Mobile price wars: Avoid if you can, win if you can’t

The market for mobile services is extremely competitive. Marketing executives are constantly rolling out promotions, or “hooks”, to attract new customers, which often lead to price wars among operators. However, there are four ways to win these mobile price wars.

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Mobile price wars Avoid if you can, win if you can’t

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About Strategy&

Beirut Bahjat El-Darwiche Partner +961-1-985-655 bahjat.eldarwiche @strategyand.ae.pwc.com Dubai Samer Bohsali Partner +971-4-436-3000 samer.bohsali @strategyand.ae.pwc.com Frankfurt Olaf Acker Partner +49-170-223-8453 olaf.acker @strategyand.de.pwc.com Riyadh Hilal Halaoui Partner +966-11-249-7781 hilal.halaoui @strategyand.ae.pwc.com

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This report was originally published by Booz & Company in 2013.

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EXECUTIVE SUMMARY

From time to time, every mobile telecom market endures a price war. New market entrants, changes in market structure, regulation-enforced mobile number portability, or simply aggressive management targets can prompt marketing managers to push for the short-lived blip in sales that aggressive price actions can yield. Market share rises, operators gain momentum, revenue ticks up, and shareholder pressure is relieved.
Despite these apparently positive initial results, our research shows that without fail price wars leave the aggressor operator and the market as a whole worse off. Price wars do more than stop market value from developing; they actually destroy potential market value—to an impressive extent. Everybody loses, including consumers. Network quality becomes strained as available capacity falls, customer churn increases, consumers expect better and better price deals, and the downward pricing spiral gains momentum. For these reasons, telecom players should stop falling prey to the temptation of launching price wars. Instead, we believe, operators should try to avoid price wars if they can— but win them if they can’t. When thinking about price wars, executives need to grapple with the two most damaging aspects of any price conflict, engagement and escalation. Within these two dimensions we provide three short-term plays with which telecom companies can meet the threat of price attacks halfway. Each of these plays uses messaging and tools to communicate with the price aggressor, and each requires a different, defined set of capabilities that allows firms to manage the risks associated with price wars. There is also a fourth, bolder play, in which the telecom player reconsiders its cost structure and becomes a new war-fighting machine. This more radical approach provides a structural cost advantage when dealing with price wars and addresses the deeper, cost-related problems in the highly competitive telecom space. Rather than be on the defensive, as a new war-fighting machine the telecom provider can fight all-out price wars if necessary and will be prepared for any eventual shakeout in the sector.

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KEY HIGHLIGHTS • Mobile price wars destroy value for the aggressor operator and all the other companies in a market. The gains to the company starting the price war tend to be short-lived. • There are three tactical plays in response to the threat of a price war: “Sword Waving,” “Surgical Strike,” and “Capture and Keep the Hill.” Each involves a measure of risk, but they all can postpone a price war or curtail the length of the conflict. • The fourth play is for a telecom operator to become “A New WarFighting Machine.” This strategic approach demands a redefinition of the cost structure through organizational restructuring, process reengineering, and rigorous operating expenditure reduction.

OH! WHAT A LOVELY WAR

market for good, while the costs of acquiring and keeping customers have risen. Shareholder returns have been lowered permanently. Enjoy It for the Moment The value-destroying power of the typical mobile price war was experienced recently in Asian markets. A series of cases shows that when operators in these markets started driving down prices, their view of the consequences of their actions likely did not go beyond the hope that their market share might rise a few points, and that ARPU might increase slightly, given an elastic rise in volume. These cases show that the aggressor clearly enjoyed a short-term rise in market share. Exhibit 1 demonstrates that in the two-year price war in Asian market #1, Operator A6’s market share rose by an impressive 44 percent, reaching 11 percent against a start point of 7 percent. There was a similar pattern in Asian market #2, portrayed in Exhibit 2. Operator B2 started a price war in anticipation of the entry of a new operator, B5—again, scoring notable initial gains. B2’s preemptive attack led to its position growing by 30 percent in a year—giving it a 24 percent market share compared to 18 percent before the price war. Operator B2 thereby outpaced established competitors, with the exception of new entrant B5. The upstart B5’s aggressive entry quickly gave it a 9 percent slice of the market, significantly outstripping even B2’s price-driven share gains.

