BEYOND MAINSTREAM JUNE 2015 SUCCEEDING AS A TELECOM CHALLENGER How to win facing strong competitors v THINK ACT SUCCEEDING AS A CHALLENGER 2ROLAND BERGER STRATEGY CONSULTANTS2Mobile operator challengers which enter markets with at least two players present have no guarantee of success – and many of them fall short of grabbing a large enough chunk of the subscriber base. p. 3 There is no 'one size fits all' for becoming a successful challenger, but the strongest performers tend to focus their efforts on capital/cost effectiveness, accentuated differentiation of products/services compared to the competition and ensuring a regulatory framework that makes it possible for them to compete effectively. p. 4 Based on the efforts of successful players, struggling challengers need to ensure four key success factors to take market share: p. 9 THE BIG3 Viettel Vietnam p. 7 ROLAND BERGER STRATEGY CONSULTANTS3 THINK ACT SUCCEEDING AS A CHALLENGER Struggling in competitive markets. Mobile telecom operators across the globe face the challenge of generating enough profits to recuperate their initial investments in spectrum licenses and network roll-outs, to cover the substantial recurring investments needed for new network technologies (e.g., 3G and 4G) and to improve their service quality. rates (see A). Operators which fail to achieve 10-15% market share often struggle to secure EBITDA margins of around 20%, which are typically needed to cover CAPEX investments, interest payments and tax. To improve performance, late entrants must take action on three fronts: A. Review the cost structure to become leaner B. Strengthen the product, service and channel differentiation versus competitors C. Obtain the necessary support to compete Ideally they should act on these dimensions in parallel. In our work with clients, we have seen that operators who fail to act early to improve their situation risk entering into a downward spiral of unstable management and deteriorating brand image. Although it's true that repositioning a struggling challenger requires planning and considerable effort, the alternative to bringing this about is often even less attractive – if viable at all. Many challenger operators (late entrant operators which entered into markets with two or more incumbents) have faced difficulties competing in this context. This uphill battle is reflected in their market share, where many fall short of securing a sizeable customer base. In markets with more than 80% mobile penetration at the time of the challengers' launch, the average market share for third entrants three years later was 16%, less than half of a three- way split of the market. However, the actual market share per operator varies substantially, from a comfortable 42% to a paltry 1%. Market share is far from the only element that drives operating profits. However, our experience in working with mobile operators, their shareholders and lenders, indicates a relatively strong relationship between market share and EBITDA margins. An analysis of 150 operators in three-operator markets confirms this, showing a significant, positive correlation between market share and EBITDA marginTHINK ACT SUCCEEDING AS A CHALLENGER ROLAND BERGER STRATEGY CONSULTANTS4 Av CORRELATION BETWEEN MARKET SHARE AND EBITDA MARGIN RATE FOR 150 OPERATORS IN 3-PLAYER MARKETS (QUARTERLY DATA, Q4-2014) A. REVIEW THE COST STRUCTURE TO BECOME LEANER Late entrants have levers available to improve cost efficiency both in the short- and long-term. One of these is network capital efficiency, where we find that clients who take a holistic approach, accounting for both technical and commercial aspects, are the most successful. This can help operators become more selective and cost effective in both maintenance and technology roll-outs. Increased network sharing, for instance, could allow operators to focus their technology investments on core areas, whilst transforming other capital investments into operational expenditures. However, such a strategy requires careful area-by- area analysis of potential price and traffic volume evolutions in order to ensure that the sharing is financially attractive compared to capital investments. For a more detailed description of how to optimize network costs, see Roland Berger's publication Building and managing a value-centric network. Staff and overhead costs also require review, and the potential levers to reduce costs merit detailed assessment. Improving HR policies for performance management, recruitment and training as well as working to reduce other operational expenditures could help operators 'do more with less'. B. STRENGTHEN THE PRODUCT, SERVICE AND CHANNEL DIFFERENTIATION VERSUS COMPETITORS Several late entrants have been successful in taking market share by introducing new product combinations to the market – better addressing under-served segments. Their strategies include an emphasis on online/non-physical distribution together with a simple and aggressively priced product portfolio. Strong customer segmentation has also led many challengers to focus their network on priority areas (e.g., major cities), while leveraging roaming agreements to serve customers in other areas. Customer segmentation can also lead operators into EB ITD A m ar gin ra te R2 = 0.28 Subscriber market share 60% 50% 40% 30% 20% 10% 0% 70% -5%-10%0%5%10%15%20%25%30%35%40%45%50%55%60% Source: Company data, Roland Berger analysisTHINK ACT SUCCEEDING AS A CHALLENGER ROLAND BERGER STRATEGY CONSULTANTS5 identifying competitive advantages in covering rural zones, where incumbents have little to no presence. For a more detailed overview of what opportunities rural populations in developing countries represent, we invite you to read the Roland Berger publication Opportunities in rural areas of emerging markets for mobile telephone operators. C. OBTAIN THE NECESSARY SUPPORT TO COMPETE Late entrants may find it hard to challenge incumbents on price due to their spectrum allocation, unfavorable roaming agreements and/or mobile termination rates (MTR). Regulatory authorities need to provide the necessary framework for late entrants to compete effectively in the market. Typical solutions to achieve this include asymmetric termination rates and caps on incumbents' national roaming prices. Without such regulatory support, late entrants are likely to face great difficulty becoming attractive to customers while securing adequate profits. Challengers that find themselves in an unfavorable regulatory context should make it their priority to lobby authorities so as to produce changes to the regulatory framework. Operators that have successfully managed to obtain regulatory changes in their favor include Zain in Saudi Arabia, LIME in Jamaica and Movistar in Peru. Learning from others Identifying individual actions to drive commercial and financial performance along the improvement fronts is necessary, but struggling challengers will need to combine these into a coherent whole in order to succeed. This is where we believe they have lessons to learn from successful peers in other markets. For this article, we have selected successful challengers from different countries and continents based on their ability to take substantial subscriber market share. Although late entrants in dire straits can be inspired by others' success, they should carefully assess the lev