100615 Zf Telco Conference v1

8/6/2019 100615 Zf Telco Conference v1

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Generating profitable growth in European markets.Highlights on Romania

Bucharest, June 2010

Iulian Circiumaru



A.T. Kearney xx/mm.yyyy/00000 2

Agenda

• A.T. Kearney at a Glance

• Local market positioning within theEuropean context

• Conclusions and implications forthe Romanian market



3A.T. Kearney

A.T. Kearney is present in Romania since 2003

We combine global insights

• 84 years of experience, founded 1926• 53 offices in 35 countries• More than 2,700 colleagues

• Growing 1 billion USD revenues company

with local expertise,

wherever our clients operate:

• Amsterdam• Berlin• Brussels

• Bucharest• Copenhagen• Düsseldorf • Frankfurt

• Helsinki• Kiev

• Lisbon• Ljubljana• London• Madrid• Milan• Moscow• Munich

• Oslo

• Paris• Prague• Rome• Stockholm• Stuttgart• Vienna• Warsaw

• Zurich

Europe

• Abu Dhabi• Dubai• Manama• Riyadh

Middle East

• Bangkok• Beijing• Hong Kong• Jakarta• Kuala Lumpur• Melbourne• Mumbai

Asia Pacific

• Atlanta• Boston• Chicago• Dallas• Detroit• Mexico City

Americas

• New York• San Francisco• São Paulo• Toronto• Washington,

DC

• New Delhi• Seoul• Shanghai• Singapore• Sydney• Tokyo



4A.T. Kearney

Our expertise spans a wide range of industries andservices

S e r v i c e s

FinancialServices Public Sector UtilitiesTransportation

Pharma &Healthcare

Supply ChainManagement

Strategic IT

Strategy

Procurement& Analytics

Organization &Transformation

Mergers &Acquisitions

Innovation &Complexity Mgt

SustainabilityOperations

Communications& High Tech

ConsumerProducts & RetailAutomotive

Aerospace& Defense

Energy & ProcessIndustries

Supply ChainManagement

Strategic IT

Strategy

Procurement& Analytics

Organization &Transformation

Mergers &Acquisitions

Innovation &Complexity Mgt

SustainabilityOperations




Global References

A.T. Kearney advises leading companies in theCommunications & High Tech Industry across all sectors

Source: A.T. Kearney

Selection

Mobile Operator Fixed Operator High-Tech and ICT Supplier

APAC

EMEA

NorthAmerica

SouthAmerica

EasternEurope

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http://slidepdf.com/reader/full/100615-zf-telco-conference-v1 7/30A.T. Kearney xx/mm.yyyy/00000 7

The network coverage in 2G is similar in all areas while 3Gis less developed in Eastern Europe

42

98

77

100

2G 3G

PopulationGeographic

Mobile network coverage in EEA1

(2009,%)EEA Western Europe Eastern Europe

47

98

86

100

3G2G

10

99

39

100

3G2G

Romania is slightly above the average of its EE peer country group

(1) EEA includes Iceland, Liechtenstein, Norway and EU27 states.Source: European Mobile Industry Observatory 2009, A.T. Kearney.

Romania,43%



Different consumer preferences and operators pricing leadto significant variance in between penetration rates ofactive SIMs across EEA

LT

148%

LU

146%

FI

145%

BG

145%

LI

141%

RO

133%

AT

130%

DE

129%

CZIT

155%

CY

161%

GR

183%

116%

SKCH

115%

BE

111%102%

NO

102%

LV

101%

IS

101%

SI

98%

MT

93%

FR

85%

126%

UK

128%

SE

129%124%

IE

123%

NL

122%

DK

117%

PL

117%

ES

117%

HU

150%

PT EE

Penetration rate of active SIMs in EEA countries(2009)

Weighted average ’09: 124%

Weighted average ’07: 117%

Romania has a high penetration of active SIMs indicating an important level ofmarket saturation on the mobile market, which raises question marks on the

business models sustainability of the incumbents

Source: European Mobile Industry Observatory 2009, A.T. Kearney.



