The Smart Cube Cubisms May2013

8/11/2019 The Smart Cube Cubisms May2013

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Cubisms

thesmartcube.com

FINANCIAL SERVICESCorporate Governance and Transparencyfor Chinese Companies P. 4

STRATEGY & MARKETINGMachine-to-Machine TechnologyThe Next Big Thing? P. 32

PROCUREMENT & S UPPLY CHA

Are Turnkey Models the Future forthe Telecom Sector? P. 19

AN ALYT IC STwitter Sentiment Analysis:Tracking Consumer Attitudeson Social Media P. 15

Vol. 3 Issue 1

Could Asia Pacic bethe Saving Grace forthe Airline Industry?P. 10


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Cubisms | FEBRUARY 2013 2

Omer AbdullahCo-founder and Managing DirectorThe Smart Cube

Welcome to our rstinstallment ofCubisms for 2013.Its always nice to start the new year afresh and this year, wecertainly embraced that philosophy. Were excited to reveal ournew look to youfrom our new corporate logo to the revampedCubisms you are now reading.

Were most excited, though, to share with you some of the

latest insights around current market issues and industrytrends. This issue spans the globe and crosses industriesto look at how consumers, the economy, the politicalenvironment, technology and suppliers are driving businessforward. In our cover story, we look at how one part of theworld is driving growth for an entire industry globally. InMachine-to-Machine Technologythe Next Big Thing? andTwitter Sentiment Analysis: Tracking Consumer Attitudeson Social Media , we look at how technology is providingmyriad solutions and insights to a wide range of companiesacross industries. In the nancial services space, we lookat how globalization has led to an increase in the scale andcomplexity of Chinese companies, creating a demand forimproved and more transparent corporate governance.And last but not least, we look at the telecom industry andhow third-party service providers have shaped the future ofnetwork deployment.

We hope you enjoy this issue and welcome any feedbackyou may have. If you would like more insight into any ofthe topics in this issue, or if you have specic ideas youwould like to see covered in future issues, please email usat [email protected] .


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MAY 2013 | Cubisms 3

Table of Contents

2013 The Smart Cube. All rights reser ved.

FINANCIAL SERVICES

4 | Corporate Governance and

Transparency for Chinese CompaniesGlobalization has led to an increase in the scaleand complexity of Chinese corporations. A naturalfollow on has been the demand for improvedand more transparent corporate governance.

23 | U.S. Major League Sports:Industry Economics andInvestment Considerations

45 | The Smart Cube Risk Appetite Index

STRATEGY & MARKETING

32 | Machine-to-MachineTechnologyThe Next Big Thing?M2M technology has evolved to providecustomized solutions to organizations across arange of industries. While the market is set togrow globally, where does this growth lie andwhat challenges should new entrants into themarket expect?

38 | Managers Snapshot: EmergingTrends in the Consumer PackagedGoods Space

PROCUREMENT & SUPPLY CHAIN

19 | Are Turnkey Models the Future

for the Telecom Sector?In response to one of the industrys mostchallenging business environments, telecomproviders have looked to Managed andProfessional Services. How has this model evolvedand what drivers are propelling this evolution?

40 | The Importance of Coal to theChinese Economy

ANA LYT IC S

15 | Twitter Sentiment Analysis:Tracking Consumer Attitudes onSocial MediaSocial networking sites can provide valuableinsight into the minds of consumers. Thisarticle explores how one tool can be used togauge consumer sentiment on a particularproduct across Twitter.

Published by The Smart Cube

Managing Director: Omer Abdullah

Managing Editor: Amanda Beto

For more information on any of thesetopics, to request article reprints orlearn more about The Smart Cube,email [email protected] .

This publication may not be reproducedor distributed (in whole or in part) to anythird party under the name of or usingthe trademarks, trade names or servicemarks of The Smart Cube withoutthe express prior written permissionof The Smart Cube.

Visit Us

linkedin.com/company/the-smart-cube

https://twitter.com/TSCInsights

Cubisms Vol. 3 Issue 1

FEATURE

10 | Could Asia Pacic be the Saving Grace for the Airline Industry?Despite adverse economic conditions in the recent past, the airline industry globally has proven tobe resilient. After a short downturn, the industry recovered quickly and, in fact, grew moderately.While the mainstay markets (Europe and North America) have not shown signicant growth, andare not expected to grow substantially in the near future, Asia Pacic has emerged as a savior of theglobal air travel industry, driving growth and expansion.

10 32 19 154


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Cubisms | MAY 20134

Financial Services

Corporate Governanceand Transparency forChinese CompaniesJyoti Prakash, Sajal Agarwal, Ashish Kumar, and Naman VijFINANCIAL RESEARCH

Corporate governanceneed of the hour?Globalization of the world economy,the opening of trade relations,convergence of global capital marketsand the resultant move towards acapitalistic, market-based economyhave led to an increase in the scale and

complexity of corporations, irrespective

of geography. A natural follow on hasbeen the demand for improved andmore transparent corporate governance(CG). According to the Organisationfor Economic Co-operation andDevelopment (OECD), Corporategovernance is critically important to acountrys economic growth and stability,because it provides the credibility

and condence that is fundamentalto capital markets. Companies withstricter internal controls and higherlevels of corporate governance areperceived to be more trustworthy andusually enjoy higher valuations as wellas easier access to capital.

At the same time, this transition towardscomplexity has also seen corporatescandal and fraud rear its ugly headwith increasing intensity. While westerncountries have seen large-scale scandals

such as Enron and WorldCom, morerecently, a growing number of such cases(and with increasing regularity) are beingattributed to Chinese companies listedon foreign exchanges.

This alarming trend has brought to thefore the issue of CG and transparencystandards in the country and hasforced the Chinese government to takea hard look at its implementation andenforcement efforts in this area.


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Financial Services

Cubisms | MAY 20136

the Securities Law and CriminalLaw (2006) led to an increase in thesupervision of listed companies andmade issuance more transparent. The

law on protecting state-owned assets ofenterprises (2009) was promulgated tosafeguard the countrys basic economicsystem, to consolidate and develop thestate-owned sector. In addition, the lawbanned embezzlement of state-ownedfunds and the sale of state-owned assetsat below fair value.

Steady regulatory progress,but CG and transparency stilllagging developed and emerging

market peersDespite the signicant headway made bythe introduction of CG standards, Chinacontinues to experience inefficiencies inthe implementation of these practices. Asa result, Chinese corporations continueto suffer from weak enforcement of andadherence to corporate laws.

The primary reason for this lack ofenforcement is persistently high stateownership, which has had a trickledowneffect on all aspects of corporate

functioning and governance in thecountry. Even after three decades ofreform, the states ownership of companiesin China remains pervasive, with closeto 80% of market capitalization beingaccounted for by government-controlledenterprises. As of mid-2010, the top 10state-owned rms accounted for nearly40% of the Shanghai Stock Exchangemarket capitalization. Mutual funds andnancial institutions (which typicallyencourage higher standards of CG) haveseen little growth since their debut in 1998.

A legacy issue related to state ownershipis non-tradable shares, which are sharesowned either by state enterprises orother legal entities that cannot betraded. Despite reforms over the years,approximately 20% of issued shares of

listed companies continue to be non-tradable. However, their percentage hasdeclined from 64% in 2004. Anotherfollow-through effect of ownership

concentration in the hands of the stateis the lack of independence among theboard of directors. Provisions allowfor the dominant shareholder (in mostcases, the government) to nominate alldirectors, putting a question mark onthe independence of the directors.

According to an assessment of arange of factors by TransparencyInternational (a non-governmentalorganization monitoring corporate andpolitical corruption in internationaldevelopment), of the largest 105 listedcompanies globally, three of the sixChinese companies on the list (includingone in Hong Kong) were among the worstperformers, i.e., least transparent, whilethe other three Chinese companies faredin the second-worst category (FIG. 2).

Figure 2 Transparency in CorporateReporting Index: Largest 105 Public

Companies Globally Average score of companies in each country (countries with three or morecompanies in top 105)

Number of Companies

SOURCES: OECD; Transparency International; Asian Corporate Governance Association

7.0 6.8 6.6 6.56.2

5.5

4.2

3.0 2.9

G e r m

a n y

U n i t e

d K i n g

d o m

S w i t z

e r l a n

d

A u s t r

a l i a

F r a n c

e B r

a z i l

U n i t e

d S t a t

e s J a p

a n

C h i n a

7 11 4 4 8 3 39 6 5

MARKETSCORES

OVERALLCG RULES &PRACTICES

ENFORCE-MENT

POLITICAL &REGULATORY

IGAAPCG

CULTURE

Singapore 69 68 64 73 87 54

Hong Kong 66 62 68 71 75 53

Thailand 58 62 44 54 80 50

Japan 55 45 57 52 70 53

Malaysia 55 52 39 63 80 38

Taiwan 53 50 35 56 77 46

India 51 49 42 56 63 43

Korea 49 43 39 56 75 34

China 45 43 33 46 70 30

Philippines 41 35 25 44 73 29

Indonesia 37 35 22 33 62 33

Figure 3 CG Rankings of Asian Markets


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Another study by the Asian CorporateGovernance Association revealed thatChinese companies lag their Asian peersas well. While the Chinese market scoredwell on accounting standards, it faredthe worst on enforcement of CG (FIG. 3).