From the outside, all price wars look remarkably similar. An operator decides to become an aggressor in the market because launching a price attack on its competitors seems attractive. Prices are slashed, generous offers are made, and consumers churn from one telecom provider to another chasing the best deal. Other operators immediately follow suit, delighted they can respond so rapidly. Regulators and policymakers look on, satisfied that their policies have created a healthy competitive environment. From the inside, the perspective is quite different. Gross additions jump as customers churn to the aggressor’s network. Network capacity is tested as traffic rises, with increased risk of blocked calls and lower voice quality. Other operators, now on the defensive, redouble their media spend and offer incremental incentives to lure their customers back. Even if they are successful, their customers return at lower average revenue per user (ARPU), similar if not slightly increased traffic, and at considerably increased cost of acquisition. By any measure, the net outcome of the price war is positive for the consumer and negative for the operator. Value has been removed from the

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Exhibit 1 Market Share Dynamics, Asian Market #1 During June 2008–June 2010 Price War
PERCENTAGE SHARE OF MARKET

25 21 17 17 15 11 11 11 7 18 17 +44% 11 6 12 Pre-Price War Post-Price War Price War Initiator A1

A2

A3

A4 Operators in Market

A5

A6

Others

Source: Operators’ annual reports; WCIS; Ovum

Exhibit 2 Market Share Dynamics, Asian Market #2 During June 2008–June 2009 Price War
PERCENTAGE SHARE OF MARKET

51 45 +30% 24 16 17 15 6 0 B1 B2 B3 Operators in Market B4 B5 9 Pre-Price War Post-Price War Price War Initiator

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Note: B5 was a new entrant to the market and so had no previous market share. Source: Operators’ annual reports; WCIS; Ovum

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Perhaps the most impressive relative gains were seen during another Asian market’s two-year price war. As Exhibit 3 shows, cutting prices yielded impressive relative gains for aggressor operator C4, whose market share jumped 121 percent. Yet in absolute terms, the three dominant players in this market proved to be resilient, and continued to dominate the scene— despite two of them registering losses in market share. This Asian market reinforces the lesson that price war gains are often limited, with the impact similarly short-lived.

Because It Certainly Won’t Last Whereas management’s celebration of the market share increase will be immediate and brief, shareholders are free to regret the impact of price wars at leisure. Relative market share may have increased from one operator to another. However, any gains made by an individual company will have been offset by the higher capital expenditure required to support dramatically larger traffic volume, and increased operating expenditure as subscriber acquisition costs jump to counteract customer attrition.

A broader study of six developed and emerging markets during price wars demonstrates that the net effect is a substantial and irreversible loss in market value available to all operators and their shareholders. Value destruction in this case applies to all but one instance (see Exhibit 4). The example of the Middle East market tells an eloquent story to boards of directors. The market before the price war should have reached 79 percent of potential value, assuming ARPU and customer growth

Exhibit 3 Market Share Dynamics, Asian Market #3 During July 2007–June 2009 Price War
PERCENTAGE SHARE OF MARKET

52

50

26

21

17

18

+121% 2 5
3

Pre-Price War Post-Price War
0

3

4

Price War Initiator

C1

C2

C3 C4 Operators in Market

C5

Others

Source: Operators’ annual reports; WCIS; Ovum

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dynamics had remained at pre-war levels. However, rather than boosting market value, the price war had the opposite effect, depressing value to 74 percent of the total. This value-destroying effect of a price war is even worse in more mature markets where the opportunities for growth are already limited— which is why potential market value

exceeds 90 percent in the two E.U. examples. For instance, E.U. market #1 suffered a decline of 14 percent in a 2009 price war. E.U. market #2 fell 22 percent in value after a 2008 price war. The value rationale for these price wars looks dubious in the extreme when we factor in the costs of sustaining the price war, and the spending required post-conflict to support growth.

