Annual Communications Leaders' Summit 2012

Strategy&’s fifth annual Communications Leaders’ Summit in Dubai gathered 23 industry leaders — telecom operators, investors, and Internet players—to discuss the current global economic outlook and strategic focus for the year ahead.

Show transcript

Annual communications leaders’ summit 2012

Strategy& is part of the PwC network

Contacts

About Strategy&

Beirut Bahjat El-Darwiche Partner +961-1-985-655 bahjat.eldarwiche @strategyand.ae.pwc.com Chady Smayra Partner +961-1-985-655 chady.smayra @strategyand.ae.pwc.com Dubai Jayant Bhargava Partner +971-4-436-3000 jayant.bhargava @strategyand.ae.pwc.com Jad Hajj Partner +971-4-436-3000 jad.hajj @strategyand.ae.pwc.com

Strategy& is a global team of practical strategists committed to helping you seize essential advantage. We do that by working alongside you to solve your toughest problems and helping you capture your greatest opportunities. These are complex and high-stakes undertakings — often game-changing transformations. We bring 100 years of strategy consulting experience and the unrivaled industry and functional capabilities of the PwC network to the task. Whether you’re charting your corporate strategy, transforming a function or business unit, or building critical capabilities, we’ll help you create the value you’re looking for with speed, confidence, and impact. We are a member of the PwC network of firms in 157 countries with more than 208,000 people committed to delivering quality in assurance, tax, and advisory services. Tell us what matters to you and find out more by visiting us at strategyand.pwc.com/me.

This report was originally published by Booz & Company in 2011.

Strategy&

INTRODUCTION

Booz & Company convened its fifth annual Communications Leaders’ Summit in Dubai in February 2012. We assembled 23 industry leaders—telecom operators, investors, and Internet players—to share insights and discuss their sentiments and strategic focus for the year ahead. The session began with a presentation of the current global economic outlook. The macroeconomic outlook for 2012 is for slowing growth, particularly in the first half of the year. Mature economies, especially those in the European Union, will focus on deleveraging, while major central banks are expected to pump liquidity into the financial system.

Those two forces present challenges and opportunities for companies in the communications industry. They come on the heels of a lackluster year. Wireless revenue growth slowed in mature and emerging markets across the world. The deceleration was pronounced in the MENA region, which has achieved one of the highest mobile penetration rates in the world. Operators had limited opportunities to counter weaker customer growth by raising prices, a trend that will persist in the near future. In

addition, the forum discussed the current environment in the MENA region, stemming in part from recent events. The confluence of economic, business, and broader factors heighten investor engagement. In this context, the attendees focused their discussions on how they can compete and grow given the difficult economic conditions and market volatility. The conversation at the fifth annual Communications Leaders’ Summit ranged across three

Booz & Company

1

broad themes, each shaped by key tensions: • Shareholder Value: What role will consolidation play and which types of combinations will dominate? Will merger and acquisition activity among industry competitors prevail as the dominant form of consolidation, or will the most important activity be one that crosses traditional

industry boundaries? In addition, to provide shareholder value will companies chose to focus on return on investment or will they instead invest for growth? • Sector Strategy: What strategic direction will operators focus on? Will they try to shape the sector or adapt to changes in offerings and services? And what role will

regulation play—will it provide incentives or punishment? • Capabilities: Do operators have the appetite to build differentiating capabilities, or will they cut costs instead? What is the role of innovation in this regard? And where should innovation optimally occur—in operations or in market offerings?

2

Booz & Company

PRESENT AT THE SUMMIT

COMPANY Abu Dhabi Media Avea Bank of America Merrill Lynch

ATTENDEE Malcolm Wall Erkan Akdemir Kadir Boysan Bill O’Neill Tamer Rashad Wafic Toutounji Sheikh Mohamed bin Isa Al Khalifa Osman Sultan Maurício França Ahmad Abdelkarim Julfar Khalifa Hassan Al Shamsi Kamal Shehadi Mohamad Mourad Karim Daoud Marc Beuls Nick Dent Ghassan Hasbani Jameel Abdullah Al Molhem Saad Dhafer Al Qahtani Akil Hamed Beshir Hannes Ametsreiter Ramazan Demir Boris Nemsic