Accounting scandals aggravatingthe situation furtherThe lack of appropriate CG andtransparency practices among Chinesecompanies has been highlighted by

the accounting scandals surroundingChinese companies listed on theNASDAQ, NYSE and the Toronto StockExchange. Firms such as Muddy Waters,Alfred Little and Citron Research haverevealed accounting discrepancies anderroneous information disclosure bya number of Chinese companies. Thenumber of cases led against suchChinese companies has increasedsubstantially, from 2 in 2009 to 15 in2010 and 38 in 2011with the mosttypical issues usually being fraudulentor misleading accounting disclosures(e.g., overstatement of assets, revenue,prots and margins).

However, some cases of other poorCG practices have also been observed.

Many of these scandals have involvedcompanies that avoided the rigorousdisclosure requirements of IPOs byopting for the reverse merger route,in which a private Chinese companyacquires an a lready listed shellcompany. Insider trading has also beenan ongoing issue, as has been seen inrecent cases in the news.

Stricter enforcement of CG andtransparency required to reap full

benets of global capital marketsContinued economic growth will placea continued emphasis on improved CG.China, despite its growth slowdown, hasfared signicantly better than its globalpeers, registering 7.7% GDP growthin 2012, having witnessed an averagegrowth rate of more than 10.0% duringthe past 30 years. Although Fixed AssetInvestments (FAI), which has been themajor driving force behind Chinas GDPgrowth, has declined, it continues to beclose to 24.0% in 2012 (FIG. 4). Growthin industrial production, at 9.6% YoYin October 2012, beat the consensus.Further, ination eased to 1.7% andretail sales increased slightly to 14.5%YoY, indicating that the economicslowdown may be past the trough.

Figure 4 China GDP and FAI Growth

NOTES:1. 2012 GDP growth cumulative until 3Q 2012; 2012 FAI growth cumulative until October 20122. Includes IPOs in Hong Kong; 2012 data as of October 31, 2012SOURCES: National Bureau of Statistics, China; Thomson One; UNCTAD

11.3% 12.7% 14.2% 9.6% 9.2% 10.4% 9.3% 7.7%

26.0% 23.9% 24.8% 25.9% 30.0%23.8% 23.8% 20.7%

2005 2006 2007 2008 2009 2010 2011 YTD 2012

GDP Growth (real. YOY) Fixed Asset Investment (nominal, YOY)

0

10

20

30

40

50

60

70

80

90

100

0

5

10

15

20

25

30

35

40

45

50

2005 2006 2007 2008 2009 2010 2011 2012

Amount raised (USD million) No. of IPOs No. of IPOs in US

Figure 5 Overseas IPOs by CompaniesDomiciled in China

GlobalCrisis

AccountingScandals

While the Chinese marketscored well on accountingstandards, it fared the worston CG enforcement.


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Cubisms | MAY 20138

Financial Services

All of which is to say that, withcontinued (and possibly furtherpickup in) economic growth, Chinesecompanies are expected to continue

to seek capital to expand existingoperations and fund growth. Chinesecompanies have been active in theforeign capital markets, with anincreasing number of them seekinglistings on foreign exchangesto raise capital.

The primary factors making thesemarkets attractive business destinationsare easier access to capital/liquidity,optimal valuation, high credit-worthinessand the possibility of new partnerships.The developed equity markets providea larger pool of capital, more liquidityand the opportunity to raise fundsfrom institutional investors (who areabsent from Chinas stock markets dueto stability and transparency concerns).Further, as the issuers expect to obtainthe right valuation for their securities,due to the presence of a large numbersof peers, these markets provide optimalvaluation opportunities. Moreover, aninternational listing enhances the scope

for improved credit ratings and thepossibility of entering into partnerships,

either through acquisitions or creationof joint venture with foreign rms, byswapping American Depositary Receipts.

The US and Hong Kong have hithertobeen the primary markets to seekcapital. While the global crisis was amajor setback, with capital raised fromIPOs in foreign markets declining75% YoY to $10.5 billion in 2008, therecovery was quick. In 2010, the marketrebounded to $38.4 billion, with arecord of 90 IPOs. Further, in 2011,foreign direct investment into Chinawas at consistently high levels, at $124billion. However, concerns regardingthe Eurozone debt crisis and fears of ahard landing for the Chinese economymade investors cautious, a situationwhich has been aggravated by the CGissues described earlier. In 2012, only 32IPOs have been launched by Chinesecompanies, raising a total of slightlyover $2 billion. Vipshop, Chinas leadingonline discount retailer for brands,was the sole US listing in 2012, raising$71 million39% lower than initiallyplanned (FIG. 5). China Auto Rental, whichhad originally planned to raise $300

million, postponed its IPO after failing toattract enough investor interest.

As companies look to get back on trackin terms of IPOs and IPO strength,improved CG will be a key factor indriving listing performance (and beyond).

Beyond the individual company level,the Chinese governments go globalstrategy (announced in 1999 in responseto the changing global environment andwith an aim to scale up local Chinesecompanies and seek those resourcesunavailable within the country) hasbeen going strongwith increasingoverseas acquisitions in both 2010 and2011 (FIGS. 6-7). Given the increasingexposure of Chinese corporations toforeign companies (through mergersand acquisitions) and their corporatestandards, it is imperative for Chinesecorporates to continue to improve theirtransparency standards.

Sound CG reectedin improved performanceDoes effective CG actually reectin performance, and does the marketrecognize and reward better CGand transparency?

To answer this question, The SmartCube evaluated CG and transparency

Figure 6 China Cross-Border M&ANumber of Successfully Completed Deals

Figure 7 China Cross-Border M&ABy Value (USD Billion)

NOTE: 2012 data as of October 31, 2012SOURCES: Bloomberg; UNCTAD

360 384 399455

264

946

769 791 718

377

2008 2009 2010 2011 2012

Chinese Acquirer/Non-Chinese Target Non-Chinese Acquirer/Chinese Target

7

119

5

11

6

11

4

12

-2

38

21

30

34

2005 2006 2007 2008 2009 2010 2011

Net Sales Net Purchases


9/48MAY 2013 | Cubisms 9

Figure 8 Transparency/DisclosurePercentage of Companies FollowingGood Practices

Figure 9 Other CG AreasPercentage of Companies FollowingGood Practices

SOURCES: China Securities Regulatory Commission; OECD; Chinese Corporate Governance History and Institutional Framework, RAND Center of Corporate Ethics and Governance, November 2Corporate Governance at the Chinese Stock Market How it Evolved, Junhua Tang and Dirk Linowski.

80%

67%

20%

73%

100%

47%

93%

60%

67%

80%

Specic committeefor different roles

Does not have differentialvoting rights

Shareholding is not concentrated amongpromoter/directors/management

Majority of Board isindependent directors

Holds regulary AGM

Best Performers Worst Performers

0%

47%

73%

87%

93%

73%

7%

40%

100%

100%

100%

100%

Has disclosure on CorporateSocial Responsibility

Has disclosure on EnvironmentalSustainability

Has disclosure on CG/Code of Ethics

Holds regular earnings calls

Provides guidance/business outlook

Has adhered to prescribed timelimit to report results

Best Performers Worst Performers

practices of the best- and worst-performing overseas-listed Chinesecompanies. It focused on overseas-listed Chinese stocks, as the impact ofthe accounting scandals is highest onthese stocks with overseas investorsbecoming more aware of the issueand hence greater scrutiny of CG andtransparency practices in these stocks.

The identication of the 15 best and 15worst performers is based on excess/lower returns generated compared withtheir sector peers listed in China (thisis to separate the effects of sector andmacroeconomic factors), premium/discount in P/E multiple (average oflast three years) to sector peers listedin China, and the level of institutionalholdings in the stock (the higher levelof institutional holdings, the better;therefore, institutional holdings levelas a parameter for the quality of thecompany was used).

The analysis of CG and transparencypractices of these companies revealedthat, on the whole, better transparencyand disclosure practices are clearly moreprevalent among the 15 best performers(FIGS 8-9). This indicates that companieswith better transparency/disclosuretend to perform better. However, thereis signicant room for improvement

in Environmental Sustainability

and Corporate Social Responsibilitydisclosures. That said, other CG areassuch as ensuring independence of boardmembers and independent members onvarious committees also continue to bea pain point for both worst performingand best performing companies.

In conclusionIn recent decades, China has continuallyreinvented itself as a globalized, market-based economy. At the same time, CGpractices are struggling to evolve andbreak free of their bureaucratic past.While the Chinese government hasshown great initiative in introducingradical reforms, the drive and effortrequired to implement these reformsmust continue to develop.

To this end, continued privatization,increased participation by institutionalshareholders (to create a broadershareholder base), strengtheningof the legal framework (increasinglegal obligation of management andcontrolling shareholders to protectminority shareholder rights) and clearlyetching out the roles, responsibilitiesand independence of the supervisoryboard are some of the key areas thatneed to be addressed on an immediatebasis for China to continue on itsgrowth trajectory.

This article was written by The Smart Cube (TSC)on an independent basis. The insights included arebased on its own research and from sources believedto be reliable. However, TSC may have receivedinformation on this topic that is condential and proprietary to a third-party. As such, thisinformation will not have been utilized and is thusnot reected in this article.