Calculating the Impact of a Price War Booz & Company used the following assumptions to determine the impact of a price war on market value. • If the market were to evolve normally during the period of the price war (based on correlated growth of penetration and ARPU), it would achieve its full potential, i.e., 100 percent. • “Value Before” is the starting value of the market at the beginning of the price war. It is reported as a percentage of what would have been the market value if no price war were to have occurred. In the case of Asian Market #1, for example, this is 44 percent. • “Value After” is the value of the market after the price war. Asian Market #1 did not achieve the 100 percent potential it should have during the time of the price war, instead remaining at only 44 percent.

Exhibit 4 Price Wars Often Lead to a Loss in Market Value
PERCENTAGE OF POTENTIAL MARKET VALUE
Value Before Value After 63 44 44 69 53 49 79 74 95 82 -14% 97 76 -22%

Asian Market #1

Asian Market #2

Asian Market #3

Middle East Market

EU Market #1

EU Market #2

Operators in Market

Source: Operators’ annual reports; WCIS; Ovum

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AVOID IF YOU CAN, WIN IF YOU CAN’T

which together offer marketing directors the ability to “avoid if you can, win if you can’t” (see Exhibit 5). Play 1: Sword Waving is a credible threat. Sword Waving is a preaggression deterrent that postpones conflict by signaling the intent to win without engaging; the equivalent of “don’t even think about starting a price war.” Play 2: Surgical Strike responds to another’s aggression but limits the conflict to an area that you choose. Surgical Strike signals, “I choose this war, right here and only here, and I’m going to win it.” Play 3: Capture and Keep the Hill is an aggressive, foot-forward play intending to capture and secure a highly specific area of the market for the long term. It allows the telecom player to isolate part of the market from the price war battlefield. Order to chief marketing officer: “Capture and keep hill 13.” Message to the market: “I am going to capture and keep that hill, no matter what.”

So how should today’s marketing directors and their CEOs respond when price war threatens? We frame our price war landscape along two dimensions: the scale of engagement and the level of escalation. The scale of engagement extends from small, focused price actions to the broad, full-scale price wars that engulf whole markets. The level of escalation contrasts short-term, focused price actions with broader, more fundamental strategic pricing actions that subsume the entire market landscape. Within this framework, we define four “plays” and one “no-go area,”

Our framework also defines a fourth play whose dynamics are quite different to those present in Plays 1 through 3. Play 4 changes the operator’s war-fighting apparatus and by lowering operating costs to the absolute minimum, creates exceptional operating margin headroom that allows the operator to position as the market price leader. Play 4 is a powerful, programmatic approach not compatible with Plays 1 through 3. Play 4 is a fundamental strategic choice, and not a short-term tactical play to counter a price war. The remaining area in the framework, the “no-go area,” is just that. We contend that operators with at-par returns should never enter this price war zone without executing Play 4 first and building a structural cost advantage. Doing so without the protection of Play 4 will result in a substantial loss of value for both the aggressor and the other market participants.

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Exhibit 5 Operators Can Use Four Different Plays in Response to Price Aggression
FRAMEWORK FOR AVOIDING MOBILE MARKET PRICE WARS

Strategic

Play 3 Capture and Keep the Hill Play 4 A New War-Fighting Machine

Level of Escalation

Play 2 Surgical Strike

Tactical

Play 1 Sword Waving No-Go Area Niche Market-Wide

Scale of Engagement

Source: Booz & Company

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Play 1: Sword Waving Our first play uses deterrence. It draws on Winston Churchill’s 1954 comment that “meeting jaw to jaw is better than war.”1 To deter a price war, non-aggressor operators use credible threats—a series of measures that will draw attention away from an imminent price war and diffuse the impact of the impending attack. Messages and tools. The audience for Sword Waving is the whole market. Messages can highlight the value delivered in service propositions in order to distract from the aggressor’s price offers. A variety of mechanisms have a proven track record. These include: free minute bonuses for prepurchased ARPU (such as for customers with pre-paid blocks of air time), a week’s free trial to a new content service, and discounted tickets to a concert or event for higher-ARPU customers. “Headline pricing,” highlighting a specific discount on an international route for example, can also be used to deliver credible threats when applied to a very limited number of portfolio items that can absorb very large price discounts without affecting the entire subscriber base. Two sets of ammunition can be used when engaging in Sword