Variations between business models of mobile operatorsand consumer preferences lead to a different ratios ofprepaid vs. postpaid services

GR

25%

75%

IS

25%

75%

PT

27%

73%

RO

30%

70%

LU

31%

69%

IE

33%

67%

LI

35%

65%

CY

35%

65%

LT

37%

63%

UK

40%

60%

HU

42%

58%

DE

44%

56%

LV

44%

56%

BE

45%

55%

EE

46%

54%

PL

46%

76%

IT

15%

85%

MT

24%

54%

SK

50%

50%

CZ

51%

49%

BG

51%

49%

NL

51%

49%

CH

53%

47%

ES

60%

40%

SE

60%

40%

AT

61%

39%

DK

62%

38%

SI

63%

37%

NO

70%

30%

FR

70%

30%

FI

91%

9%

Post-paidPrepaid

Percentage of pre- and post-paid SIMs in EEA countries(2009)

Romania has a relatively low percentage of postpaid users also due toaggressive offers for prepaid services


Average prepaid SIMs ’09: 56%



The levels of penetration, tariffs variances and consumerpreferences lead to high national discrepancies infix/mobile split

75%

25%

LT

131

69%

31%

BG

137

62%

38%

EE

138

58%

42%

HU

162

65%

MT

49

82%

18%

SK

74

77%

23%

LI

101

77%

23%

PL

114

46%

35%

SI

195

56%

44%

PT

196

69%

31%

CY

238

32%

68%

BE

251

62%

38%

IS

265

44%

56%

UK

267

44%

56%

NL

274

50%

50%

FR

280

57%

43%

ES

289

60%

40%

IE

297

52%

48%

DE

301

24%

76%

AT

302

57%

43%

LU

313

30%

70%

LV

314

80%

20%

IT

326

53% 54%

FI

322

74%

26%

DK

331

50%

50%

CH

332

45%

55%

GR

360

56%

47%

SE

383

35%

65%

NO

383

43%

57%260

CZ

117

69%

31%

RO

118

44%

Minutes of usage by mobile and fixed line per capita in EEA

Weighted averages: Total: 260

Fixed line: 134 Mobile: 126

In Romania, as in other CEE states, the mobile calls dominate on a marketsignificantly below the EEA level in terms of usage per capita

MobileFixed line




The average coverage with 3G services is more than doublethe percentage of population owning 3G enabled phones

3G Population coverage in the EEA(2009)

83% 85% 88% 90% 90% 91%81%

94% 97% 97% 98%92%

IT PT CH SL AT UK LU SE IE

43% 44% 46%

PL LT CY SK LVHU RO

34%

BG IS CZ FI

98% 98%

LI GR EE BE DE DK NO FR ES NL

49% 50% 50% 53% 54% 60%70% 70% 70% 75% 80% 81%

Weighted average ’09 77%

6%

EE

6%

31%

FIIS

32%

LT

18%

SK PL

20%

BG

21%

FR PT

42%

IE

48%

CY

50%

IT

53%

GR

58%

LU

60%

9%

BE

16%

CZ

17%

LV

6%

MT

17%

HU

18%

33%

AT

34%

LIDK

36%

UK

40% 41%

SE

41%

ES

41%

24%

NO

25%

RO

26%

DE

27%

SI

28%

CH NL

Weighted average ’09 33%

Percentage of EEA population with 3G enabled phones(2009)


Romania shows gaps to close comparing to the averages, especially on the3G network coverage



Mobile broadband penetration is within the beginning stageand varies significantly across Europe

Mobile broadband penetration in Europe(% of population, Q2 2009)

1,6%1,8%

PT IE HUCZDK DEAT ESSE LTSKPLITUK SI RO FR MT GR BE NL EE LU BG LV CY

13,8%12,6%

10,8%

8,3%

6,3% 4,9%4,7%4,7%

4,5%4,4%

3,2%1,6%

3,2%2,8%

2,5%2,1%1,5%

3,2%

1,3%1,0%0,8%

0,5%

1,9%1,4%

Source: Broadband Access in EU: Stuation at 1st July 2009, European Comission.