The views mentioned in this article do not in any way constitute investment advice and should not beconstrued as an offer to sell, a solicitation to buy, oran endorsement or recommendation of anycompany, security or commodity. TSC disclaims allresponsibility for investment decisions based on thecontent of this article or the dissemination ordistribution of this article to a third party. Anyconclusions, calculations or determinations reachedconstitute TSCs views as of the date of this publication and are subject to change without notice.


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Cubisms | MAY 201310

Feature

Could Asia Pacic bethe Saving Grace forthe Airline Industry? Vivek Goyal, Nitish Mittal, and Subash ChandarSTRATEGIC SERVICES

D espite adverse economicconditions in the recent past,the airline industry globallyhas proven to be resilient. After a shortdownturn, the industry recoveredquickly and, in fact, grew moderately.From 2011 to 2031, annual air trafficis expected to increase at a compoundannual growth rate (CAGR) of 5%,

and reach about 13.8 billion revenuepassenger kilometers (RPK) (FIG. 1).

While the mainstay markets (Europeand North America) have not shownsignicant growth, and are notexpected to grow substantially in thenear future, Asia Pacic has emerged asa savior of the global air travel industry,

driving growth and expansion. With the

EU struggling to contain its debt crisisand the US registering stagnant growthin air travel, consumers in these regionsare increasingly rethinking their airtravel needs. Freight volumes in theseregions have also grown sluggishly in therecent past. All the while, Asia Pacichas been registering healthy growth.

Airline industry in AsiaPacic vis--vis the worldThe commercial airline industry inAsia Pacic is experiencing the best

phase in its history. Rapid growth hasbeen fueled by lenient regulations, theemergence of low-cost carriers, favorabledemographics, and sustained economicactivity. Between 2012 and 2031, theregion is likely to record a CAGR of 7%in air travel, increasing its market sharefrom 27% in 2011 to 37% in 2031 (FIG. 2).In contrast, the North American andEuropean markets are likely to grow ata relatively muted CAGR of 3% and 4%,respectively, during the period.


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Figure 1 World Annual Traffic Evolution(RPK Trillion, 19712031F)

SOURCE: Airbus Global Market Forecast 20122031 (September 2012)

EXPECTED AIRTRAFFIC

Air trafcwill double inthe next 15

years

202120314.4%

201120215.1%

R P K

( T R I L L I O N )

TOTAL AIRTRAFFIC

Air trafchas doubled

every 15years

Figure 2 World RPK Breakdown By Region

SOURCE: Boeing Current Market Outlook 20122031 (September 2012)

North America

28%

Europe27%

Others

18%

Asia Pacic27%

North America20%

Europe20%

Others23%

Asia Pacic37%

2011100% = 5,198billion RPK

2031F100% = 13,764

billion RPK

According to the International AirTransport Association (IATA), in 2011,Asia Pacic, as compared with its peers,recorded higher net and operating

prots. Of the 10 most protablecarriers (by net prot), half were fromAsia Pacic. Also in 2011, the Asia-Pacic airline market generated totalrevenues of approximately $200 billion,second only to North America. Duringthat year, 10 of the 20 largest airlines(by revenue) were based out of Asia(compared with only ve Asian carriergroups in 2001).

The IATA forecast also reported thatAsia-Pacic airlines are likely to recorda net prot of $2.3 billion in 2012,accounting for about 56% of the globalairline industry prots ($4.1 billion),making Asia Pacic a driver of airlineindustry growth (FIG. 3).

Key drivers fueling growth

Mounting downstream demandWithin the Asia-Pacic region, Chinaand India are leading the way. By 2014,air passenger traffic on Asia-Pacic

routes will increase to 360 million45%of all global air passenger trafficwithChina and India being the largestcontributors fueled by the emergenceof low cost airlines, increasing travelrequirements, and rising disposableincome. Outbound trips made byChinese tourists totaled 57 million in2010, and this gure is likely to rise to100 million by 2015. The Indian travelindustry has been recording double-digit growth, and it is expected to havearound 1.8 billion travelers by 2021.

Increasing corporate travelAccording to various statisticalbodies, corporate travel is also expectedto further drive growth of the Asia-Pacic airline industry as a numberof professionals/entrepreneurs aretraveling within and to the region.This is largely attributed to theincreasing trade, business, and nancialopportunities happening within thisregion among various countries. As

a result, Asian markets are likely to


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Feature

experience continuous growth inbusiness travel, despite a weak Europeaneconomy. In China, business travel is

expected to grow 17% and 21% in 2012and 2013, respectively, and the countryis projected to pass the US as the worldslargest business travel market by 2015.

Budding middle classThe rapidly growing middle class inAsia Pacic provides a large number ofopportunities for the airline industry,domestically and internationally. By2030, Asia Pacic will be home to 66%of the middle class population. Further,in Asia, there are 270 cities with apopulation of one million that lackan airport. Additionally, by 2014, onebillion people are expected to travel byair in Asia Pacic.

Growth of online travel agenciesOnline travel agencies (OTAs) inAsia Pacic continue to dominate travelretail sales. There also is signicantroom for growth, as bustling economicactivity and the rise in adoption ofe-commerce continue to aid the travel

and tourism industry. OTAs are alsoexperiencing faster growth than airlinewebsites, leading all travel categories

in terms of unique monthly visitorsand attracting, in some cases, morethan twice as many visitors as airlinewebsites. Online gross bookings in thisregion are likely to grow twice as fast asthe total travel market to comprise 25%of the total market by 2013.

Growth in Asia Pacic helpsairline industry soarMany of the key drivers fueling growthamong Asia-Pacic airlines have a direct

impact on the airline industry globally.Three primary areas are in new airplanedeliveries, demand for single-aisleaircraft and the outcrop of new airlinesin the Asia-Pacic market.

Asia Pacic to lead in newairplane deliveriesBetween 2011 and 2031, the numberof airplanes in the Asia-Pacic eetwill nearly triple, from 4,710 to 13,670.To meet the increasing demand,

-2

0

2

4

6

8

10

12

Europe Asia Pacic North America Latin America Middle East Africa

2010 2011 2012F 2013F

U S D

B i l l i o n

Figure 3 Airline Net Prots By Region (USD Billion)

SOURCE: IATA Financial Forecast (September 2012)

We see tremendous growth potential in Asia Pacic. The

Asia-Pacic region is now the worlds single largest aviationmarket, as well as a growingeconomic powerhouse,making it crucial for airlinesto be a part of this market forincreased growth.

Robert Bailey, President and CEO, AbacusInternational (June 2012)


13/48MAY 2013 | Cubisms 13

approximately 34% of new airplanesbeing produced globally will bedelivered to the region (valued at $1.7trillion) (FIG. 4). This will make Asia

Pacic one of the primary contributorsto worldwide eet growth, which isexpected to grow at an annual rateof 4%, nearly doubling in 2030 ascompared with 2010.

Rising single-aisle aircraft usageThe increasing preference for alow cost carrier (LCC) model and theincrease in demand for short-haulying are likely to fuel a substantialincrease in demand for single-aisleaircraft. Between 2003 and 2011,single-aisle capacity doubled, and itis expected to further double by 2021(FIG. 5). The narrow body, single-aislesegment is likely to increase as well, asthese aircraft have lower maintenance,better economics, and higher fuelefficiency. This will be primarily due tothe increased demand for LCCs fromdeveloping economies such as Indiaand China.

New airlines entering the marketTo leverage these growth

opportunities, the number of new airlinesin Asia Pacic has increased sharply overthe past decade. New LCCs have croppedup in almost every major nation (FIG. 6).Regional airlines also are establishingsubsidiaries in neighboring countriesand even diversied business groups areentering the sector.

Asia-Pacic market set totake-off amidst turbulenceThe recent growth in the number ofnew airlines in the Asia-Pacic regionis quite apparent. Looking ahead,passenger traffic is likely to continueto remain robust, with carriers lookingto maintain high load factors andimplement lean practices, while strictlycontrolling unit operating costs to keepair travel affordable. In addition, fullservice network carriers, with a focuson premium services, are expected togain traction. LCCs will primarily focuson streamlining short-haul operations,

while some (for instance, Indigo) will

63.4% 69.0%

18.6%22.9%

14.0%5.6%

4.0% 2.5%

2011 2031F

Single Aisle Twin Aisle Regional Jets Large

19,890 39,780

SOURCE: Boeing Current Market Outlook 20122031, September 2012

Figure 5 Share In Global FleetBy Aircraft Size

Figure 4 Global Airplane FleetBy Region

SOURCE: Boeing Current Market Outlook 20122031, September 2012

34.4%

23.7%

22.2%

33.4%

20.9%

22.3%

8.7%

6.4%

13.8%

14.2% 19,890

39,7802031F

2011

Asia Pacic North America Europe Latin America Others

The economic conditions in China and India are helping todrive business opportunities and thus generating business travelactivity, because companies want to get their people where thebusiness opportunities are.