Waving—promotions that can be turned on and off at high frequency with no legacy impact and additions to existing products. A message must give a positive impression. It should highlight benefits to be received. What it emphatically must not do is mention price, as this forces the operator into the no-go zone and triggers the broad price war that the company is seeking to avoid. Non-aggressors should direct their messages to other audiences that can be helpful, such as regulators and opinion leaders. These groups can see beyond short-term price reductions. They typically respond well to messages of long-term investment, particularly in infrastructure that will improve national competitiveness. In some markets, regulators take a dim view of overly aggressive pricing actions—they should be lobbied to intervene, assuming this is allowed. The business press can also prove influential in rallying opinion in favor of value-based market stability. Lastly, and this action should be handled with some care, many markets maintain industry

fora in which senior operating company executives share ideas and considerations common to all telecom providers. When used with appropriate respect, discussions in these fora can restore stability and ensure that the right balance is maintained between shareholder and customer needs. Capabilities. The key capability required for this play is to understand how actions in response to imminent aggression will affect different market segments. The range of impacts is important. For example, some segments will interpret an action as a reward for loyalty; other customers will see the same action as an incentive to upgrade to a smartphone. Given that the intent of the action is to signal avoidance of a price war, not to engage in one, understanding its effect is essential. If an action causes other operators to start slashing prices, then it has failed. Target outcomes. The best outcome from a non-aggressor’s standpoint is that the aggressor retreats and the impending price war fails to materialize. Other operators are content with launching a series of promotions, but all-out conflict is avoided.

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Value implications. Although Sword Waving can work in emerging markets, this tactic comes more naturally to established players in mature markets. These operators have built their brands over a period of time on the premise of delivering value to the customer, as opposed to the lowest prices and questionable quality. The companies therefore have every incentive not to sacrifice their reputations for a short-lived pricing advantage. For example, when a new provider entered an E.U. market in 2009, its competitors reduced their prices quickly in response. The defending

incumbent operator engaged in Sword Waving through the threat of an all-out price war and embarked on a series of diversionary actions— resetting the game toward valueadded services, introducing innovative triple play (mobile voice, TV, Internet) offerings, and launching aggressive marketing campaigns. Although price-based competition drove down value by around 10 percent, the incumbent’s successful signaling toward value ensured that the other players stopped their price reduction moves within two quarters. This reversed the downward ARPU trend and averted a full-blown price war.

Sword Waving is value-efficient compared to engaging in full hostilities. Exhibit 6 plots the outcome of a Sword Waving campaign against that of a fullyfledged price war. A non-aggressor faced with imminent price-based competition may lose market share of 2 to 3 percent in the initial couple of quarters, but should manage to end hostilities within two to three quarters. The overall value loss is around 3 to 4 percent in total. By contrast, an all-out price war inflicts up to a 5 percent loss in market share and can last around five quarters.

Exhibit 6 Sword Waving Limits the Damage to Value and the Price War’s Duration
VALUE IMPLICATIONS FOR SWORD-WAVING PLAY
Quarter Q0 Sword-Waving Play Market Share Loss (%) Benchmarks in E.U. market (September 2008–December 2008) 0 -1 -2 -3 -4 -5 Market value impact per quarter: 3.8% decrease Price war duration: 2–3 quarters Market value impact per quarter: 6.7% decrease Price war duration: around 6 quarters Sword-Waving Play Price War Participation Q1 Q2 Q3 Q4 Q5

Price War Benchmarks in three developing Asian markets (June 2008–September 2010, June 2008–September 2009, December 2007–June 2009)

