts by competitors Telefónica still enjoys a comfortable leadership position in the fixed-line market
- Orange still holds only a minute market share (1.8%) of active fixed lines. Over the last two years, Orange has succeeded in growing its share of lines but at the expense of loosing revenue share
- Telefónica has lost more ground in the highly competitive residential than in the business one. Orange has a better position in the residential segment where a strong price war is taking place
Fact 5. Telefónica has managed to hold on to its broadband market share. Vodafone and Jazztel are capturing market share from Orange and Ono
- Orange´s position may be the weakest of the market, having lost broadband customers (~97,000 in 2008) despite the fact the market is growing.
- Vodafone and Jazztel have been the recent winners in the last years, with increases of a 159% and a 78% (respectively) of net adds as % of their customer base in 2007.
Fact 6. The Pay TV market is stagnate, but Orange has managed to grow its customer base to 2.5% representing a ~155% CAGR from ´07-´09
- Due to the current unavailability of Pay TDT services (e.g., Gol TV – dedicated football channel), this year may present an opportunity for capturing new Pay TV customers before the Pay TDT threat appears
- Telefonic’a imagenio will end with near 680K subscribers, a number that has been nearly flat in the last 2 years. However, Telefónica reported in its latest investors meeting in October a growth up to 1.2M clients in 2012.
Fact 7. Telefónica’s dominant position has a lot to do with customer satisfaction. Telefónica has the lowest complaint ratios in the fixed market and has managed to remain the leader despite having the most expensive offers. This is suggests that the quality of its service provisioning is positively valued by customers
- In 2008, Orange and Ya.com had the highest complaint ratios on broadband service provisioning. Their performance has since worsened during 2009
- Additionally, Orange and Ya.com have the poorest performance rating among competitors for customers service satisfaction
- Vodafone, Jazztel, Ono and rest of regional cable operators have similar customer satisfaction rates, being the first two, the highest rated in terms of incidence calls per 10K customers.
Enjoy the reading. Best, CVA
Latecomers to mobile phone markets struggle.
There was an interesting article yesterday that took my attention in my headlines telecom RSS sources. Reuters, published a short benchmark of three mobile operators that tried to break their respective markets whilst being the last player to penetrate it.
It’s amazing to see how 2010 is expected to be the year of return to profitability for these challengers (considering that their financial results show they were significantly EBITDA negative over the last four years and that countries such as Spain or UK currently hold the toughest recession and economical downturn ever). Having worked as a consultant for one of these players, and being the markets analysed Spain, Poland and the UK, I have my doubts: this turn-around into black numbers can come in 2010, but I would expect some delays, at least for Yoigo and 3. Good luck in any case.
Very interesting article. Very good Reuters. Enjoy, CVA.
FACTBOX-Latecomers to mobile phone markets struggle.
As France prepares to accept bids for a fourth mobile phone licence on Oct. 29, here is a look at operators that have tried to break into European markets long after rivals. These three operators were the last to enter their respective markets and none have yet turned a profit.
SPAIN – YOIGO
Main shareholder: 76 percent owned by TeliaSonera
Price paid for the licence: 136 million euros in 2000
Investment in network and operations: 1 billion euros
Launched first commercial offer: 2006
Current market share: 2.2 percent
Financial results: 117 million euro in losses in 2008, aims for EBITDA profit in 2010The Spanish private company obtained the licence in 2000. But it struggled to build a network and did not launch commercial services until 2006. As a result, Yoigo’s competitors had already signed up 45 million customers by the time it came to market. Telefonica’s Movistar brand held half the market, while Vodafone and France Telecom’s Orange split the rest. Yoigo, which is 76 percent owned by Norwegian telecom firm TeliaSonera, has spent 1 billion euros on infrastructure, recruiting clients, and building a brand in recent years.
Is it possible to win the broadband battle in Spain?