Christa Degnan Manning, DirectoreXpert Insights Research, American Express Global Business Travel (November 2011)


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Feature

Figure 6 Asia Pacic Low Cost Carriers Overview

AIRLINE

COUNTRY

COMMENCEMENT OFOPERATIONS

DEVELOPMENT

Jetstar Japan Japan In 2012, Jetstar Airways entered Japan by forming a partnership with Japan Airlines (JAL) andMitsubishi Corporation

AirAsia Japan Japan Joint venture among AirAsia, Malaysia, and All Nippon Airways, Japan. The airline commencedoperations in August 2012

Scoot Singapore LCC subsidiary of Singapore Airlines. Began operations in June 2012

Air Mantra India Subsidiary of Rel igare Group, which s ta rted operations in 2012

Peach Aviation Japan Commenced operations in March 2012, as a joint venture between All Nippon Airways and the FirstEastern Investment Group (a Hong Kong-based private equity and venture capital rm)

Tiger Airways, Australia Austral ia An Australian subsidiary of Tiger Airway, the airline commenced its services in November 2007

Tianjin Airlines China Commenced operations in 2007, with a focus on China, Mongolia, and South Korea

AirAsia X Malaysia Began operations in November 2007. It is a long-haul, budget airline, with domestic andinternational operations

IndiGo India Commenced operations in August 2006, and is Indias largest LCC. In January 2011, it qualied to startinternational operations, which coincided with an order for 180 A320s from Airbus worth $15 billion

Henan Airlines China A domestic airline established in 2006 It is a joint venture between Shenzhen Airlines of China andMesa Air Group of the US

GoAir India Began operations in November 2005, in India as a LCC. In 2011, the company ordered 72 new A320 Airbusaircraft in a deal worth about $6.1 billion

Spring Airlines China A China-based LCC, which began operations in July 2005

SpiceJet India Started operations in 2005, as an LCC. To augment its eet of 20 Boeing 737NGs, it ordered 15 Q400s

(with 15 options) and 30 Boeing 737NG aircraft in November 2010, adding to another 8 B737s on order.

also venture into international and long-haul markets. Asia-Pacic carriers willcontinue to invest in service innovation,adding more fuel-efficient aircraft in

a bid to meet the projected growth intravel demand.

However, the industry continues to facechallenges, such as a weak cargo marketand high fuel prices. Further, the globaleconomic slowdown has resulted insignicant downside pressure on airfreight volumes. This is primarily dueto weak consumer sentiment, especiallyin developed economies such as Europeand the US, and a correspondingslowdown of exports from Asia.

On the regulatory side, the global airlinemarket has been affected by politicalconcerns in the US and Europe. Inaddition, global air travel experiencedincreased government regulationsregarding airport security, emissions

and taxes, resulting in dampenedgrowth. In Asia Pacic, the presenceof multiple governments and regulatorsin a highly diverse region has led to

several inconsistencies.

From a workforce standpoint, the regionneeds to train personnel such as pilotsand aircraft technicians to leverage thebenets of rapid eet modernization andprojected growth in air travel. Accordingto Boeings estimates, Asia Pacic islikely to require the highest number ofnew pilots and technicians over the next20 years globally. A pilot shortage hasalready started to take place in the Asia-Pacic region, with airlines experiencingdelays and operational interruptionsdue to pilot scheduling constraints. Theregion is expected to need an additional185,600 pilots and 243,500 techniciansby 2031, as airlines expand their eetand new carriers open shop.

Final destinationAmidst the rapidly changing marketdynamics and increasing regulations,air carriers have started to adopt

different end user strategies. Thefuture may look bleak in the short term,driven by immediate challenges such ashigh fuel costs and risks posed by theEurozone crisis; however, air carriersfrom Asia Pacic are likely to standout. The region is expected to exhibithigher sales and margins than theirWestern counterparts in the long term.Carriers in the region also are looking toinnovate and differentiate by providingtravel features such as air-cushioned

seats and freshly-made food to attractcustomers. The spirit of transformationthat is prevailing across this region, inthe form of strategic realignments andversatile airline offerings, is likely topropel these air carriers to look beyondtraditional business models and registerhigh sales growth in the long run.


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Analytics

TWITTER SENTIMENT ANALYSIS: Tracking ConsumerAttitudes on

Social MediaDeepak Trehan and Rachit Khare

DATA ANALYTICS

S ocial networking sites can providevaluable insight into the mindsof consumers. The wealth of dataavailable can help marketers betterunderstand wide-ranging issues, suchas customer reception of a new productlaunch, overall product attribution likes

and dislikes and brand perception.Armed with this knowledge, marketerscan develop a more effective strategyand make better decisions overall. Thatsaid, given the unstructured natureof the data, tracking and analyzinginformation from social channels can

be daunting, and many marketers today

are using statistical tools and analyticaltechniques to derive meaningful insights.

This article explores the use of onesuch tool to gauge consumer sentimenton a particular product across Twitter.An illustrative example is used todemonstrate the tools effectiveness on aparticular topicspecically looking atthe launch of the Apple iPhone 5 andthe nearly 60,000 tweets related to it.

Sentiment analysis:a three-step approachThe overall model development can bedivided into three phases (FIG. 1):

1. Collect and prepare data

2. Derive sentiment and visualize data

3. Build a model


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Analytics

Collect and prepare dataR, an open source statistical software,

provides a Twitter interface that canbe used to download tweets based onkeyword and hashtag search criteria.Nearly 60,000 tweets were downloadedtwo months after the launch of the

Apple iPhone 5. This was done to ensurethat consumers had enough time to useand express their views about variousfeatures of the device.

Processing of these tweets for sentimentanalysis presented a number ofchallenges, including:

Segregating commercial tweets

Cleaning tweets for word forms suchas nouns and adjectives

Filtering out commonly usedEnglish words

Some of these challenges wereaddressed by applying the followingset of operations:

Identifying words such as win,contest, etc., that could be attr ibutedto commercial tweets

Cleaning text, such as removing httplinks, punctuation, whitespace, etc.

Removing stop words such as had,which, that, product name, etc.

Stemming to get the root form ofevery word

Derive sentiment andvisualize tweetsAfter the data was cleaned, a customlist of positive and negative wordsassociated with the device was built toclassify the tweets. A matching logicwas developed to derive a sentiment

-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7

2 10 53 2611,606

5,867

25,670

11,102

2,883524

16%

53%

30%

Negative Neutral Positive

Score

F r e q u e n c y

Figure 2 Frequency Distribution of Tweets Across Sentiment Score

Figure 1 Sentiment Analysis Flowchart

D a t a

C o l l e c t i o n

a n d

P r e p a r a t

i o n

D e r i v e

S e n t i m e n t

B u

i l d M o d e l

Download tweets from TwitterClean tweets remove RT, http

links, punctuation, etc.Normalize tweet words remove

English keywords, stem words

Visualize tweet data inword clouds

Derive sentiment by matchingproduct-specic positive and

negative keywords

Transform textual data into matrixform (Term Document Matrix)

Consolidate product-specic keywords

Build Decision Tree Model YES

NO

Consolidation achieved?


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19/48MAY 2013 | Cubisms 19

Procurement & Supply Chain

Are Turnkey Modelsthe Future for theTelecom Sector? Pankaj Dokania and Subash ChandarSTRATEGIC SERVICES

I n the rst half of the last decade,leading network equipment providers(NEPs) such as Alcatel-Lucent,Ericsson, and Nokia Siemens Networks(NSN) faced one of the industrys mostchallenging business environments.

Confronted with declining prot marginsfrom voice services, increasing marketcomplexities, strengthening regulations,and changing consumer preferences,telecom companies realized the need tostreamline their operations and focus on

core competencies. Telecom operators

were forced to adopt new strategicoutsourcing business models on accountof changing market dynamics, whichincluded outsourcing various non-corefunctions to third-party service providers.

One of the outcomes of this rethinkin business models was the origin ofManaged and Professional Services(MAPS), a practice where telecomoperators transfer their networkmaintenance and management-relatedresponsibilities to NEPs. From 2000to 2009, a number of managed andprofessional services deals were signed,as network operators took aggressivesteps to streamline operations. Further,the evolution of MAPS and increase intrust among network service providersand equipment manufacturers led tothe beginning of turnkey models in thetelecom sector, where NEPs handle


20/48Cubisms | FEBRUARY 201320

Procurement & Supply Chain

Figure 1 Turnkey Logistics Management Model

Typically, equipment vendors employ 3PL players to managethe logistics and warehousing initiatives

Entirely Managed by the Equipment Manufacturer

Warehouse(Logistic Company/Equipment Supplier)

Network ProvidersBase Stations

ManufacturingFacility

the complete deployment process fromlogistics to installation of the equipmentin the base station for telecomcompanies (FIG. 1).

Since then, the turnkey market has alsobeen driven by the growing demand fornew network deployment and expansionfrom network operators that are eitherresource constrained or lacking inadequate in-house expertise. With thecontinuing evolution, telecom operatorshad a single point solution in NEPsfor their base station deployment andmanagement (FIG. 2).

Drivers propelling this evolution

SHIFTING BUSINESS ECOSYSTEMTelecom companies are increasinglysimplifying the supply chain andmoving closer to consumers. As a result,these companies are relinquishing thetechnological aspects of the businessand focusing on sales and marketing.Further, increasing competition inthe telecom market requires network

operators to differentiate their productofferings with new mobile services andcontent. All these require an extensiveeffort on the part of the operator,while improving the time-to-market ofthe new services. Therefore, telecomcompanies are increasingly outsourcingeld activitiesleveraging thevendors expertise as the technologicalenvironment is becoming morecomplexwhile keeping planning andmanagement functions in-house.

