A second chance for telecoms
Peter Martin takes a peek at the private thoughts of a strategist at one of Europe's troubled telecommunications companies
Published : Dec 17 2001 21:04:11 GMT | Last Updated : Dec 18 2001 17:34:05 GMT
To: CEO, Incumbitelel
From: Head of Strategy
Re: Shaping our destiny
You asked for a response to the (anonymous) comments of one of our big shareholders in yesterday's newspaper. He said: "I fear the company has lost control of its future. It seems to be drifting, with its main businesses steadily eroding under pressure from new entrants and from regulators. I don't think management knows how to regain the initiative."
So unfair. Alas, this view seems to be widely shared, since we have lagged behind the modest revival in European telecommunications shares this autumn. In this paper, I set out how a former telecoms monopoly like us in a medium-size European market can regain control of our future.
First the bad news: our investor has a point. Taking on heavy debt, as we did in the telecoms boom, means accepting constraints on our actions. Committing to a third-generation deployment plan, as we did to gain our licence, sets us on an investment path dictated by others. Living within a tight regulatory framework - about to be reinforced by the new European Union telecoms regulation package agreed last week - limits our freedom of commercial action and enforces a slow decline in market share.
We could ignore this when the overall market was growing at 20 per cent a year, at the peak of the late-1990s boom. Now, however, McKinsey* forecasts overall industry revenue growth at little more than gross domestic product. We are trapped in a slow-growth industry, with unsustainable debt: more than $200bn (£137bn)for the eight largest European telecoms companies.
But there is some good news. Two of our three main businesses - wireless and data services - are growing significantly faster than GDP and offer substantial scope for cross-border economies of scale, if we are bold enough to take them. Our third activity, the conventional fixed line business, is the real problem - but even here there are imaginative solutions.
The rest of this paper addresses our strategic options but they are unachievable unless we can simultaneously improve our operational performance. In particular, that means: Serious cost-cutting. We've slimmed down the business since privatisation but there is more to do. That won't be popular - but we need to remind government and unions that our primary responsibility is now to shareholders. Much better marketing. We must be smarter at devising packages of services that our customers want and pricing them attractively. Set the marketing department free to shape new packages. Don't confine it to coming up with cute names for offerings designed by engineers and accountants. Seizing the mobile opportunity. A new generation of organiser-like wireless handsets is (at last!) about to launch, such as next year's Handspring Treo. This creates a real opportunity to sell replacement handsets and generate extra service revenues. We must push the new gadgets hard through our distribution partners and roll out a general packet radio service to make the best of their new features.
Now, on to strategy. First, wireless. The European Commission** estimates that mobile services make up 38 per cent of the European telecoms market, up from 23 per cent in 1998. In Spain, Portugal, Austria and Finland, mobile phones already generate more revenue than fixed ones. But EU penetration is now 73 per cent, so future growth in new users is limited.
There are cross-border economies of scale in wireless service, in procurement, engineering and branding. McKinsey estimates six wireless operators already hold more than 70 per cent of European subscribers. "Because of the need for scale, European wireless will eventually be dominated by three or four large operators," it says. I'd say it is already clear that Vodafone and France Telecom's Orange will make the cut. Deutsche Telekom, the UK's MMO and Spain's Telefonica Moviles will fight for the other slots. The rest of us must choose the best time to cash in our leading national position.
Remember that former fixed line monopolies are mobile market leaders in every European country except the UK, with juicy market shares of up to 60 per cent. That has got to be worth something when the big boys' finances allow them to think about acquisitions again in two to four years' time. To set ourselves up for this deal, we'll have to do a first-rate job in selling those glamorous new handsets.
Next, business data services, which are also growing fast. Like most European telcos, we are the dominant provider to our local companies. A few years ago we were expecting serious international competition from powerful alliances such as Concert, Unisource and Global One but all three flopped. There's a real opportunity for someone to create a pan-European - or even global - business data services consolidator. It could be us. But do we have the nerve? And the finances?
In the fixed line business, by contrast, there are no cross-border economies of scale. But if we get the marketing right, we can transform our customers' grudging acceptance of our services into enthusiasm. And that would let us think the unthinkable: spinning off the infrastructure into a "wires business", a stable low-growth utility that takes on most of the debt. With a private equity firm as the key investor, it would provide basic services to us and to other "asset-light" telcos that would own the customer relationships but not the wires. Customer inertia would let us retain the dominant market share but the local loop would be unbundled and the regulator would be off our back.
If we play this right, we can escape our debt trap, free ourselves from much of the regulatory burden, cash in our sub-scale wireless business and fill a gap in cross-border data services. Of course, this is the sort of visionary thinking that landed us in our current mess. (Remember the glossy Incumbitel 2000! corporate plan?) But at least it would show our shareholders we're not just drifting.
*Facing disconnection: Hard choices for Europe's telcos by Josep Isern and Maria Isabel Rios, McKinsey Quarterly, 2002 No 1, www.mckinseyquarterly.com
**Annexes to the seventh report on the implementation of the telecommunications regulatory package, Commission Staff Working Paper SEC (2001) 1922 Brussels, 26.11.2001. www.europa.eu.int
Contact Peter Martin
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