Source: Operators’ annual reports; analysts reports; WCIS; Ovum

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Play 2: Surgical Strike The second play accepts conflict as inevitable. Deterrence is not an option. A Surgical Strike in response to a price war seeks to limit the damage and pick the terrain for conflict. This is an upper-hand posture in which a defending operator changes the direction of the price war to its advantage, chooses the marketing weapons it will use, and in the process wrong-foots the original aggressor. Messages and tools. Surgical Strike has a narrower audience than Sword Waving. Messaging is highly targeted and focused on value; it is delivered in a manner that excludes all that could be unappealing to the broader market. For example, the operator can offer a

time-of-day-bound, low-rate international tariff accessed only through referral; credit-transferred free minutes from parents to children with on-net free calls in group; or discounted concert tickets. These incentives limit the scope and scale of the price war. They deliver a compelling value proposition to a precise market segment. By launching a Surgical Strike, the operator joins the price war, but controls its impact. The Surgical Strike sets the agenda for the price war, wresting the initiative from the aggressor. Other competitors can follow with Surgical Strikes of their own. What they cannot do, however, is to launch broad price actions of the kind that tend to start a price war.

Such wide-ranging price offerings lack immediacy and focus, making them generic and unappealing in comparison to a Surgical Strike. This play can also make extensive use of below the line (BTL) activities, in the main to deliver propositions considerably more aggressive than expressed in above the line (ATL) counterparts, while acting as a trigger to promote rule-setting dialogue with the competition to control the situation overall. Capabilities. Precision targeting and effective delivery of marketing messages are the key capabilities in this approach. The most advanced precision marketing will define a target segment measured in the low thousands and develop messages

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that will appeal to this very narrow audience. When using a Surgical Strike the operator can change its target segment and messages during the campaign. Indeed, such fleetness of foot will serve to keep the competition guessing while keeping the pressure on. Target outcomes. Executed correctly, this play increases value extracted from a specific market segment. The result is increased customer loyalty in the target segment. The operator

builds presence in one or more key segments, which lowers churn rates and creates a more meaningful bond with customers. By limiting the scope of the price war, the telecom provider controls the damage to itself and the broader market. Value implications. The Surgical Strike is mainly used in developed countries. In these more mature markets, participants see a price war as a short-term tactical fillip—they accept that it is not a means of winning the

long-term battle for growth and sustainability. In particular, players focus on creating an improved perception of the value of their offerings in a particular market segment, building trust and loyalty, and strengthening customer relationships. In an emerging market, the success of a Surgical Strike depends on focusing unequivocally on a single segment, or even better, a sub-segment. For example, offerings to sole traders in small offices or home offices, large families, or teenage girls.

The Surgical Strike enables the defending operator to strengthen its share of specific market segments.

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One E.U. operator launched a Surgical Strike in response to a price war initiated by an aggressor in 2008 and 2009. The defending operator’s strategy focused on high-value customer segments—including corporate clients—by offering targeted promotions and restructuring price plans for mobile value-added services, and enterprise and business packages. In response, the aggressor scaled back its price-focused attacks within four quarters. Although market ARPU dropped initially by around 10 to 12 percent, the trend reversed after a year. Around

10 percent of incremental value was regained as the market refocused by other competitors following in the footsteps of the defender. The Surgical Strike option compares favorably to full-scale conflict (see Exhibit 7). A defending player adopting this focused pricing approach may lose market share of 2 to 3 percent over the medium term (i.e., four quarters). However, this operator can limit its price-based actions to roughly the same amount of time. Overall reduction in market value is restricted to

around 16 percent for the duration of the price war. There is no question that the price war causes damage, but its effect is still less harmful than fullscale conflict. On the positive side, the Surgical Strike enables the defending operator to strengthen its share of specific market segments and improve customer experience within them. Medium-term losses are offset by the benefits of customer retention.