POSITION Chief Executive Officer Chief Executive Officer Chief Strategy Officer Chief Investment Officer Head of Middle East Wealth Management Senior Vice President, Investments Group Chief Executive Officer Chief Executive Officer Investment Director Group Chief Executive Officer Group Senior Vice President, Marketing Group Senior Vice President, Regulatory Affairs Gulf Regional Manager Chief Executive Officer Former Chief Executive Officer at Millicom International Cellular International Chief Business Development Officer Group Chief Executive Officer, International Operations Chief Executive Officer, Saudi Arabia Operations Group Chief Executive Officer, Strategic Operations Chairman Chief Executive Officer Vice President, Strategy and Business Development Advisor

Batelco Group du Emirates Investment Authority Etisalat Group

Google Intigral Millicom Qtel Group Saudi Telecom

Telecom Egypt Telekom Austria Türk Telekom VimpelCom

Booz & Company

3

SHAREHOLDER VALUE

Conference participants discussed two significant drivers of shareholder value in communications companies. One driver is consolidation, which offers operators different approaches. Some operators might choose to combine with similar companies, while others might opt to ally with those in adjacent businesses. The second driver involves focusing on boosting value to shareholders by focusing on return on investment or the pursuit of growth opportunities. Consolidation Almost across the board, conference attendees see consolidation as a major force that will continue in the sector and alter the landscape of the industry. One attendee stated that there is a glut of telecom operators. “We have too many players worldwide,” he said. Another added to this sentiment, saying that consolidation in the communications

sector remains inevitable because of the numerous advantages of scale. Operators can gain perspectives from other markets as well as introduce their services and products into those markets. “Scale is an important issue that many telecom operators are addressing,” the participant said. “Many regional operators have addressed that by entering into new markets and creating clusters, like Africa or Asia or the Middle East, and I see that continuing.” Several attendees noted that the financial crisis will drive a new wave of consolidation in the industry. Referring to the financial crisis, one participant said: “It’s going to play a big role. It may drive some companies out of business. It may push some companies close to the brink. Either scenario will make those companies a target for consolidation.”

4

Booz & Company

Ahmad Abdelkarim Julfar, Etisalat Group; Sheikh Mohamed bin Isa Al Khalifa, Batelco Group

Saad Dhafer Al Qahtani, Saudi Telecom; Jameel Abdullah Al Molhem, Saudi Telecom

Booz & Company

5

“We should be very proactive. We have to be inventive and we have to reinvent ourselves again if we want to be in the business 10 and 20 years down the road. Otherwise, most of these companies will disappear if we do not reinvent ourselves.”

6

Booz & Company

Another attendee remarked that India is poised to enter a period of mega-consolidation, once rules and regulations are fully in place. Asia is also likely to be a region replete with consolidation—as will the Middle East, an outcome driven in part by the current sociopolitical changes. Although the group was virtually unanimous in its belief that consolidation was likely, there were different views on what such combinations would look like. One participant did not foresee blockbuster mergers of giant operators. “Definitely there will be consolidation, maybe not of equals, but at least there will be a number of consolidators that will emerge in 2012,” he said. Participants also had opposing views on whether the consolidation would be between companies that offer similar services, or between those in adjacent businesses—such as the acquisition by Google of the handset manufacturing business of Motorola Mobility. One participant said the industry has a long record of investing in adjacent businesses in its quest for growth opportunities, an approach that could persist. “There may possibly in the future be a second

wave of companies buying others across businesses, to access new technology, such as cloud services,” this participant said. Others said such acquisitions are unlikely to dominate. There has been talk for years about telecom and media companies combining. A handful of such combinations notwithstanding, there has been little such merger activity. Said one conference participant, “We need more visibility on the business models that make sense for that sort of merger.” Another attendee added: “It’s easier to get into the same line of business and not go immediately into adjacent businesses.” Shareholder Returns: ROI vs. Growth Another part of the discussion on shareholder value revolved around how companies would focus their efforts to provide returns—by maximizing return on existing investments or by investing for future growth. One participant wondered if operators that for years had focused on growth opportunities could manage to change their mind-set and shy away from investing in such opportunities. “We are accustomed