The growth trend is expected to continue with forecasts of 20% penetration innext 2-3 years, fueled by marketing push and growth of compliant phones


http://slidepdf.com/reader/full/100615-zf-telco-conference-v1 13/3013A.T. Kearney

Consumer Internet Traffic & Revenue by Type, 2008

14%

7%

7%

Revenue

2%6%2%

60%

1%

Traffic

54%

18%

3%

22%

2%

(1) Includes Video and Casual Gaming; (2) Includes all General/Vertical Content, Search and e-Commerce Online Services; (3) Includes AdultSource: Cisco, Gartner, IAB, IDC, eMarketer, Business Insights, JP Morgan, Natixis, PwC, A.T. Kearney analysis

File-sharing/ Digital

Downloads

VoD3)

IPTV

Other Online Services2

Communications

Gaming1) /Gambling 1%

Communications

Gaming/Gambling

General/Vertical Content Sites

Digital Music/Video/Book Sales

Search

e-Retaile-Travele-Brokerage

VoD3)

IPTV

File Sharing & VoD:

•Generate 73% of allconsumer traffic...

• ...but only 8% ofconsumerrevenues

In addition, broadband markets must see a realignment ofvalue and cost



On the European level, the strong increase in mobile usagedid not balance the drop of tariffs

222325262828303030

34

CAGR ’00-’09: -4,7%

2009200820072006200520042003200220012000

Evolution of ARPU in Europe(EUR/user)

767704634

530470

404342296

225

16,6%

200820072006200520042003200220012000

Minutes of use on mobile(billion of minutes per year)




In European telecoms, fierce price declines have outpacedefforts to cut costs and boost volumes

Voice Revenue per MinuteIndexed to 2005 = 100

Data Revenue per GBIndexed to 2005 = 100

Source: Global Cost Benchmark, A.T. Kearney analysis

OPEX per MinuteIndexed to 2005 = 100

OPEX per Air Traffic (voice & data)Indexed to 2005 = 100

European Wireless Key Economic Trends

5263

71

87

100

20062005 2007

CAGR -15%

20092008

712

26

57

100

2005

CAGR -49%

2009200820072006

576170

80

100

2005

CAGR -13%

2009200820072006

3648

62

78

100

2005

CAGR -23%

2009200820072006



To protect the margins within the context of decreasingARPU the mobile operators resorted to OPEX reduction

Sales

-6%

6%

-6%

IT Marketing &Product

Development

-18%

Suport& overhead

-14%

Network

-10%

CustomerManagement

Cost reduction by function

Cost reduction by function

Source: A.T. Kearney- European Cost Benchmarking for Mobile Operators.

Are business models sustainable?

Highlights on cost reduction focus



Users of telecommunication services are among the mostlikely customers to change suppliers, thus…

Gas BankingElectricity

18%19%

22%

7%

InternetProvider

19%

8%

Insurance Mobile

11%

FixedTelephone

Percentage of EU27 consumers that changed supplier in the last two years(% of consumers, 2008)

Source: “Consumers view on switching service providers” -EUROBAROMETER of January 2009.

… are the cost reduction initiatives carefully aligned with the marketchallenges?



European Telecom demand has shown different exposureto the crisis

European Telecom demand: key trends

Voice revenues decline not

clearly

accelerated bycrisis

Fixed broadband lines growth

more impacted

by saturationthan crisis

Increase in F-M substitution

Internet & Data revenues growth

still steady

Mobile Fixed

ARPUs impactedwhere/whencrisis hits

strongly

Usage elasticity to voice price is

dropping,

roaming reducing

Data services appear resilient

to the crisis

Handsets replacement

cycle is slowing

Market decrease will likelybe accelerated as economic

downturn will exacerbatestructural factors

Market partially impacted sofar, but deeper hit expected

as crisis continues

More impacted by economic downturn



F-M Convergence

MobileFixed

Consolidation in European Telco Sector

External growth will most probably determine concentration in Europeand a further expansion to emerging markets

External growthin emerging

markets

Largemultinational

operatorsexpanding

Fixed andmobile sectors

converging

Expansion in emerging markets

Consolidation& External

Growth

Few championssurviving at

national level



In summary, several consolidation & external growth drivers fosteredby macroeconomic downturn will most probably reshape the EuropeanTelecomunication industry

