re: McKinsey on European (Wireless) Telecomms
>> Facing Disconnection: Hard Choices For Europe’S Telcos
McKinsey Quarterly
2002 Number 1
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Wireless
Europe’s wireless industry is under intense pressure. Demand for the new technologies in which the sector has invested so heavily has fallen short of projections, and returns from that investment are unlikely to materialize for five to ten years. Substantial restructuring will certainly continue.
So far, the flurry of mergers and acquisitions has meant that the six leading wireless operators hold more than 70 percent of the subscriber base in Europe - a clear sign of the value that operators attach to scale in this business. Vodafone, for example, has said that synergies from consolidation could represent up to 20 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA) within two to three years. Among the benefits of size and geographic coverage are preferred access to new technology, the development of a global brand that offers scale advantages in marketing, faster launches for new products and services, better offerings to corporations, and preferential roaming agreements (the pacts that allow customers to use their mobile telephones outside the base of their operators).
Six Operators Lead the European Market (Edited Exhibit)
Operator Subs % 1997 Subs % 2000
Vodafone 8% 24%
BT 6% 12%
FT/Orange 7% 12%
TIM 18% 10%
DT 2% 8%
Telefonica 6% 6%
Total 47% 72%
The pace and extent of the restructuring still to come will be affected by the emergence of mobile virtual-network operators (MVNOs),1 which buy capacity from existing network owners. MVNOs such as Virgin Mobile, already present in some markets, will have an increasingly great impact as more countries change their regulations to give these asset-light operations access to networks. The development of wholesale markets, which enable infrastructure owners to sell excess capacity more easily, will also determine how quickly MVNOs expand throughout Europe. Since incumbents have to bear the heavy infrastructure costs that virtual networks avoid, those incumbents will need efficiencies of scale to compete.
How quickly applications for wireless data services catch the public’s fancy is another question that will affect the timing of this restructuring. If our expectations are confounded, and public acceptance takes less than five years to develop, the contenders would have more room. Some of the pressure would thus be lifted from incumbents, which would share in the accelerated market growth. For most incumbents, though, we expect that growth will come too late to help them carry on as integrated operators.
Because of the need for scale, European wireless will eventually be dominated by three or four large operators - focused companies and incumbents that have successfully followed an integrated approach. At the national level, some domestic operators will remain competitive thanks to their existing infrastructure, but they will find their market share slowly eroded by larger rivals. We envisage that companies such as Orange and Vodafone, which already have a healthy presence in all of the biggest markets, will try to complete their pan-European coverage band as they search for ever greater scale. Others, such as Deutsche Telekom, Telecom Italia Mobile, and Telefónica Móviles, which have operations in one or two large markets outside their home countries, could also bid for a wider Continental presence, though not all will succeed. Smaller companies that avoid being swallowed by the bigger fish could merge among themselves or forge alliances in an attempt to build regional competitors.
The unfolding of such a scenario could, however, be hindered by government antitrust watchdogs and by regulators pushing for increased competition and lower prices. Moreover, some mergers could make redundant the licenses for which each successful candidate paid billions of dollars. Writing off so large an investment would be a bitter pill to swallow.
Data
In Europe, revenue from data services - which make it possible to transfer digital information between different computers - has been growing by about 20 percent a year (compared with about 4 percent for voice services) as more companies wire together their branches and outlets and more consumers seek access to the Internet. At first, providers of these services focused on large corporations, such as banks, that rely on the massive real-time exchange of information, but the market is quickly diversifying.
National incumbents have strong local positions, since about 90 percent of revenues still come from domestic traffic. But these positions are coming under attack, first from operators of city rings and metropolitan area networks2 and then from international data carriers, which are turning to domestic traffic as they attempt to find uses for their overcapacity. As these attackers try to expand their reach, they are moving quickly into the small- and midsize-business markets.
If incumbents do nothing, they will see attackers erode their share of domestic traffic. But to defend their current positions, they will have to make an expensive commitment to deliver more efficient services and to develop new capabilities. To harvest some of the growth potential, they could pursue asset-light data services for their domestic customers’ foreign operations or target promising foreign niche markets - small and midsize businesses, for example. A further possibility is data hosting (services that manage and distribute content within a network).
The boldest option would be to enter the international arena with a large acquisition, perhaps of a global company hurt by falling market valuations. Such a strategy would depend heavily on scale to make an adequate return on, say, infrastructure investments and to attract the necessary expertise and other resources. We estimate that a company would have to be among the top three in each national market it entered if it is going to reach the appropriate scale.
For an incumbent with the right internal skills and expertise, focusing on data services could be less risky and less expensive than focusing on wireless operations. Although both data and wireless strategies can be approached one country at a time, the up-front costs for wireless tend to be much higher. Moreover, providers of data services can more easily focus on customers concentrated in small areas, such as urban centers. <<
- Eric - |