REDUCTION IN OPERATIONAL COSTSGlobally, telecom companies havecome under increasing pressure tostreamline their operational costs due todeclining margins from voice services.This has sparked growth of leanerbusiness models. Network operators canleverage their manufacturing expertiseand R&D capabilities to drive downcosts. Therefore, a turnkey logisticsmanagement model is a comprehensivemodel that can address an operatorsimperative to cost-effectively plan anddesign new network deployment.

Before 2000, in the absenceof a turnkey model, networkoperators typically hireda telecom consultant fornetwork deployment,including network planning,design, and optimization andengaged with a third-partylogistics provider (3PL), suchas DHL and Kuehne & Nagel, for transportation and warehousing of the networkequipment.


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Financial Services

U.S. MAJOR LEAGUE SPORTS:

Industry Economicsand InvestmentConsiderationsSourish Gupta and Nakul Kanchan

FINANCIAL RESEARCH

T he four major sports leagues inthe United Statesthe NationalFootball League (NFL), MajorLeague Baseball (MLB), the NationalBasketball Association (NBA) andthe National Hockey League (NHL)witnessed deals worth an estimated$5.6 billion in 2012, an increase of 200%YoY. The $2.2 billion 1 sale of baseball

team, the Los Angeles Dodgers, toGuggenheim Baseball Management inMay 2012, is the largest ever buyout ofa professional sports team. The dealvalued the team at an expensive 9.3xEV 2/Sales, despite the Dodgers beingin Chapter 11 bankruptcy at the timewith a meager $3.2 million in EBITDA 3 in the preceding season. The valuationmultiple for the Dodgers deal wasmuch higher than that of any othermajor league deal, but even the medianEV/Sales multiple of 3.8x for all majorleague deals in 2012, was far from cheap.

All of this merits the questionare U.S.major league teams good investments,or are they only for affluent individual

investors following a personal dreamof owning a sports franchise? Whileownership of sports teams certainlyhas novelty, glamour, and a passion forsport associated with it, our analysissuggests that, following positivedevelopments between 2011 and 2013,major league teams can potentiallymake for a strong investment case (at

an industry level). The major leaguesrecent media rights contracts promisesubstantial improvement in top line,while renewed collective bargainingagreements (CBAs) with the playershave not only immunized the leaguesfrom labor disputes for several yearsto come, but have also reduced payrollcosts. This can potentially transformmany teams into highly protablebusinesses. That said, the major leaguesremain an extremely heterogeneousmix of protable and deep-in-the-redteams. Given the demanding valuationmultiples that deals have typicallycommanded, not all teams will prove tobe truly attractive investments.

Are U.S. major league teams good investments, or are theyonly for affluent individualinvestors following a personaldream of owning a sports franchise?

1) Includes $150 million paid for real estate in the vicinity of Dodger Stadium2) EV: Enterprise Value3) EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization


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Financial Services

Figure 1 Major League Deals Hit A High 4 in 2012,Even if the Dodgers Sale is Excluded

Figure 2 Deal Multiples 5 Expanded Signicantly in 2012

1) Includes $150 million paid for real estate in the vicinity of Dodger Stadium4) Deal values represent pro-rata allocation of Enterprise Value (EV) based on stake acquired5) Deal multiples are calculated based on sales in immediately preceding game season; dollar values in comments on the chart

represent EV on a 100% basis

0.0

2.5

5.0

7.5

10.0

2008 2009 2010 2011 2012

Median Highest

LA Dodgers(MLB),$2.2 billion1

Houston Astros(MLB),$680 million

WashingtonWizards (NBA),$551 million

Miami Dolphins(NFL),$1.1 billion

E V / S a

l e s

PittsburghSteelers (NFL),$800 million

0

2

4

6

8

10

12

0

1

2

3

4

5

6

2007 2008 2009 2010 2011 2012

N o

. o

f D e a l s

U S D

B i l l i o n

NFL MLB NBA NHL Total no. of deals

SOURCES: WR Hambrecht + Co;Forbes , Thomson Financial, and various press

SOURCES: WR Hambrecht + Co;Forbes , Thomson Financial, and various press

Notes

U.S. major league teams are privatelyheld entities and do not disclose nancialinformation publicly. As a result, all nancialdatails in this articlerevenue, EBITDA,debtfor the U.S. major leagues is basedon estimates published byForbes . Forbes calculates revenue net of debt servicingcost for stadium/arena related debt. Thismay result in a signicant understatementof revenue and EBITDA gures.Forbes estimates also have been disputed fromtime to time by league ofcials.

In this article, all references to nancial

data of the NFL, MLB, NBA and NHL,unless mentioned otherwise, refer to theaggregated nancials of the individualteams within the league.

All references to data pertaining to aspecic year are to data for the seasonended in that year. For example, 2012 refersto the NBA season 2011-12.


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The major sports leagues in theU.S. are among the worlds topprofessional sports leagues byattendance and revenueAt approximately 75 million, MLB hasthe highest spectator attendance amongthe worlds professional sports leagues.This is supported by each of the MLBs30 teams playing 162 games during theregular season, compared with 16 gamesper team in the NFL and 82 gamesper team in the NBA and the NHL.By revenue, the four U.S. majorleagues are among the top ve leaguesglobally, with the NFLs large broadcasttelevision deals making it the highest

revenue earner.

Resilient revenue with a trackrecord of consistent growthThe combined revenue of the fourmajor leagues increased 4.3% YoY

to $22.7 billion in 2012. Except for a YoYdrop in revenue for the NBA inthe 2011-12 season, due to a ve-monthleague lockout by owners, each of themajor leagues delivered YoY revenuegrowth every year between 2008 and2012. In the recessionary year of 2009,when U.S. nominal GDP declined 2.2%YoY and nominal gross output of theprivate services industry dropped4.4% 6, the major leagues outperformed,with an increase of 5.2% YoY in

combined revenue.

Figure 3 The U.S. Major Leagues are Among the HighestRevenue Earners Globally By Revenue (USD Billion)

SOURCES: Forbes ; Deloitte Football Finance Review 2012; DFL Bundesliga Report 2012; IBIS WorldRevenue for European leagues converted at EUR/USD=1.39 (average during 2011; source: Bloomberg)Latest publicly available data, other than US major leagues, pertains to seasons ended 2011

8.3

6.4

4.03.5

3.12.7

2.4 2.2

0.4

8.8

6.8

3.73.4

NFL MLB NBA EPL (UK) NHL Bundesliga(Ger.)

La Liga(Spain)

Serie A (Italy) AFL(Australia)

Season Ended 2011 Season Ended 2012

6) Source: US Bureau of Economic Analysis


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Financial Services

The resilience and growth in themajor leagues revenue reect the largeproportion of revenue derived frommulti-year media rights contracts andgrowing revenue from digital media.The NFL, for example, earned asmuch as 42% of its 2012 revenue from

long-term contracts with broadcasttelevision companies for media rightsfees. Such contracts lend stability torevenue and also contribute to growththrough escalator clauses thatincrease rights fees over the duration ofthe contract. MLB has historically hadlower levels of revenue from broadcasttelevision, but local media rightscontracts, agreed between individualteams and regional sports networks(RSNs), contribute signicantly to totalrevenue. Moreover, MLB has been ableto expand its revenue streams throughits Internet and interactive media arm,MLB Advanced Media (MLBAM).MLBAM has witnessed explosivegrowth, with revenue growing from $75million in 2002, to $620 million 7 in 2012,and has enjoyed major success with itsApple iPhone application.

Gate revenue, comprising ticket sales,concessions, and arena parking, isthe traditional revenue stream for the

major leagues. In terms of spectatorattendance, the U.S. is a largelysaturated market, with attendanceseeing minimal growth over the longterm (for instance, the NFLs regularseason attendance has grown at aCAGR of 0.4% between 2000 and

2012). As a result, growth for theserevenue streams is dependent on priceimprovement. Ticket sales duringthe regular game season, the majorcomponent of gate revenue, havewitnessed a recovery after a declinebetween 2008 and 2010, when personalincome levels weakened and consumersreined in discretionary spending.For the NFL and the NHL, averageattendance at stadiums/arenas hasconsistently been at or above 90% ofcapacity from 2009 to 2012, enablingteams to increase ticket prices steadilyfrom year to year. MLB has been theexception among the major leagues,with the high volume of total gamesper season, at 2,430 (twice that of theNBA and NHL and 9.5 times that of theNFL), resulting in average attendanceof around 70% of stadium capacitybetween 2009 and 2012. This has ledto MLB ticket prices stagnating despitean increase in attendance during the2011-12 season.