Exhibit 7 A Surgical Strike Can Control the Impact of a Price War
VALUE IMPLICATIONS FOR SURGICAL STRIKE PLAY
Quarter Q0 Surgical Strike Play Market Share Loss (%) Benchmarks in E.U. market (September 2008–June 2009) 0 -1 -2 -3 -4 -5 Market value impact per quarter: 4.3% decrease Price war duration: around 3–4 quarters Market value impact per quarter: 6.7% decrease Price war duration: around 6 quarters Surgical Strike Play Price War Participation Q1 Q2 Q3 Q4 Q5

Price War Benchmarks in three developing Asian markets (June 2008–September 2010, June 2008–September 2009, December 2007–June 2009)

Source: Operators’ annual reports; analysts reports; WCIS; Ovum

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Play 3: Capture and Keep the Hill Our third play also involves joining the price war with an aggressive counterattack. Capture and Keep the Hill limits the scale of engagement while ratcheting up the level of intensity, and thus takes Surgical Strike to an extreme. It targets an entire market segment with the intent of dominating it. Like taking a hill on a battlefield, this play isolates part of the market from the broader conflict. Capture and Keep the Hill is a powerful, sustainable way to gain disproportionate share of a valuable, sticky market segment. Messages and tools. The messages of Capture and Keep the Hill are focused, narrow, and enduring. They are most effective when applied to a segment that is not overly price-sensitive. Messages must be sustained over a long period of time. For example, an operator’s senior executives can address medium and large enterprises by direct, personal approaches and pitches. Such personal commitments, along with support guaranteed to an entire company through a special, senior-level relationship, provide compelling messages. This relation-

ship can deliver, for example, tailored pricing plans; subsidized, first-release handsets; three-hour lost or broken replacement guarantees; and so on. In an emerging market, Capture and Keep the Hill could involve services for medium and large enterprises. In a more mature market, the offering could be services for international travelling professionals, or for the creative and advertising industries. If a Capture and Keep the Hill action is aimed at a numerically larger segment, messages can be shaped by both the proposition and the ecosystem that surround it. This involves creating unique combinations of public or private services: for example, high-speed 3G plus personal hotspot network performance (from the operator) positioned alongside new-generation smartphones (from a handset partner)—all delivered through an ecosystem that builds a user community of small app developers (supported by the operator), social network devotees, and creative industry participants (committed users). Done successfully, this approach can establish an operator at

the heart of a target user community, building a defendable, non-transactional position. Capabilities. Capture and Keep the Hill is not for the faint-hearted. It requires disciplined management capabilities to support the battles that will be joined along the way. An operating company that decides to launch Capture and Keep the Hill needs “product evangelists” who can represent it to a specific community. It should have a CEO and chief commercial officer combination prepared to spend time on the road wooing large accounts and pitching the service offering to potential buyers. Target outcomes. Capture and Keep the Hill can apply equally to established and emerging markets. In mature markets, players adopt focused approaches to gain market share while maintaining profitability. In emerging markets, this play blunts the effect of price aggression and allows a defending operator to establish a commanding presence in a market segment or sub-segment.

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Value implications. With Capture and Keep the Hill, players can gain market share of value in specific segments even though their total market share may suffer. Although the overall value of the telecom market affected by the price war could drop by over 25 percent, this remains lower than in markets that have a fully-fledged, unfocused price war. For example, when a Middle East market suffered through a broad-

spectrum price war between March 2008 and September 2009, the second-largest mobile player executed a committed and focused Capture and Keep the Hill play. The operator offered data-based, innovative services to specific segments and switched pre-paid customers to postpaid plans through promotions and incentives. As a result, this player limited the impact of the war to a 1.6 percent loss in its profit margin, as compared to 8 percent and 20 per-

cent losses for its two main competitors (see Exhibit 8). Still, Capture and Keep the Hill has an appreciable risk. If the operator loses its resolve and is forced to retreat, the consequences will be far-reaching, with an important and negative impact on market reputation.