Spain’s telecommunications watchdog, Comisión del Mercado de las Telecomunicaciones (CMT), approved in 2008 a first set of proposals to liberalise the country’s fixed telephony traffic market and its prices, in an effort to prevent anti-competitive practices and promote telecom challengers against the incumbent, Telefónica. The fixed telephony regulations put forth by the CMT loosened connection charges and gave the operator freedom to decide on the price. The regulator continued to set the maximum annual increase for subscription fees, but allowed Telefónica to reduce the subscription fee.
For the fixed telephony wholesale market, the CMT proposed regulation for call origination, the service that allows an alternative operator, interconnected to the Telefónica network, to attend calls using the fixed telephone network. The regulatory body made sure that the Spanish telecoms giant could provide two wholesale offers – the reference interconnection offer and the wholesale access to the telephone line.
What has happened almost two years after? Please take a look at the following slide:
If we see the subscribers vs. net additions per player (defined as the number of new subscribers, or gross adds, minus the number of customers that drop service, or churners) we can take different conclusions:
- The Spanish market has been a question of one player until end of 2008. The effort to promote alternative players has clearly not worked. It’s not just that Telefónica accounts for more than 55% of total market but also that Telefónica has clearly won the acquisition battle in the market.
- Telefonica’s acquisition rhythm has been halved in 2009, giving room to Vodafone and Jazztel which net-adds growth went over 150% and 78% each.
- Vodafone managed to gain one position in 2 years, being the fourth broadband player in the market after buying Tele2 and outperforming in customer acquisition.
- Orange and ONO need serious help. Having reacted after having negative net adds from Q108 to Q109, Orange didn’t manage to gain more than a 10% of the total net additions. ONO did a little bit better, but for sure bellow shareholders expectations, getting a 14% of the total net adds.
What it’s crystal clear is that it’s difficult to fight against the incumbent giant. Therefore the CMT has recently decided to cut the wholesale prices for unbundled loop access to Telefonica’s ADSL network by 25 percent. Dubbed ADSL-IP (in Spain) and GigADSL (at regional level), these services are essential for alternative operators that plan to offer ADSL services throughout the country and compete with Telefonica. CMT has also adopted a resolution to reduce the wholesale rental price of the shared loop by 31.3 percent, from EUR 3 per month to EUR 2.06. In the shared loop mode, Telefonica continues to provide the voice service, while the alternative operator offers its customers broadband services, renting only the loop segment that uses the non-voice frequency band spectrum.
Will this be enough? No. Or better asked? Will this CMT’s cut change the operator’s current trends? I don’t think so. There are alternative operators that seem to have clear which strategy to follow and that will benefit of it, but there are others that are moving in Zigzags following the competitors’ movements and that require a serious turn-around strategy.
CAPEX optimization and financial performance in addressable markets, regional expansion through indirect ADSL, retention and prevention strategies towards valuable clients and operational excellence to improve customer satisfaction would be the big suggestions that I foresee mandatory for the alternative players.
Is it possible to win the broadband battle in Spain? Some players are clearly showing there’s light at the end of the funnel trying not to wake up the sleeping giant. The future is promising but the threat is big, very big.
Best regards
CVA
Mobile broadband computing to explode in 2010?
I just received Disruptive Analysis’ new report, “Mobile Broadband Computing”. It provides a detailed analysis of the market for fast wireless data connectivity from notebooks, smaller “netbooks”, and the new category of mobile Internet devices (MIDs).
The popularity of flatrate data plans and cheap HSDPA modems has accelerated the market to reach 35 million subscribers worldwide at the end of 2008, more than doubling in a year. New innovations like “free” subsidised netbooks, sold through mobile carriers’ channels are driving expectations of a continued explosion in 2009 and 2010.
There is widespread enthusiasm for notebooks and MID featuring built-in 3G or WiMAX modems. Long-term prospects for the broader market are exceptional, with the global market growing to over 340 million active users by the end of 2014, using a mix of 3G, WiMAX and LTE networks. But despite this, some of the short-term optimism is unjustified.