Figure 4 Consistent RevenueGrowth Across Leagues, Barring theNBAs 2011 Lockout YoY Revenue Growth

10%

-5%

0%

5%

10%

15%

2008 2009 2010 2011 2012

NFL MLB NBA NHL

Lockout reduced regularseason to 66 games per team(down from the usual 82)

34% 42% 41%49%

42%12%

25% 4%

8%

16%11%

9%

30% 23% 38%

NFL MLB NBA NHL

Ticket sales (season, regular seating)

Parking, concessionsNational media

Local media, sponsors,

merchandising, luxury box

SOURCE: Forbes SOURCE: Forbes

Figure 5 Large Share of Long-termMedia and Sponsorship Contracts OffersRevenue Stability Revenue Mix, 2012

7) Estimated (Source:Forbes )


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3.7

0.8 0.80.15

6.0

1.50.9

0.210

2

4

6

8

NFL MLB NBA NHL

Previous New

2014-22

2014-21

2013-21

2008-16 (renewalnegotiations expectedto start in 2013/14)

Increasing media rights fees setto signicantly improve NFLand MLB revenue and protsstarting 2014For advertisers, the major leaguesoffer virtually unmatched consumerreach. According to Nielsen, combinedviewership for the title matches of theleagues in 2012 was 143.9 million. TheNFLs Super Bowl XLVI (2012, where theNew York Giants beat the New EnglandPatriots) garnered maximum viewershipof 111.3 million, with the Miami Heatversus Oklahoma City Thunder NBAnals garnering the second highestviewership at 16.9 million. Backed by

such high numbers, television ad rateshave been in a long-term uptrend asadvertisers jostle for airtime during keymajor league events.

The NFL and the NHL renewed theirnational broadcast television rightscontracts in 2011, while MLB followedsuit in 2012. The contracts, rangingbetween 8 and 10 years, were renewedat substantially higher annual ratescompared with the previous contractsat a 62% increase for the NFL, 89%for the MLB and 41% for the NHL. Interms of addition to total 2012 revenue,the renewed contracts translate into a14% increase for the NFL and 5% forMLB, but just 1% for the NHL. TheNBAs broadcast television contractscome up for renewal in 2016, and theincrease in rights fees is likely to be justas large as the other leagues, given thattelevision ratings for the NBAs regularseason were up sharply in 2011-12.

National media rights, however, arejust one part of the story of the majorleagues revenue growth. From 2011through 2013, several teams haveseparately signed large rights deals withRSNs. Given that revenue from dealswith RSNs are categorized as localrevenue for teams, only a portion ofthis revenue is shared with other teams(as opposed to national revenue, whichis divided equally among teams). Teamswith the most lucrative RSN deals stand

to benet the most. The largest RSNdeal to date has been the L.A. Dodgerscontract with Time Warner Cable, a25-year deal starting 2014 that various

press reports estimate to be in the rangeof $280 to $320 million in annual fees (incomparison, the Dodgers 2012 revenuewas $245 million). The New YorkYankees and the Los Angeles Angelsof Anaheim, among others, have alsonegotiated signicant deals with RSNs.Along with media rights fees, the latestdeals included an equity stake in theRSN, broadening the teams revenuestreams to include a share in cablesubscription fees as well.

The NFL, with a 14.9% EBITDAmargin in 2012, has consistentlydelivered superior margins comparedwith the other major leagues. Theremaining major leagues, despitesteady revenue growth, have so farbeen low-margin businesses. The newmedia rights contracts, which start in2014 for MLB and the NFL, could bea game changer for the protability ofMLB and will help the NFL improvemargins further. The only incremental

Figure 6 Latest Television Rights Contracts Have BeenSigned at Sharply Higher Fee LevelsEstimated Annual Media Rights Fees (USD Billion)

SOURCES: Data on Previous contracts Theory of the perfect game: Competitive balance in Monopoly sports leagues,2009, John Vrooman, Vanderbilt University;Forbes ; various press


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Wide disparities in nancialperformance of teams, not everyteam is an attractive businessDespite the leagues attempts at creatinga level playing eld for team nances,nancial health varies widely amongteams. Even in the NFL, where poolednational revenue accounts for nearly60% of the leagues revenue, the DallasCowboys generated revenue of $500million and enjoyed a 45% EBITDAmargin in 2012, against the league-wideaverage revenue of $275 million andaverage margin of 14.9%. The differencein nancial health of teams is the largestin the NHL, which also had the highest

number of EBITDA-negative teams, at13 out of the total 30.

Apart from the scale of business, asdetermined by revenue, the criticaldriver of prots is player salaries.According to the respective CBAs,players are guaranteed approximatelyhalf of league-wide revenue, makingplayer payrolls the single largest costcomponent for the teams. The CBAsalso set a team-level salary cap as wellas minimum salary levels (identical

for all teams). While each team hasthe exibility of paying player salarieswithin the range provided by theminimum and cap levels, only a fewteams are able to avoid hitting orbreaching the cap as most try to outbidother teams for the best players. Playerpayroll costs have typically been one ofthe primary reasons behind variationsin EBITDA margin among teams. TheDallas Cowboys, Toronto Maple Leafs,New York Knicks and Oakland Athletics

were the most protable teams in theirrespective leagues in terms of 2012EBITDA margin, driven in large part bybeing among the teams with the lowestplayer payroll expenses (as a percentageof revenue).

The variance in EBITDA margins, andconsequently cash generation, has alsoled to large variances among teamsin terms of leverage. For instance,excluding teams with negative EBITDA,

the debt-to-EBITDA ratio in 2012among MLB teams varied between298 for the Philadelphia Phillies and nilfor debt-free teams such as the AtlantaBraves and the Seattle Mariners.

With such signicant variances innancial performance, investments inmajor league teams require investors tobe highly selective.

Figure 8 Revenue Disparity is Highest in the NHL andthe NBA Top 3 and Bottom 3 Teams by Revenue in EachLeague (USD Million, 2012)

500

380

373

231

227

226

471

336

279

173

169

167

243

197

162

93

87

84

200

199

169

85

83

66

Dallas Cowboys

New England Patriots

Washington Redskins

St. Louis Rams

Minnesota Vikings

Oakland Raiders

New York Yankees

Boston Red Sox

Philadelphia PhilliesOakland Athletics

Kansas City Royals

Tampa Bay Rays

New York Knicks

Los Angeles Lakers

Chicago Bulls

Charlotte Bobcats

Milwaukee Bucks

Brooklyn Nets

Toronto Maple Leafs

New York Rangers

Montreal Canadiens

Columbus Blue Jackets

Phoenix Coyotes

New York Islanders

SOURCE: Forbes

NFL

MLB

NBA

NHL


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Finance

From an investors perspective,key differentiators amongteams are size of the homemarket and payrollThe revenue-sharing frameworkfollowed by each league places all teamson equal footing as far as revenuefrom national media rights fees,sponsorships, and merchandising areconcerned. The CBAs set the share ofrevenue payable to players.

Consequently, the key factor separatingnancially strong teams from weak onesis the ability to generate local revenue.Apart from MLB, where teams in

large markets share nearly half of localrevenue, the majority of local revenue isretained by the team. In this scenario,the size of the home market populationbecomes the differentiating factor forrelative revenue generation potentialfor a team. The size of the home marketpopulation is the main driver for gaterevenue (through game attendance) andin making media rights for the teamattractive to RSNs looking to reach outto the maximum number of consumers.

The impact of large home marketson revenue is borne out by the factthat the teams based in the 10 largestmetropolitan areas by population in the

United States constitute the majorityof the top 10 teams by revenue in eachleague. For example, 9 of the top 10teams by revenue in MLB are basedin these markets, while 7 of the top 10teams by revenue in the NBA are basedin these markets. However, several ofthe large markets house more than oneteam in the same major league and thiscan certainly lead to one of the teamslosing out in revenue.

On-eld/court performance of the teamis clearly important as well, resulting inhigher spectator attendance and highertelevision viewership, which leads tohigher gate revenue and better deals forlocal media rights fees. However, teamperformance is obviously unpredictableand unlikely to be a good criterionfor investments. Moreover, the size ofthe home market can, in many cases,overshadow performance as far asrevenue generation is concerned.For instance, during the 2000-01 to

2011-12 seasons, the NBA team, theNew York Knicks, best performanceshave been rst round losses in theEastern Conference playoffs, with anaverage wins-to-games-played ratio of43%. In comparison, the San AntonioSpurs, during the same period, wonthe NBA nals three times, reachedthe nal round of the playoffs threetimes, and averaged a wins-to-total-games ratio of 71%. However, the Spursgenerated revenue of $127 millionin 2012, compared with the Knicks$243 million.

Controlling spending on player salariesis critical for protability. The NFL andthe NHL have hard caps wherebyteams cannot exceed a set level foraggregate player salaries. However,MLB and the NBA have soft caps.In this case, teams are penalized ifthey exceed the team salary cap andare required to pay a luxury tax aspenalty. As a result, if not consciously

SOURCE: US Census Bureau,Forbes

10) Metropolitan Statistical Areas as designated by the US Census Bureau; NHL gure includes three of the NHLs top 10 teamsby revenue based in Canada, in Toronto, Montreal and Vancouver; according to the Television Bureau of Canada (based ondata from Nielsen), these are the top three television markets by population in Canada

7 7

8

9

MLB NBA NFL NHL

Figure 9 Most Teams in Top 10 Metropolitan Areas 10 are Among the Top 10 Revenue EarnersNumber of teams in top 10 U.S. metro areas that are amongtop 10 revenue earners in their league


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controlled, prots of teams with highplayer payrolls not only suffer due to thesalaries paid, but also take an additionalhit due to the luxury tax, signicantly

reducing margins.

