January 31, 2014 | Written by: Rob van den Dam
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Global communications service providers (CSPs) have not escaped the industry trends of declining profitability and revenue growth. The negative profit and revenue growth trends are creating pressures for global CSPs to better manage costs and reap benefits from economies of scale. The critical question and call to action for them is how to arrest this decline and flatten or turn the curve back to margin growth. If this is not done, the next question is how long shareholders will accept margin drops before they pull their funds, signaling a massive upheaval in the industry.
Let me first set a little bit of background. From 2002 through 2012, the subscriber base of the 15 largest global CSPs (operating in 10 countries or more and an annual revenue of over US5 billion) grew sixfold. And though revenue and profit have lagged subscriber growth, they grew in a way that has created shareholder value.
The market today, however, is virtually saturated, making it difficult to find new subscribers. Competition has become fierce, with over-the-top (OTT) providers attacking core service revenues and driving up CSP network costs. In fact, both global and single-market CSPs have experienced declines in EBITDA during the 2002 through 2012 timeframe. Though the decline in EBITDA margin was lower for global CSPs than for single-market CSPs, the EBITDA margin gap between the two groups has narrowed. And from a market appreciation point of view, global CSPs no longer trade at a meaningful premium compared to their peers.
The reality is that CSPs are not nearly as globally integrated as they might be. If this is indeed the case, where are global CSPs in their progression toward becoming globally integrated enterprises, and what barriers do they face? What should they do to overcome the barriers and accelerate the benefits associated with a GIE structure?
To answer these questions, we analyzed the current state of global CSPs, both from a financial and operations perspective. We performed research on 15 of the largest global CSPs, conducting financial analyses on the companies, as well as interviews with both group and operating company (opco) executives. The results can be found in our latest report: What being global really means.
We discovered that global CSPs are in a nascent stage in terms of leveraging economies of scale to gain superior margins over their single-market peers. The good news is that CSPs with a global footprint have numerous opportunities to leverage scale to capture additional value from their multi-country presence. By becoming more globally integrated, CSPs increase their ability to transform and leverage value chains across businesses and geographies and deliver productivity gains. In addition, greater global integration enables quicker response to changing markets, more precision in predicting results and increased focus on strategic initiatives.
To be successful in the future and to create value for the shareholders, they’ve got to begin to think about integrating their business around the world. And so what does that mean? That means everything from the organization, how they are organized, the processes they use, the systems they deploy, and basically the way they operate, and there is a tremendous amount of value to unlock by these companies thinking about how to do things in a more standardized way.
That does not mean giving up localization. It does not mean having CSPs completely homogenized. IBM itself operates very differently in the United States than it does in South Africa, but we still have one organizing framework for the business.
That is the goal, and that’s the opportunity for these multi-country operators. And this is an opportunity for a group of single-market countries as well, particularly in China and, to some extent, those in India, where the evolution of telephony was in the provinces or districts. Leveraging what they are doing in one province to another. To make this transformation, CSPs must develop and clearly articulate a global vision and operating model that achieves economies of scale, expands consolidation and drives continuous improvements. In doing, they become true global entities, agile and able to respond to this new era of global economics. So this is a very exciting time though it is going to take several years to make it happen.
To achieve meaningful financial advantage over their single-market peers, global communication service providers (CSPs) should focus on improving their global integration to drive the synergies necessary for cost savings and innovative growth. Download the new IBM IBV study “What being global really means” to find out more.
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