10%

32%

58%

14%

36%

50%

Today End game

European Telecommunication market structure

Consolidation drivers

National marketrepairing• Consolidate locally to

achieve scale

F-M Convergence• Mobile champions

acquiring Fixed Altnets• Merge among Fixed and

Mobile Altnets

Multinational

Strength• Acquire int‟l market share• Sell & Acquire to

rationalize portfolio

Multinational Integrated (1)

National integrated 15%

10%

75%

25%

10%

65%Multinational Integrated

National integrated

Others Others

Mobile Fixed Mobile Fixed

# of Groups (2) 42

Notes: (1) F-M integrated at country level (2) ~ 95% of total marketSource: Company Reports, Merrill Lynch, A.T. Kearney analysis

< 30



Multinational groups will enhance market power in EuropeanTelecomunication markets leveraging their strong financial position

Expected market evolution

Source: Company Reports, Merrill Lynch, A.T. Kearney analysis

53%

87%

Mobile Fixed

Today

End game scenario

Multinationalgroups

Otheroperators Strong financial position to

enable growth

• Increase in equity and in L/Tfinancial leverage may bring~60 € bn for acquisitions

Multinational dimension inmature markets rewarded byinvestors: -15% vs. -26% avg.European market performance(Jun-08 to Mar-09)

Some cross-country synergiesto be leveraged

• Brand equity• Product development

• Group functions (althoughexecution)

Drivers for European

multinational expansion

Fixed Mobile multinational groups may enlargemarket power in particular in Fixed sector

~15%

Limited

47%

The direction of multinational expansion shall take into consideration thatsize in local markets drives cost position hence margins

13%~5%



Agenda

• A.T. Kearney at a Glance

• Local market positioning within the

European context

• Conclusions and implications forthe Romanian market



The Romanian market has good aspects, but also lessgood ones…

Market potential Despite the high penetration rate, the local market still demonstrates a good potential

to grow on the medium and long term.

Need to review the business models

Consolidation most likely

Customer trends

Further drop in prices?

Overview of the key outcomes for the Romanian market

However, in order to achieve sustainable growth, local market players have to review,rethink and reinvent their business models.

Realignment of value and cost has to be done based on strong fundamentalassumptions, not on an ad-hoc basis.

Often, restructuring of business models result in realignments of offering portfolio, but areshuffled offer does not imply a realignment of business models!

Consolidation is highly probable on the current fragmented market. The consolidation wave is conditioned to increasing needs to finance network CAPEX which

cannot be supported by small players, low valuations which make small players easy targets,severe pressure on margins which force low performing players in M&As.

Consolidation could be a means of reducing pressure on margins on the overall market leveland enable the market to afford next waves of technology (scale economies effects).

Additional downward adjustments of prices depend, apart from the regulatoryenvironment, mainly on pace of consolidation trend and on the sustainability of the localbusiness models.

Slowdown of handsets replacement cycles Customer retention function gain more and more importance (costs with customer

management have to be rationalized, not merely reduced!)



CONTACT DETAILS:A.T. Kearney Management Consulting SRL

39-41 Academiei Street, 6th floor,010013 , District 1, BucharestRomania

Iulian Circiumaru, Associate

+40 (21) 304 02 20 (Office)+40 (21) 304 02 38 (Fax)

[email protected]

Thank you!




Back – up pages




Notes: (1) MOU = Minutes of Usage; RPM = Revenues per Minute; Elasticity calculated as “delta MOU %” / “- delta RPM %”. MTRs r eductionover 2008 does not substantially affect elasticity trends

Source: Companies reports; Merrill Lynch; A.T. Kearney analysis

Some indicators warn on critical impact that crisis mayhave, particularly on mobile revenues

Mobile elasticity of MoU to RPM(1)

- #, ‟07 – „08 -

E l a s t i c i t y o f M

O U t o R P M

GD P g

r ow t h ( % )

14,5 14,2 14,0 13,2 12,5 12,4 12,3 11,8

21,3 21,5 21,4 20,3 19,3 19,5 19,4 18,7

RPM ( € cents /min)

Voice ARPU ( € )

Corr.= 87%

Elasticity of MOU to RPM

GDP growth (%)

Strong correlation between GDP growth and usage elasticity on price warnson critical impact that tariff reductions would have during crisis




In a W-shaped scenario, revenues and margins would betangibly hit as market trends would worsen