Deal activity may increase asmore teams become nanciallyattractiveThe majority of major league teamsare owned by individual investors.However, private equity (PE) rmsas well as corporations have also hadconsistent presence as team owners,though to a limited degree until now.Several top executives from well-known

private equity rms currently ownteams in their individual capacities this includes, among others, MarkWalter of Guggenheim Par tners (MLBsL.A. Dodgers) and Joe Lacob of KPCB(NBAs Golden State Warriors). PE rmPlatinum Equity currently owns theNBAs Detroit Pistons, while TowerbrookCapital and the private equity arm ofOntario Teachers Pension Plan formerlyowned the NHLs St. Louis Blues andToronto Maple Leafs, respectively.Corporate owners include RogersCommunications (NHLs TorontoMaple Leafs), real estate investmentcompany Lerner Enterprises (MLBsWashington Nationals), Liberty Media(MLBs Atlanta Braves) and NintendoCorporation (MLBs Seattle Mariners).

The current situation appears quiteconducive for investment by PE rms an imminent increase in revenue andprots due to higher media rights fees,high levels of debt on the balance sheet

of many teams across the four leagues,negative EBITDA (which can lead todifficulty in servicing high levels of debtuntil the additional media rights feesin 2014 start owing in), and teamswith high payroll costs that can bebrought down (while still maintainingthem above the CBAs prescribedminimum) to expand margins. Strategicinvestments by media companies could

also be in order, given that ownershipof a major league team could open upaccess to the teams media rights. Assuch, there is likely to be an increase in

the number of deals to buy into majorleague franchises. The NFL, with itsalready high margins and upcominglarge media rights fees and the NBA,where the new CBA has alreadyexpanded prots with new mediarights contracts expected to be signedduring 2013-14, appear to be the mostsuitable hunting grounds for PE andstrategic investors.

Though multiples are likely

to contractThe increase in EV/Sales valuationmultiples (based on historical sales) fortransactions executed in 2012, is likelyto reverse, as the multiples reectedexpectations of an increase in mediarights fees due to the upcoming contractrenewals. With these contracts havingmaterialized (except for the NBA)through 8-to-10-year contracts, thenext wave of growth for major leagueteams revenue and protability isnow several years away. Moreover, acomparison with the trading multiplesof listed peersmajor European soccerclubsshows that the average EV/Salesmultiple for U.S. major league deals hasbeen signicantly higher. The EPLsManchester United is the only listedpeer trading at a higher multiple (6.8xEV/Sales 11) than the U.S. major leagues2012 average deal multiple. However,this is supported by Manchester Unitedsreported EBITDA margin of 26.7%,which is signicantly better than the

U.S. major leagues average. Other peerswith meaningful market capitalization(above $50 million) include the GermanBundesligas Borussia Dortmund,Italian Serie As A.S. Roma and Scottishmajor leagues Celtic. All three peers arecurrently trading at EV/Sales multiplesin the range of 1.2-1.6x, much lower thanthe median 3.8x for U.S. major leaguedeals in 2012.

This article was written by The Smart Cube (TSC)on an independent basis. The insights includedare based on its own research and from sourcesbelieved to be reliable. However, TSC may havereceived information on this topic that is

condential and proprietary to a third-party. As such, this information wi ll not have beenutilized and is thus not reected in this article.

The views mentioned in this article do not in any way constitute investment advice and should notbe construed as an offer to sell, a solicitation to buy,or an endorsement or recommendation of anycompany, security or commodity. TSC disclaimsall responsibility for investment decisions basedon the content of this article or the disseminationor distribution of this article to a third party. Any conclusions , calculations or dete rminationsreached constitute TSCs views as of the dateof this publication and are subject to change without notice.

11) All valuations based on share prices as of April 15, 2013; EV/Sales multiple is based on the latest reported nancial year.


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Strategy & Marketing

Machine-to-MachineTechnologyThe NextBig Thing?Rohitashwa Agarwal and Upasna LalSTRATEGIC SERVICES

M achine-to-Machine (M2M)refers to the technology thatallows communication amongmachines (wireless or wired systems). Itis based on a process in which a devicecaptures a particular event (inventorylevels, test results, etc.) and transfers theinformation gathered through a network(wireless, wired, or short-range network)

to another device. A special application

(at the receiving device) is then usedto translate this information into ameaningful event (placing an order forinventory, dispatch of medicine, etc.) (FIG.1).

Since the rst signicant developmentin M2M technology in 1995, M2M hasevolved to provide customized solutionsto organizations across a range of

industries, including retail, health care,

transportation, utilities, security, IT, and

telecom, allowing users to control remoteassets and systems, and access sensitiveinformation (FIG. 2). While the marketis set to grow globally, the emergingAsia-Pacic countries are expectedto experience high growth, owingto increased network coverage, datathroughput growth, expected regulatorychanges, and a rising number of healthcare and infrastructural projects in thenear future.

M2M applicationsAs of 2011, M2M applications werelargely used by companies based out ofNorth America and Europe. However,between 2012 and 2017, Asia-Paciccountries, such as China and India, areexpected to become leading users ofM2M technology (FIG. 3).

Three types of connections are used inthe M2M marketwireless (2G, 3G, 4G,and satellite), xed, and short-range(Wi-Fi, Bluetooth, ZigBee, MAN, etc.).

By 2015, short-range connections are


33/48MAY 2013 | Cubisms 33

Figure 2 Evolution of M M

First signicant development in M2M technology tookplace in 1995, when Siemens set up a dedicateddepartment to undertake development of products forindustrial M2M applications.

Technological breakthroughs between 2006 and 2008, led to asubstantial cost reduction in the development and applicationof M2M-based products, and expanded applications of thistechnology across industry ver ticals, including surveillance,security, health care, and utilities.

From 1995 to 2005, several M2M products werelaunched for applications across point of sales (POS)terminals, vehicle telematics, remote monitoring, and

logistics routing and tracking purposes.

General Motors and Hughes Electronics were amongthe rst companies to adopt M2M technology.

Since 2009, M2M has become one of the fastestgrowing markets with several players, including

AT&T, Vodafone, Telenor, Verizon, and Qualcommmaking signicant investments in this market.

M2M applications have increased across smartbuildings, and energy distribution and monitoring, etc.

Figure 1 M M Process Flow

KEY INDUSTRIES

BACK ENDSUPPORT

FIELD SUPPORTTEAM

Data Collection

Coordination

On Site SupportMonitoring and Diagnostics

Wireless Data Transfer

M2M Server and Application

Retail

Industrial

IT & Telecom

Energy

REMOTE EQUIPMENTHealth Care

Security

Transport

Smart Buildings

expected to dominate the market witharound 70% share, as most informationbeing transferred through M2M doesnot require long-distance transmission.This will be followed by wireless

connections (i.e., long-range cellularand satellite connections)accountingfor 2025% of the marketand thenxed connections, accounting for lessthan 10% of the market.

Cellular M2M marketOngoing developments in high-speeddata transfer, cloud computing,smartphone technology, and regulatoryinitiatives have created a three-fold

advantage for the cellular-based(wireless) M2M market includingsubstantial reductions in installationand operational costs, easy installationand usability, and an increase in thenumber of applications. These benets

are expected to drive signicant demandfor cellular M2M applications acrossindustries, making it a key focus area forservice providers.

Although the share of emerging Asia-Pacic countries in the total M2Mconnections is expected to increase,their share in cellular M2M connections(a part of the overall M2M connections)has registered only minor growth


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35/48MAY 2013 | Cubisms 35

personal safety of patients, byreducing their physical movementsand hospital visit requirements. Inaddition, it helps to ensure regular

drug compliance, as per prescriptions. Effective Utilization of Health-care

Facilities: Many patients withchronic illnesses can be monitored athome, thereby eliminating the needfor hospital admissions for regularmedical tests. This leads to efficientutilization of hospital beds andresource capacity. This free capacitycan be provided to other patients whorequire emergency treatment.

PROACTIVE MONITORING AND TREATMENTContinuous monitoring through anM2M network allows doctors to identifysigns of health deterioration earlier thanthe scheduled physical examination,which can be done only after certain

time intervals. M2M-based solutionsallow the doctor to diagnose diseasesproactively and on a real-time basis.

PRODUCT LIFE CYCLE MANAGEMENTApplication of M2M technology providespharmaceutical companies with a moreefficient means to manage inventory,control counterfeiting, and meet regulatoryrequirements. The technology allowscompanies to track and trace the locationand condition (including quantity,temperature levels, etc.) of their productsin transit and storage.

Smart buildings/homesSmart buildings/homes operatingon M2M-based networks allow usersto remotely monitor and control allelectronic devices; monitor electricity,gas and water consumption; andcontrol security equipment using a

smartphone or PC, allowing for greatercontrol over energy costs. There is aparticularly increasing trend towardsthe use of M2M-based tools to optimize

energy consumption (for heating, airconditioning, lighting, etc.) within thebuilding and the home. By 2020, thismarket is expected to account for 27%of global M2M connections. Smartbuildings also help in the detection andprevention of electricity theft or loss(due to faulty systems). Although thecost versus benet is a key driver for thismarket, the installation of a smart meter(an advanced meter that enables two-way communication between the meterand the central system) in buildingshas shown to lead to cost savings with areduction in energy expenditure.

In 2009, the European Unionannounced mandatory installation

Case Study: How Promega (a US-based biotech company) saved $1.7 million using M2M technology?

