Detecon: Managing the Profitability of Eastern European Mobile Telecommunication Carriers

Opinion Paper Managing the Profitability of Eastern European Mobile Telecommunication Carriers 2010 / 03 We make ICT strategies work Managing the Profitability of Eastern European Mobile Telecommunication Carriers Contents 1 Executive Summary............................................................................................. 3 2 Current Market Situation...................................................................................... 4 3 Benchmark Results ............................................................................................. 6 4 Strategic Measures............................................................................................ 10 5 Potential Detecon Support................................................................................. 12 6 The Authors ....................................................................................................... 13 7 The Company .................................................................................................... 14 Opinion Paper 2 Detecon International GmbH Managing the Profitability of Eastern European Mobile Telecommunication Carriers 1 Executive Summary Nearly all major European telecommunications carriers have stakes in Eastern Europe1. Against this background, Detecon performed a benchmark study on the financial performance of Eastern European mobile telecommunications operators in late 20092 in order to learn more about the subsidiaries’ value contributions to the groups as a whole and to highlight strategic measures for those charged with governance. Our scope included 22 countries from Eastern Europe representing around 496 million mobile subscribers. We assessed the data of mobile operators serving around 350 million subscribers in 14 countries and benchmarked the results against mature and integrated peer operators (Vodafone, Telenor, Verizon, AT&T, Telefonica, Deutsche Telekom, France Telecom, NTT DoCoMo). Detecon focuses on three financial KPIs3. The benchmark shows that Eastern European mobile operators are still profitable. However, this paper emphasizes the need for strict control of financial performance, and Detecon recommends those charged with governance both at headquarters and within local subsidiaries to collaborate closely, as this will be the only effective approach to maintain profitability. Russia Estonia Subscribers in Scope [mio.] Latvia 496 Lithuania 500 Belarus 400 347 Poland 300 Ukraine 200 Czech Republic Slovakia 100 Moldova Hungary 0 Romania Total Covered Slovenia Subscribers Subscribers Croatia Bosnia/ Herze- Serbia govina Bulgaria Montenegro Macedonia Turkey Albania Legend: Greece Captured Not captured N.A. Figure 1: Benchmark Scope 1 Even though “Eastern Europe” may be a misleading term, as there are great economic, political and historical differences between these countries, Detecon decided to assess them as a group, as it is common practice from a corporate perspective. See also “Wrongly labelled” (The Economist, 07.01.2010). 2 Financial data has been obtained from the annual reports of the operators as of FY 2008. 3 Key performance indicators assessed: EBITDA margin, EVA®, Operational Gearing. Opinion Paper 3 Detecon International GmbH Managing the Profitability of Eastern European Mobile Telecommunication Carriers 2 Current Market Situation Rapid subscriber growth Increased competition Network roll-out Pressure of the new technologies Significant business complexity Start up Growth Maturity Saturation Restart Avg. Life cycle phases of stage telecommunication companies Structure the business and fight with its complexity Revenue driven Profit driven Market saturation, no revenue- driven growth Business inefficiencies prohibit Business innovations Market launch further development Enter/create new License acquisition + Financial downturn markets Eastern Europe Figure 2: Market Stage of Mobile Operators in Eastern Europe US$/month/subs. ARPUs % of population Penetration rates 16 110 100 14 90 12 80 10 70 60 8 50 6 40 4 30 20 2 10 0 0 2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009 Aggregate Mobile Penetration Voice PC penetration Data Wireline broadband 3G penetration Source: Pyramid research Figure 3: Growth prospects remain in data and broadband Opinion Paper 4 Detecon International GmbH Managing the Profitability of Eastern European Mobile Telecommunication Carriers Eastern European telecommunications markets have matured and are now saturating (compare figure 2). Operators are facing business inefficiencies and are under pressure from the effects of the financial crisis4. Moreover, competition is increasing and the need for ongoing investments in new technologies remains. Therefore, revenue-driven business models ought to be replaced by profit-driven ones in order to defend profitability and liquidity. As shown in figure 3, total ARPU5 has constantly decreased until 2006. Since then, aggregate ARPU levels are stable.