to growth,” he said. “We have been brought up with growth; that is what we know.” Another agreed that telecom operators are unlikely to abandon their quest for growth. “The regional shareholders will be after growth-led investment more than return,” he said. One attendee pointed out that all operators are looking for growth in one capacity or another. He argued that the industry is at a turning point where it runs the risk of evolving into a utility, or commodity provider, unless it invests in growth. “We are all investing in new technologies that will lead to growth in coming years,” he said. “Growth may not come today or tomorrow. We need to be patient.” Several participants, however, were adamant that now is not the right time for companies to be investing in growth. Instead, operators should be solely focused on maximizing returns. “Very clearly and without any doubt, investors today do not have the vision or the intent to go into growth investments—the sort that pays off in five years or three years or six years,” one attendee said. Another participant supported that view: “In turbulent times such as now, most people will go for return-led investments rather

Booz & Company

7

than growth-led investments, because usually return-led investments offer stability rather than volatility. This is what, at least for the medium term, I as an investor would go for.” Other attendees agreed: “Most shareholders today are asking for return-led investments, and they are

asking first about the bottom line before even the revenue,” said one. Another added: “Shareholders have become risk-averse, and that is a defining characteristic of the industry.” One participant summed up the consolidation and growth issues in the discussion on shareholder value

by setting the stage for the later discussion on innovation. He said that there are ways for telecom to be a growth industry and not just become a utility. Consolidation is not the answer as it reduces the number of operators in a market and potentially stifles innovation, he said.

Ghassan Hasbani, Saudi Telecom; Osman Sultan, du; Erkan Akdemir, Avea

8

Booz & Company

SECTOR STRATEGY

waiting for changes and events, watching market evolution, and then reacting accordingly. Several participants said telecom operators are cognizant of the imperative to shape the sector, rather than simply adapt to it. “We recognize that we can’t afford to miss out,”one commented, adding that competition now can come from unexpected places, not just established communications companies. “Things are changing so fast. You can have someone sitting at home competing with a telecom operator. You don’t have to be a Google or a Facebook to compete.” Another participant echoed the need for operators to be bold and to promote change. “I think we should be very proactive. We have to be inventive and we have to reinvent ourselves again if we want to be in the business 10 and 20 years down

the road. Otherwise, most of these companies will disappear if we do not reinvent ourselves.” Another attendee, however, noted that telecom operators in general— including in the MENA region—are adapting too slowly to the sector’s fast-changing pace. “We’ll always feel the pinch from the other side in order to move faster,” he said. One way to combat the slow-moving pace is to move in a collaborative manner, forging partnerships, he added. “We have to acknowledge that sometimes you cannot move alone.” Yet another participant noted that the telecom industry is not in the business of creating applications, “just like we are not in the business of creating infrastructure technology.” He summed up his comments by adding that the role of the telecom sector is to enable the users who develop the applications. “We are an industry that is 150 years

The discussion then shifted to topics pertaining to strategy. The first part of this conversation revolved around the different strategic approaches that operators can use. Some operators might opt to shape the sector. Others might choose to react and adapt to changes. The discussion also covered the regulatory realm, with attendees exchanging perspectives on whether regulators will influence behavior through incentives or punishment. Shape the Sector or Adapt to Changes? Some operators are taking bold, proactive steps to shape the industry. Others are being more adaptive,

Kamal Shehadi, Etisalat Group; Boris Nemsic, VimpelCom

Booz & Company

9

old, which has always been in the business of connecting more people at higher speeds with cheaper prices.” Sector Regulation The next topic of discussion was regulation, and participants largely agreed that governments and regulators are poised to exert increasing pressure on operators. The prevailing sentiment among conference attendees was that in many countries regulation focuses on compliance, with regulations imposed by fiat.