Exhibit 8 Capture and Keep the Hill Is an Aggressive Counterattack to Seize a Market Segment
VALUE IMPLICATIONS FOR CAPTURE AND KEEP THE HILL PLAY
Quarter Q0 Capture and Keep the Hill Play Market Share Loss (%) Benchmarks in Middle East market (March 2008–September 2009) 0 -1 -2 -3 -4 -5 Market value impact per quarter: 5.4% decrease Price war duration: around 6 quarters Market value impact per quarter: 6.7% decrease Price war duration: around 6 quarters Capture and Keep the Hill Play Price War Participation Q1 Q2 Q3 Q4 Q5

Price War Benchmarks in three developing Asian markets (June ’08–September ’10, June ’08–September ’09, December ’07–June ’09)

Source: Operators’ annual reports; analysts reports; WCIS; Ovum

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A NEW WARFIGHTING MACHINE

three structural elements that can support efficient business models and an advantageous cost structure: 1. Organizational restructuring. This typically includes functional consolidation and outsourcing—such as consolidating mobile network and IT, technology, and procurement functions—to create synergies and cost benefits before then outsourcing on a larger scale. 2. Process reengineering. This includes the design of back-end processes, particularly those related to product development and product launch, simplification of customer processes, delayering customer segments, and radically simplifying product offerings and propositions. 3. Rigorous operating expenditure reduction. This involves strenuous efforts to lower operating

The fourth play is fundamentally different; it is strategic and involves mobile operators rethinking their business models. The aim is to become a new war-fighting machine thanks to a radically improved cost structure. The operator sets out to acquire a structural cost advantage that can be leveraged into a superior, sustained price position. Capabilities of the New War-Fighting Machine With this approach, the operator develops a new capability set and a clear competitive advantage based on

costs across multiple dimensions (infrastructure, materials, and services). Some firms have managed this through facilities-based costsaving efforts including centralization, investing to improve power efficiency, taking advantage of managed services, network sharing, and aggressive traffic optimization (see Exhibit 9). Other operators have focused on non-facilities– based cost-saving efforts such as launching mobile virtual network operators and sub-branding. Value Implications. A radically lean cost structure typically results in improved margins and allows operators the mobility and flexibility to make strategic pricing choices that influence the structure of the market. This allows companies to consider all available competitive positions instead of just focusing on price as a basis of competition.

Exhibit 9 Operators Should Rethink Their Cost Structure
OPERATING EXPENDITURE REDUCTION; IMPACT ON PRICING STRUCTURE
Operating Expenditure Reduction per Select Cost-Saving Initiatives Infrastructure Cost-Reduction Initiatives 7%–9% 3%–5% Technology Sourcing Centralization Power Efficiency 5%–8% 14%–15%

6%–9%

Managed Services

Traffic Optimization

Materials and Services Sourcing Centralization

Impact of Cost Reduction on Pricing Structure Current margins Cost reduction Improved margins Improved margins Potential price (RPM) reduction Potential reduction in improved margins

Current RPM

Materials and Services Cost Reduction per MoU

Infrastructure Cost Reduction per MoU

Reduced RPM Due to Cost-Saving Initiatives

Note: MoU = minutes of use, RPM = rate per minute Source: Booz & Company

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CONCLUSION

Price wars are brutal and valuedestructive. They produce no winners. Yet, they are controllable, and in many cases avoidable. Operators can respond with any (or all) of the three tactical price plays we have outlined that, if executed properly, will see them through the war and can even curtail the length of the conflict. By definition, these plays are better than getting into the ditches with aggressors and joining the valuedepleting fight. Yet the best option remains that of the structurally advantaged reformulation of an operator’s business model

by means of a radical change in its cost structure. The highly competitive and oversupplied telecom market will be merciless to those operators that fail to address their cost and organizational problems. By contrast, telecom providers that reorganize themselves to generate synergies and savings, that redraw processes, and that diligently reduce costs, will be less vulnerable to price wars. Instead of being on the defensive, these new war-fighting machines will be positioned to lead their markets and return their shareholders sustained, above-par returns.

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Endnotes
Churchill made this comment to a Congressional luncheon in the U.S. on June 26, 1954.
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This report was originally published by Booz & Company in 2013.

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