fixed mobile integration - opportunity or challenge? (detecon executive briefing)

www.detecon.com

Dr. Arnulf Heuermann [email protected]

Fixed Mobile Integration – Opportunity or Challenge? In many mature markets the home business revenues of fixed and mobile telecommunications carriers are shrinking despite strong growth in traffic. New strategies have to be developed with a focus on performance optimization, exploiting internal and external growth opportunities, and preventing customer churn.

In line with the technological trend towards next generation networks, where services run on convergent networks, most carriers are now revising their old company structures where fixed and mobile businesses were separate entities or strategic business units operating their own sales organizations, service and network platforms.

The integration of fixed and mobile operations is one of the major management tasks, often also in combination with fixed-mobile merger activities. The central challenge is to release the synergy potential of such integrated organizations.

> Executive Briefing

Detecon International GmbH 09/2008 2 www.detecon.com


Fixed Mobile Integration – Opportunity or Challenge?

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Introduction

Since the early nineteen-nineties mobile network operators have produced a remarkable success story on a world-wide scale. With more than 3bn subscribers in digital mobile networks they have surpassed fixed access lines by far and experienced tremendous growth in subscribers, traffic, revenues and profits. EBITDA margins between 35 and 55% are the rule. At the same time fixed networks in mature markets grew slowly then stagnated, and although the broadband market is booming it cannot compensate for the losses in revenues from legacy services.

Despite continuing growth in the mobile data business the average mobile network operator (MNO) in Europe is facing decreasing revenues for the first time, caused amongst others by regulatory intervention in international roaming tariffs and termination rates. We believe that MNOs will see a market consolidation and that fixed-mobile integrated businesses will have a significant competitive advantage in the medium term future.

Fixed-Mobile Mergers as Potential for Growth

External growth and the release of synergies are the major drivers for fixed-mobile integration:

Over the last three years Telecom Italia has re-acquired the remaining TIM shares, one of its spin-offs several years previously,

Belgacom followed with its re-integration of Belgacom Mobile and

Swisscom joined with the buyback of 25% of Swisscom Mobile from Vodafone.

Fixed line carriers have started to hunt for mobile operators, for example

the Japanese Softbank Corp., a broadband fixed line, online, advertising and e-commerce company, is buying Vodafone’s mobile business in Japan,

the British cable network operator NTL took over mobile service provider Virgin Mobile and

in 2007 the French mobile operator SFR acquired the French ISP “Tele2” and increased its share in Neuf-Cegetel, a fixed line and cable service provider.

At the same time mobile operators are diversifying their service portfolios, in particular by extending their footprints in the fixed broadband market.

Vodafone changed its mobile only strategy in 2006 and, having integrated its German Arcor subsidiary (amongst others), is now attacking Deutsche Telekom in Germany with mobile and fixed products offered under a combined brand.

In 2008 VimpelCom, the second largest Russian mobile operator acquired the second largest alternative network provider, Golden Telecom, thereby challenging Uralsvyazinform, until then the only truly integrated operator in Russia.




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Apart from external growth fixed-mobile integration also offers internal growth potential. Broadband applications like IPTV, gaming, video on demand and community related video applications are neither fixed nor mobile - but require fixed and broadband access. Fixed-mobile integrated carriers will be more flexible and able to offer the best suited technology mix for both densely and sparsely populated regions.

The Challenge of Fixed-Mobile Organizational Integration

An integrated fixed-mobile organization is part of the wider trend towards the “horizontal” restructuring of telcos. Instead of “vertical” organizations separated into fixed voice, mobile and data business units, new structures are cut into network operation, services and sales.

On the network side increasing competition and market saturation as well as technical progress makes a strict cost-leadership strategy necessary. This means standardization, using economies of scale and scope, and shared use of resources as well as enforcing the OPEX and CAPEX optimization potential in the NGN.

On the service and in particular the sales side new market entrants like MVNOs, resellers, media companies and ISPs are attacking parts of the carrier value chain. Integrated carriers are forced to follow a clear differentiation strategy, as only “specialist offers” can compete or are accepted by specific customer segments. Cost-leadership and differentiation strategies are in conflict and make a separation of business units for service, sales and network operations necessary.

Transformation Path Towards an Integrated Company

Fixed Service Mobile Service

Network Network

Fixed sales, services and

network

Separate organization Integrated organization Customer-centric organization

Fixed and mobile companies with separate management, HR, Finance, Procurement, and other overhead.

Separate sales channels, points of sales, CRM systems, customer segmentation and dealer conditions.

Separate licenses for fixed and mobile services, different pricing, no bundles or FMC services, different billing.

Access networks technically separated, backhaul systems separate, mobile network with own switching and leased lines.

Fixed service: marketing of fixed & Internet & Data and corporate services.