“Governments and regulators might be putting more pressure on the telecom industry because it is the most lucrative, or one of the most lucrative, sectors remaining,” one participant said. He backed up that assertion by noting that many other sectors operate with 5 percent to 10 percent profit margins, whereas many telecom providers have margins in excess of 20 percent. Another participant voiced his belief that governments will impose taxes on the sector. “There’s going to be

more telecom levies coming in the future,” he said, summing up the concerns of many. “The telecom industry specifically is seen by many as a cash-generation machine. Governments may be seeing it as a treasury income,” he added. “They may increase levies in the form of royalties and taxes. They may introduce new cash-out mechanisms. Regulations are not being used wisely to incentivize investment in the sector.”

Marc Beuls, formerly Millicom; Ghassan Hasbani, Saudi Telecom

Jameel Abdullah Al Molhem, Saudi Telecom; Ghassan Hasbani, Saudi Telecom; Erkan Akdemir, Avea

10

Booz & Company

CAPABILITIES

Participants also covered the realm of capabilities—the specific strengths of sector operators. The discussion centered particularly on operational capabilities and innovation capabilities. On operational capabilities, the question was whether operators are overly focused on optimizing cost structure. In doing so, they may not develop the appropriate capabilities required to capture growth when the

economy improves. One participant noted that the sector has recently suffered from capability gaps in its effort to capture growth. He observed that although telecom operators enabled social media to a large extent, they did not create social media, and they did not capture a lot of the value generated by social media. Another concurred, adding that there is a cultural element to it, as “shareholders look to us for different things” such as

Sheikh Mohamed bin Isa Al Khalifa, Batelco Group; Karim Sabbagh, Booz & Company; Akil Hamed Beshir, Telecom Egypt

Booz & Company

11

stability and cash flow, not necessarily for the ability to build new capabilities in adjacent areas. Another attendee suggested that a balanced approach is ideal. Operators would focus on cost optimizing and capability building. That, however, will be difficult to accomplish. He added, “We need to be patient and we need to be smart about how large conglomerates and multinationals in

the telecom industry manage their portfolios to guarantee this balance and keep shareholders happy.” The other major area of discussion was about innovation capabilities, which take on many forms. Some operators have prioritized process innovation— creating new business models and deploying advanced infrastructure to improve performance—while others focused on market innovation,

creating new services, content, and applications. Regardless of which avenue they choose, most participants recognize that innovation is vital to the sector’s future. Some participants said that the industry should ideally target market innovation, “bringing new products, new offerings, new ways of doing things—making life simpler,” as one attendee said. However, he added,

Karim Daoud, Intigral; Khalifa Hassan Al Shamsi, Etisalat Group; Maurício França, Emirates Investment Authority

12

Booz & Company

Martin Reitenspiess, Booz & Company; Hannes Ametsreiter, Telekom Austria

Kadir Boysan, Avea; Nick Dent, Qtel Group; Mohamad Mourad, Google; Saad Dhafer Al Qahtani, Saudi Telecom; Malcolm Wall, Abu Dhabi Media; Akil Hamed Beshir, Telecom Egypt; Hannes Ametsreiter, Telekom Austria

Booz & Company

13

that this is not the case in reality: Innovation “is not in the forefront for communications players,” he said. “In the current environment, where everybody is rightly concerned about our turbulent world, operators will be inclined to look at process innovation more than market innovation; and they will look at cost optimization more intensely than capabilities building.” Others disagreed; they pointed out that the economic downturn has created an ideal environment for operators to make big moves and not be complacent—thus making the case to focus on market innovation. “When things are tough, and when the environment is difficult, you need to stick out your neck and you need to take a slightly different approach than probably some of your competitors or your colleagues are doing,” said one attendee. Another concurred, adding: “We need to change our mind-set; we need to reinvent ourselves.”