ABOUT PROMEGA: Headquartered in Madison, Wisconsin,Promega operates in the eld of genomics, protein analysis

and expression, cellular analysis, drug discovery, and geneticidentity analysis. With more than 1,200 employees and 2,500products, the company has an annual revenue of $300 million.

CHALLENGE: Promegas 1518% of total inventory was beingwritten off each year as shrinkagedue to products notbeing sold during their life cycle or being damaged in transitor storage. This was costing the company approximately$1.2 million per annum. Owing to the low level of control overstorage of products and low visibility on expiry dates for onsiteproducts, the company was losing an additional $500,000each year as write-offs in product spoilage.

SOLUTION:To tackle the problem of product spoilage, the companydecided to switch to advanced freezers for inventory storage.

These freezers are equipped with radio frequency identication(RFID) technology that captures data such as volume of liquidwithin a container and temperature of the product, and transmitsthis information to the data center using M2M technology. Italso provides the user with information regarding location of theproduct, its expiry date, details of the end user, etc., thus providingthe company with greater control over its supply chain.

RESULTS: Deployment of RFID- and M2M-enabled freezershelped Promega reduce its product shrinkage to near-zerolevels and hence, save about $1.7 million annually. Further, thisprovided the company with more detail about end users andtheir preferences, as well as the overall supply chain.

The real advantage to Promega is the information it captures. Now, we really know who ourend customer is at the individual level. Now we have the intelligence about their preferencesand buying habits and usage patterns to proactively tailor our delivery practices to theirspecic needs. And as part of improving our customer service, we nd we have moreopportunities to introduce new products, more merchandising opportunities, and higherability to add incremental business through more efficient supply.

Todd Clermont, Business Development Director, Promega (2012)


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of smart meters in all homes by 2022.The smart meter automatically collectsdata about energy consumption andquality of supply at the customer site

and communicates back to the utilitycompany for monitoring and billingpurposes. Between 2010 and 2017, thenumber of smart meters installed inEurope is expected to increase morethan four-fold.

Growth potentialOver the past few years, several reportshave been published, highlighting themassive growth potential in the M2Mmarket. However, the marketin termsof number of M2M connections as well astotal revenue generatedhas not grownas expected (FIG. 6).

Five barriers to growth

High investment costsTo effectively exploit the opportunitiesin the M2M market, communicationservice providers (CSPs) need to investheavily to keep up with growth indemand. The key investment areasinclude the following:

Product development: Given thecustomized nature of M2M products,companies need to proactively identifyareas that need product innovation andhave strong in-house R&D capabilitiesto support new product development.

Platform-related costs: A high level of

technological innovation in the marketwill require companies to regularlyupdate the platform used for integrationof internal and external devicesi.e.,

devices at customer locations andback-end devicesand also ensure thatthe platform is compatible with newapplications being launched.

In addition, companies will need toinvest in infrastructure and humanresources to expand their sales,marketing, order management, andafter-sales capabilities.

Service management: Serviceproviders need to develop strongservice management facilities todeliver timely service, as requiredby customers, and ensure smoothfunctioning of devices, transmissionlines, and applications.

Declining ARPU (average revenue peruser) and slower-than-expected growthof the M2M market have affected serviceproviders faith regarding returnon investments.

Standardization of M2M servicesThe M2M market involves multipleplatforms and devices as well asoperations through remote locations,different types of networks andapplications, and most importantly,transmission of sensitive informationthrough M2M systems. This makesstandardization of the complete M2M

solution, including product, platform,device, and application development;monitoring of transmission; andprocessing of information critical in

gaining consumer condence. Expertsbelieve that the absence of globalstandards has acted as a key barrier toM2M market growth.

In July 2012, several globalstandard organizations collaboratedon an agenda to standardize M2Mcommunication and launched aninitiative to develop oneM2Masingle standard for the global M2Mmarket. Participating organizationsinclude the Association of Radio

Industries and Businesses (ARIB),the Telecommunication TechnologyCommittee (TTC) of Japan, theAlliance for TelecommunicationsIndustry Solutions (ATIS), theTelecommunications IndustryAssociation (TIA) of the US, theChina Communications StandardsAssociation (CCSA), the EuropeanTelecommunications Standards Institute(ETSI) and the TelecommunicationsTechnology Association (TTA) of Korea.

oneM2M is also expected to simplifythe development of M2M devices andapplications, create a mass market,shorten the time-to-market for newproducts, and help CSPs in reducingoperating and capital expenses.

2011 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F

84 96113

148 180217

257299

341376

CAGR: 18.1%

Figure 6 Global M M Market SizeRevenue Opportunity (USD Billion)

SOURCE: Machina Research

Machina Research, a UK-basedadvisory rm on the M2M market,projected that the M2M marketoffers a potential to expand to $376billion by 2020.

However, actual growth in the M2Mmarket will be at a relatively slowerrate. The forecast market size for theM2M market between 2012 and 2017is 2535% of the potential marketsize, owing to several challenges thatwill prevent operators from tappinginto this market.


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Strained growth inemerging markets

While a few emerging countries (suchas Brazil, China, and India) are alreadyusing M2M technology across industriesand are continuously expanding theusage of these systems, the demand forM2M products in the Middle East andAfrica declined over the past few years.Slow nancial growth and politicalunrest in the recent past have been themain reasons for strained growth ofM2M in African markets.

Fragmented target market

The M2M target market is highlyfragmented, covering several industriesand niche user segments. While certainM2M solutions can cater to several usersacross industries, others are customizedto meet the requirements of specic endusers only. For example, the user segmentof a eet management application is verylimited, compared with that of a smartmetering application or a CCTV securityapplication. There is faster growth ofM2M applications in industries such astransportation, logistics, and security,where some relatively standardizedsolutions can be deployed. However,applications developed for specicconsumer segments offer limited revenueopportunities, as the associated salesvolumes are low.

This fragmented target market leadsto a slowdown in the development ofnew applications, as each applicationinvolves longer go-to-market timelines.Development of M2M solutions that are

applicable across industries will be critical

to the growth of this market. Convincingcustomers about the benets of M2Mapplications also is a big challenge.

Customer persuasion The M2M market faces a major

challenge of limited technology awarenessamong potential individual customers.According to industry experts, convincingend users about the benets of adoptingM2M technology is an issue due to highinstallation costs. Standardization intechnology used, and deployment of devicesthat are more compatible with advancingtechnology can help operators in this regard.

Security of information is another constraintin the acceptance of M2M technology bycustomers, as they are skeptical aboutsharing personal information.

Although there are barriers to growth,various companies have successfullyimplemented M2M technology acrosstheir supply chain in the recent past andachieved cost benets (FIG. 7).

The future of M2M technologyIndustry analysts and market experts

agree that the market is set to registerexponential growth over the next decade.The opportunities available in the marketare potentially limitless, as M2M offersapplications for almost every industry,from automation in industries such asautomobiles, security and surveillance,utilities, smart buildings/homes, toimproving health-care facilities andmonitoring logistics. The most criticalfactor that makes M2M highly attractiveis that it can be customized to meet

general as well as niche requirements.

However, the outlook for the M2Mmarket is not entirely rosy, as thereare multiple barriers that may preventthe market from growing to its fullpotential. The investment costsinvolved are high and the target marketis fragmented. These factors, coupledwith the fact that a large number ofcustomers are still not convinced aboutthe effective cost savings of M2Mapplication in day-to-day operations,pose concerns about the pace of growth.

M2M is a unique market and CSPsneed to manage their steps within the

space carefully. The future of M2M willbe determined by service providersability to devise innovative strategies toimprove their product development andservice capabilities, reduce the cost oftechnological upgrades, and market theproduct across untapped industries.

END USER SERVICE PROVIDER(S) APPLICATION KEY BENEFITS

ABB nPhase, Verizon, conEdisonIndustrial and Energy

Asset MonitoringReduction in service time by approximately 50%

American Trash Management KORE Telematics, Sprint, Verizon Transportat ion Reduction in operational costs by almost 25%

CardioNet Sprint Remote Health MonitoringReduction in health monitoring cost perpatient by about 90%

Tata Teleservices (TTSL) Discom, TTSL Smart Grid and Metering Savings on bill collection costs of 1520%

Vodafone Bglobal Metering, Vodafone Smart MeteringReduction in electricity consumptionby almost 10%

Figure 7 Other Industry Examples of Successful M2M Application Between 2006 and 2010


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MANAGERS SNAPSHOT: Emerging Trends inthe Consumer PackagedGoods SpaceSubash Chandar

STRATEGIC SERVICES

V ery few industries today areas global and multifaceted asConsumer Packaged Goods(CPG). Organizations within this industryare extremely responsive to consumerdemands and sentiments and largelyoperate in a business environment that ishighly dynamic and increasingly prone tothe following challenges:

Need for continuous innovation andproduct development

Increasing government regulations

Rapidly changing consumer demands

Rising raw material and productdevelopment costs

Brand commoditization

Emerging low-cost privatelabel manufacturers

Given these challenges, CPG playersare today operating in a more complex,volatile, and changing environment.In order to more effectively respond tothese challenges and attain sustainabletop-line growth, CPG companiesare deploying new strategies basedon innovation, reduction in time-to-market, operational transformation aswell as the adoption of new technologiesand tools in marketing and sales. As aresult, ve underlying trends have beenshaping the CPG industry beginning in

2011 and will continue to inuence t

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