Why Telcos are Endangered Species

1. Why Telco’s are Endangered Species
Presenter: Vishal

2. Table of Contents
Telco’s – Endangered Species
Industry Evolution, Structure, Status
Growth Continuum, M&A
6 Growth Areas, VAS Opportunity
Telco’s – Operating Model
Appendix
Telco’s – NGOSS for IT Strategy
Telco’s – Sweet Spot

3. Telco’s
Endangered Species
December 2011 ―The Future Of Telecom: Strategies To Move Off The Endangered Species List‖

4. Telco’s
Industry
Today Future
Higher Growth & Investment
Expanding
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 services
Addressable Market
Open Connectivity
Survivor/Consolidation Market Shakeout Consumers opt for OTT Content
Declining
Multiple Single Svcs & Tools
Lower Growth & Investment
Vertical Industry Structure Horizontal
Source: IBM’s 2015 Scenario for Telco Industry - 2011

5. The Double Helix: Industries Movebetween Horizontal to
Industry Structure Vertical Structures
Evolution - 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. Handset OEM’s Moves 2x as fast as Network Operators
Industry Structure
Evolution - 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. Telco’s
Endangered 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. • 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 Check
140.0 50.0%
Revenue vs EBITDA
120.0
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. • 7 out of 12 in zone of trouble
Industry
Status Check
Dividend
12.0 Accenture
High
High
IBM
BT Group 10.0
Apple Rising Stars
Falling Stars Cognizant
8.0
Rising Stars Infosys
Falling Stars Wipro Tech TCS
Microsoft Telstra
P/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
Vodafone
Low
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. • 6 out of 12 has no or –ve Brand Equity
Industry
Status Check Enterprise Value vs Brand Value
300.0 300.0
250.0 250.0
59.5
200.0 200.0
43.6
150.0 150.0
44.0
72.8
100.0 191.1 100.0
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 12.3
Source: Google Finance

11. Growth
Continuum
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. • Over the past century Six waves for M&A
M&A • If no M&A, Future trend is to create low cost players
Six Waves
Post WW-1, Tech Changes
Telco Oligopoly Merged
Source: BCG Brave New World of M&A 2007

13. • Creating low cost players instead of M&A is a trend driven by lower success
M&A •
rate in M&A and high associated risks
Vertically Integrated players or premium segment players to employ low
7th 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. Telco's
6 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. Telco’s Return
ROIC vs Risk
High
• 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 Subscribers
Expected 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&A
Low
Do Nothing
Harvest Cash Flows
Low Anticipated Risk High
Source: Stlpartners, Roadmap to Telco2.0, E&Y Valuation Drivers in Telco

16. • Consistent Benchmark for Operating Margin or ROCE
Growth • Consistent Benchmark for ROE
Benchmark
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. Challenges
Telco’s •
•
Network Engineering and Technology Lead Business
Structured along Product Lines
Operating 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. • 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
Network
Legend: Yes No Source: Forrester, New Business Models Emerge for Telcos

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
Network
Legend: Yes No Source: Forrester, New Business Models Emerge for Telcos

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
Network
Legend: Source: Forrester, New Business Models Emerge for Telcos
Yes No

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
Network
Legend: Source: Forrester, New Business Models Emerge for Telcos
Yes No

22. Telco’s
IT 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. Questions
Thank you
Source: http://www.flickr.com/photos/yggg/774488265/sizes/o/in/photostream/

24. Appendix

25. Sales
Complexity
Vendors vs Buyers
―Technology Buyer Insight Study: Defining The Gap Between Buyers And Sellers‖ – Oct 2011

26. Sales
Long Term View
Selling is not about relationships
It's 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
customer's 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 isn't as effective because
it doesn't 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. Industry
Status - 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