Despite that sentiment, several participants remarked that historically the innovative strength of the communications sector lies in its ability to improve internal operations—how it prices, packages, and creates services at home or on mobile platforms for customers. One participant spoke about his organization’s effort to glean insights from other organizations in unrelated fields. For example, a telecom operator studied the processes at the McDonald’s fast-food chain to see how it institutionalizes operational excellence—serving many people efficiently and effectively. Thanks to its analysis of McDonald’s, the telecom company is now using similar processes in its mobile retail store to speed up transactions with customers. “We found out that selling a prepaid package takes 13 minutes,” he said. “Then we had a task: let us reduce that turnaround to six minutes.” In another example,

the operator studied Ritz-Carlton, the hotel chain well known for its excellent customer service. “I believe we can learn a lot from other industries,” the participant said. Process innovation especially is critical in emerging markets, which mandate low-cost structures to attain profitability. The industry needs to be innovative to serve customers with $2 average revenue per user (ARPU), said one attendee. “You have to be innovative to be able to expand your reach in a market where a lot of people do not even have access to telephony,” he said. “There must be some level of innovation in our operating model, both on the capabilities side and on the services side. But we are a service industry, so most of the innovation is coming from channels, capability to care for customers, and capability to deliver higher-quality services to many more people.”

14

Booz & Company

“Consumers who historically were very loyal to brands and essentially conservative cannot get the new technology quick enough. If that technology is brought by a new supplier, they are not worried about terminating previous relationships. We are dealing with different technology, and we are dealing with a different consumer.”

Booz & Company

15

Bill O’Neill, Bank of America Merrill Lynch

Toshiya Imai, Booz & Company; Amr Goussous, Booz & Company; Sheikh Mohamed bin Isa Al Khalifa, Batelco Group

16

Booz & Company

CONCLUSION

Throughout the session, communications executives and investors focused on the underlying theme of how they will be able to ensure growth despite a slowing economy and volatile markets. There was clear consensus on some fronts. Participants largely believed that intra-sector consolidation is likely. They also concurred in their concern about increasing regulatory and fiscal pressure on the sector. However, there were strongly divergent opinions about whether operators will focus more intently on providing return on investment or investing in growth and whether operators will choose to mold the sector or instead react to changes. Innovation is likely to persist as a pressing need, conference attendees said, but they differed on whether the focus of the innovation will be on operational efficiency or on new services and applications. One participant noted that a key challenge and opportunity facing the industry will be the changing consumer. “The consumer has totally changed in this environment,” the

participant said, pointing to the rapid pace of innovation set by adjacent sectors—as evidenced by consumers’ immediate embrace of iPads and the ubiquity of social media—and the promise of new services such as smart TV and cloud computing. “We have consumers who historically were very loyal to brands and essentially conservative. Consumers now cannot get the new technology quick enough, and if that technology is brought to them by a new supplier in the market, they are not worried about terminating their previous relationship. We are dealing with different technology, and we are dealing with a different consumer.” To set the stage for a successful year, industry operators must adapt to the challenges presented by the economy and by competitors. They will have to do more to provide existing and potential customers with fast speeds, ubiquitous access, new applications, and better customer service, in order to emerge intact from the current turbulence, protect their business, and position themselves for future growth.

Nick Dent, Qtel Group; Hadi Raad, Booz & Company; Bahjat El-Darwiche, Booz & Company; Joseph Sims, Booz & Company

Booz & Company

17

Strategy& is a global team of practical strategists committed to helping you seize essential advantage. We do that by working alongside you to solve your toughest problems and helping you capture your greatest opportunities.

These are complex and high-stakes undertakings — often game-changing transformations. We bring 100 years of strategy consulting experience and the unrivaled industry and functional capabilities of the PwC network to the task. Whether you’re

charting your corporate strategy, transforming a function or business unit, or building critical capabilities, we’ll help you create the value you’re looking for with speed, confidence, and impact.

We are part of the PwC network of firms in 157 countries with more than 208,000 people committed to delivering quality in assurance, tax, and advisory services. Tell us what matters to you and find out more by visiting us at strategyand.pwc.com/me.

This report was originally published by Booz & Company in 2011.

www.strategyand.pwc.com/me
© 2016 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Mentions of Strategy& refer to the global team of practical strategists that is integrated within the PwC network of firms. For more about Strategy&, see www.strategyand.pwc.com/me. No reproduction is permitted in whole or part without written permission of PwC. Disclaimer: This content is for general purposes only, and should not be used as a substitute for consultation with professional advisors.