Transparency Key to Avoiding Catastrophe for Telco Management
2017.02.24   |   2 pages   |   NextGen Strategy Reports

Author:
Jon Newman


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Issue: Transparency Key to Avoiding Catastrophe for Telco Management

Telco share prices depend heavily on investor confidence, and shock falls are increasingly common after bad news (profit warning, significant fine or loss of a legal case).  The shift from reserved market with a unique value proposition (licensed voice) to commoditised utility (data connectivity) may mean P/E ratios no longer reflect reality.  An apparent stable share price, maintained in the absence of bad news, is therefore vulnerable to knee-jerk reactions to surprise announcements.  The C-Suite may be (has been) swept out of office by such reactions, exacerbating the challenges already faced.

Analysis, Inferences and Implications

The telecoms business has long been recognised as among the most capital-intensive, while the returns it offers on capital employed have been relatively low (in percentage terms).  Market entry limited by, for example, licences and spectrum allocations, has nevertheless enabled players to attract the necessary capital investment and loans to fund network deployments and operations.

20-30 years of geometric growth in the sector has reassured investors and allowed all parties to benefit (with the rising tide floating all boats).  But now, P/E ratios for the sector may not have adjusted sufficiently to account for its maturity in developed markets.  High penetration and reliable bandwidth mean that it will be difficult to achieve continued revenue growth from basic connectivity.

The huge amounts of capital already committed may encourage investors to give credence to Telcos committing to achieve future growth through building value-added digital portfolios on top of their networks.  The uncomfortable truth that agile digital players without the need for infrastructure-building levels of CAPEX may be better placed to win that growth is mutually ignored until a reappraisal is catalysed by bad news.  The more unanticipated the news, the more catastrophic the likely share price adjustment.

Catastrophe theory shows how reactions to change can either be smooth or disproportionate, based on how realistic expectations are prior to the change.  Where hope is high and trust is compromised, large share price adjustments can make it difficult for top management to stay in place, even though it may be more difficult to manage the issues that catalysed the loss of trust without continuity in the C-Suite.

Promoting a realistic assessment of business prospects to staff, analysts and external stakeholders, based on what is actually achievable, rather than what is hoped for, is the essential first step in averting damaging catastrophes.

Many MNOs are still focused mainly on retaining legacy revenues and preventing OTT players from profiting too cheaply from network assets, with digital aspirations founded more on hope than realism.  These players are more vulnerable to catastrophe than those that commit to a digital portfolio (like AT&T) and/or make the uncomfortable decision to be more explicit about future growth and profitability and the need to introduce a B2B2C approach.

 

Companies: AT&T, BT, Vocus, Telecom Italia, MTN,

Countries: USA, UK, Australia, Italy, South Africa, Nigeria

Keywords: Top management, Catastrophe theory, Spectrum allocation, Digital portfolio, Growth prospects, Digital players, share price, RoI, Realism, OTT, return on investment, Telecoms licence, capital intensity, confidence, P/E ratio,

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Issue: Transparency Key to Avoiding Catastrophe for Telco Management

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Analysis, Inferences and Implications

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Supporting Research & Analysis

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