Mobile service: marketing of mobile services.

Network : network management for fixed and mobile business, and marketing of carrier services (wholesale).

Integrated sales & customer channels for all services. Integrated CRM system.

Business: marketing of all (bundled) telco services to business & corporate customers.

Residential: marketing of all (bundled) telco services to private customers.

Network : Network management for own company, other carriers.

Integrated sales & customer care for all services.

Integrated brand as an option.

Business ResidentialMobile sales, services and

network

Sales Channels, CRM Sales

Figure 1: Generic FMI Organizational Development




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For the integration of formerly independent fixed and mobile operations with their own networks, service platforms and sales structures the transformation to a horizontal organization means a shake-up of the traditional business structures.

On the sales side a (re-)branding, combined points of sales, harmonized dealer concepts and conditions, product bundles, and training of personnel to sell FMC products are only some of the challenges to be faced. The integration will only be successful with a unified mobile-fixed customer market segmentation, segment-specific fixed-mobile product bundles and harmonized price plans. CRM systems and customer care in general are major challenges, as the mobile organization’s data base is based on individual customers, while the fixed organization works with household data.

On the service side seamless fixed-mobile convergent services will require a network independent service platform that will gradually be introduced with the transformation to NGN structures, but which is still a technological challenge. When integrating fixed and mobile service organizations it may be useful to structure them according to “business” and “residential” units with the former mobile services building the bulk of the residential and the fixed services the bulk of the business customer units.

On the network side most of the backbone’s technical and O&M departments, including switching, may be integrated.

The transformation from separately operating business entities towards an integrated organization creates a lot of potential for synergies, but these will not be released automatically. Avea, the third largest mobile operator in Turkey which is currently integrating their business into Türk Telekom, installed e.g. a “Chief Synergy Officer” responsible for the realization of all synergies during the fixed-mobile integration process. At Deutsche Telekom members of the board have cross business unit responsibilities, e.g. the CEO of the fixed broadband unit T-Home is also head of sales in the whole DT Group.

Synergies result from more revenues as well as CAPEX and OPEX savings.

CAPEX Synergies

Large CAPEX savings potential comes from the lower procurement costs of FMI operators. A net present value of more than $450m in synergies is expected from the integration of VimpelCom and Golden Telecom, of which one-fifth are generated from procurement savings. The value might easily be larger when applied to the best vendor prices of a global player taking over a relatively small operator in a developing country, as Vodafone and France Telecom did in 2008.




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Joint network development is another source of CAPEX savings. For example, when rolling-out a WiMAX network, many of the existing GSM backend systems might be re-usable. Another example are synergies to be achieved by using cost effective GSM based “fixed line” access to customers living far away from the next fixed switching center. According to our experience total CAPEX savings from joint network development can be about 20% in the start-up phase and 9% in the long run.

OPEX Synergies

A major source of OPEX synergies are lower HR costs. Less personnel will be required for general marketing-mix and segmentation, convergent CRM systems, combined usage of points of sales, call centers, and business customer sales. In addition there will be scale effects from general overheads, joint network development and O&M. Calculations for stand-alone staff for fixed and mobile operations vs. combined operations reveal staff cost savings of nearly 20%.

Other costs of goods sold like dealer commissions, international traffic termination, channel leasing etc. also allow synergies which may reach between 9 and 14% of all COGS. Some carriers that we work with in emerging markets plan to use about 10% of their fixed business sites for future mobile roll-out, saving substantial site-rental OPEX.

Combined fixed and mobile operations may also lead to consolidated operations and billing costs by replacing separate OSS systems with next generation operations support systems. Synergies arise from the reduced number of charging systems to maintain, optimized provisioning of new subscribers, and process automation.




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Conclusion & Recommendations

External growth will be one of the few options open to carriers in mature markets to increase their shareholder value. Fixed-mobile mergers offer an attractive growth perspective.

Stand alone fixed or mobile carriers will have an increasingly weak competitive position on the cost side of the business, but also difficulties to compete with FMC services. FMC services will become increasingly important for customer lifetime management. Offering fixed and mobile access technologies will also be a prerequisite to fully exploit the potential from the increasing demand for broadband internet services such as IPTV.

Fixed-mobile integration (FMI) offers potential for CAPEX and OPEX cost reduction. These synergies, however, will not occur unless carriers significantly restructure their organizations. FMI will be the first step for a future-oriented organization taking all the technical opportunities of a next generation network into account. Such an organization requires a clear separation into FMI strategic business units for sales, services and network operations. It may be useful to nominate a “Chief Synergy Officer” to master the transition phase of FMI or to install cross business unit responsibilities at the board level.

fixed mobile integration - opportunity or challenge? (detecon executive briefing)

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