Why going green makes good business sense in telecom?
As explained in my previous post related to Green Telecom, energy consumption is one of the leading drivers of operating expenses for both fixed and mobile network operators. Reliable access to electricity is limited in many developing countries that are currently the high-growth markets for telecommunications.
It’s been a long time until telecom’s carbon footprint has been a hot topic in the industry. Without preventive measures, it is expected to increase dramatically in the coming years reaching the 179 MtCO2e in Mobile infrastructure related assets, 51 MtCO2e in Telecom devices or 49 MtCO2e in Fixed broadband. However, increasing legislative and market pressure will force telecom operators to rapidly reduce their carbon footprint.
As an example, Vodafone has recently said it will halve its carbon dioxide emissions by 2020, largely by making its networks more energy efficient. Like Vodafone, some other telecom companies and handset manufacturers have already decided to conduct similar exercises (as listed in the European ICT companies’ commitments to targets and deadlines for CO2 and greenhouse gas emissions (GHG) and energy efficiency / consumption) such as Deutsche Telekom (20% reduction of CO2 emission by 2020), France Telecom (20% reduction of CO2 emission by 2020), Telecom Italia (30% increase for eco-efficiency indicator by 2020), British Telecommunication PLC (80% reduction of CO2 emission by 2020) or Nokia (6% reduction of energy consumption of offices and sites by 2012).
Nice promises, right?. The bad news for the operators and network infrastructure vendors come when realizing that corporate social responsibility initiatives (with a goal of reducing their networks’ carbon footprints), can decrease their competitive advantage and financial performance. Therefore, operators have to prevent any potential downside with a clear and straightforward green strategy to comply with regulation at the same time they obtain significant economical benefits.
This is not just a question of reducing the power requirements of their equipments. Some additional factors will converge over the next several years, creating significant market potential for greener telecom networks. These market drivers are manifesting themselves in several ways within the global telecom industry. The large equipment vendors are creating highly efficient network elements that consume far less power than in previous hardware generations.
Operators and vendors alike are exploring innovative network architectures and topologies that will support more capacity with fewer infrastructures. And the entire industry is working to incorporate renewable energy sources such as solar and wind power, particularly for off grid mobile base stations in developing countries where the vast majority of subscriber additions will occur over the next five years.
mmC Group has recently closed a strategic partnership with off7, a specialized carbon emissions consultancy with which we have collaborated in diverse green strategy assignments having done a detailed examination of the opportunities and challenges associated with improving the energy efficiency of fixed and mobile telecom networks, as well as utilizing renewable power sources such as solar photovoltaics, wind energy, and fuel cells.
As a result, we have gained a comprehensive experience in the technologies as well as the key drivers of market development over the next five years and beyond. Detailed business case analyses have been provided to our clients, along with an in-depth examination of industry participants’ motivations for deploying greener networks. Forecasts included energy efficient network infrastructure capex spending and emissions reductions from fixed and mobile networks as well as telecom data centres have been delivered…but what for?
Just for giving the answer to the question: Can a telecom operator become green? And the answer is YES but there’s another question to rise: Which is the potential downside (either operational and financial) of doing things wrong? And the answer is SEVERE.
A carbon reduction commitment does not specifically deal with the scenario where a company outsources parts of its business. Considering that most of the reductions come from the infrastructure and that most of the operators are looking at infrastructure outsourcing agreements, we have some problems to deal with: Who will bear the cost of participation? Who will bear the cost of investing in low carbon technology? Who will be responsible for carbon strategy? Does it make business sense to offshore carbon-heavy activities to a jurisdiction with lower environmental costs? etc.
As usually, I have prepared a case study on how do we approach to Green telecom strategies in the telecom sector. I would really appreciate to get your comments and help me answer to the original question: Can a telecom operator become green?.
Best regards, CVA.