European(1) Mobile Service Revenues- YoY % growth, ‟07 – „13 -

European(1) Fixed Line Revenues- YoY % growth, ‟07 – „13 -

140 142 136 136 133 133 135

52 53 49 50 47 47 49

Revenue YoY growth (%, “W” scenario)

EBITDA

Revenues

Source: IMF; IDC; A.T. Kearney analysis

Notes: (1) Countries include Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Sweden, Spain,Switzerland, UK

MOBILE FIXED

2,4%1,0%

-4,2%

0,6%

-2,8%

0,2%

1,7%

GDP growth (%, “W” scenario)

( € bn)

158 158 153 149 144 141 137

49 49 46 44 42 40 38

GDP growth (%, “W” scenario)

EBITDA

Revenues

( € bn)

Revenue YoY growth

GDP growth

Revenue YoY growth

GDP growth

Revenue YoY growth (%, “W” scenario)




During 2000-2008 period the proportion of mobilecommunication increased to almost half and the tendencyis likely to continue

818

767

1,585

2008

+4%

2007

1,576

704

872

2006

1,518

634

884

2005

1,433

530

903

2004

1,392

470

922

2003

1,352

404

948

2002

1,321

342

979

2001

1,274

296

978

2000

1,190

225

965

Mobile minutes of use

Fixed line minutes of use

Minutes of use on mobile and fixed lines in the EEA(billion of minutes per year) CAGR 2000-2008

17%

-2%

19% 23% 26% 30% 34% 37% 42% 45% 48%Mobile %of Total

Mobile services driven an increase in market overall with total calls increasingfrom 200 min per user per month in 2001 to 260 min in 2008


1 Consolidation & external growth




Local consolidation will be a way to reduce pressure on industrymargins and position sector in better shape to afford next wave oftechnology innovation

Source: Merrill Lynch; Company Reports; A.T. Kearney analysis

Nationalconsolidation

A

Mobile

EBITDA Margin vs. Market Share- %; ‟08 -

Consolidation in UK required to uplift sector margins

Consolidation in other EU countries may drive sectormargins improvement

Fixed

BB penetration on HH X = # of players beingconsolidated (Expectation)

EBITDA Margin vs. concentration- %; ‟08 -

Improvement in local sector EBITDA may be drivenby the consolidation of 1-2 smaller players in main EUmarkets

10%

20%

30%

40%

50%

60%

40% 50% 60% 70% 80% 90% 100%

EBITDA (%)

SpainPortugal

Italy

FranceGermany

FinlandAustriaUK

Sweden

1-2+

1

1

Market share of first 2 players (%)

11

15%

20%

25%

30%

35%

40%

45%

50%

5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

EBITDA %

Market Share# of Customers

Sub-scale

Few Champions Optimal scale

1. Consolidation & external growth

1 Consolidation & external growth



F-M convergence will be reached via an acquisition game led by MobileChampions and a merger game among Altnets

N t (1) I l d lti ti l i t i i hi h th t i b t

European Telecom service market - 2008

29%

18%

18%

36%

4%

20%

3%

17%

56%

Mobile Fixed

Integrated fixedincumbents

Mobile Champions

Altnets(1) fixed ormobile only

Incumbentsfixed only

Integrated Altnets(1)

Mobile champions acquiring andconsolidating sub-scale fixedAltnets, leveraging on:

̶ Strong cash-flows generated

̶ Strong brand recognition to beleveraged in fixed

2

Mobile Altnets merging with Fixed

Altnets to exploit benefits of F-Mintegration

To be sustainable, mergers shouldinvolve players with sufficient scale(Multi-mergers might be required)

Acquisition game1

Merger game2

Mobile champions: 1st and 2nd mobile player in more than one country(in some cases with fixed operations)

Altnets(1) fixed or mobile only: Altnets with no integrated operations in country

Integrated Altnets(1): Altnets with integrated operations in country

Incumbent Fixed only: Fixed incumbents not integrated in country

Integrated Fixed incumbents: Fixed incumbents integrated in country

F-M drivers of externalgrowth & consolidation

Fixed and mobilesectors

converging

B

Fading out

1

1. Consolidation & external growth

100615 Zf Telco Conference v1

Documents

Transcript of 100615 Zf Telco Conference v1