When the Financial Times reported in January that CEO Vittorio Colao was facing pressure from some shareholders to break-up the global operator it prompted other mobile groups to re-examine the global versus local debate. Some theories suggest that value should be generated by global scale but the reality is that many of the theoretical benefits are not achieved in reality. As is so often the case, realising the benefits of global scale is down to effective execution.
In theory, operators with international scale should achieve significant purchasing economies. In practice, some national operators have managed to get more advantageous equipment pricing and terms than their parent. As a result, some local operators have opted out of the group purchasing process altogether. In the case of securing content deals content owners, in theory, are attracted by distribution partners who can provide the widest distribution or eyeballs for their content. In practice the industry has not embraced exclusive content deals and those that did, such as 3 in the UK, rapidly rejected them. There is also probably little content that is truly global in its appeal and that customers are prepared to pay for. However, global players in general probably do have a stronger bargaining position with some suppliers, particularly equipment vendors.
International operators make great play of their ability to leverage learning and experience across their operations. In practise, cumbersome group structures often fail to disseminate the learning effectively and may actually stifle local innovation and slow down decision making. For large groups with a mix of developed and developing markets the learning from developed, increasingly data centric markets is of less relevance for voice centric developing markets. Indeed operators in Africa and other developing markets are sometimes confronted with re-charges for group services that are of little relevance or benefit. Indeed local operations should have a better understanding of their customers and competitors than those sitting centrally. Whilst the benefits of technological innovation can be replicated across markets the same is not necessarily true of propositions and tariff structures.
In theory, it should not be necessary to have a large international footprint to create attractive roaming offers (e.g. in the airline industry, the Star Alliance was an early example of how marketing benefits of sharing Airmiles’ eligibility could offset the smaller scale of individual airline operators). In practice however, Vodafone was the first to launch successful ‘passport’ type products in Europe. Of course, Vodafone customers travelling to the US are unable to use Verizon’s CDMA network and so a uniform technology footprint is a prerequisite for realising global roaming benefits. A “roam like home” proposition can be very compelling and is much easier to implement with a global footprint due to billing and accounting issues. The ability to steer roaming customers onto your own network can also deliver significant commercial benefits. In practice a global footprint may well attract higher spending business customers who roam although the benefits will diminish as roaming rates are regulated downwards.
In maturing markets consolidation can often be expected as economies of scale are much easier to achieve at the local rather than global level. Prior to consolidation taking place profits and cash flow can come under significant pressure due to high levels of competition. To act as consolidator an operator will need access to cash to either make acquisitions or to ride out the storm. A global parent with a strong balance sheet can provide a major advantage in mature markets. However the sheer size of a global parent may mean that opportunities in smaller, local markets are missed if the benefits of a consolidation play represent only a rounding error in the parent’s consolidated accounts. Smaller markets may find themselves a long way down the parent’s priority list.
Global players in theory can also benefit from portfolio effects where the “cash cows” in the mature markets can finance the growth of “problem children” and maintain “stars” elsewhere in the portfolio. In theory, capital markets should be able to provide this funding, but, as recent events have shown, capital markets are often far from perfect. The strategic implications of the Boston Consulting Group Matrix for business unit portfolio management may hold true to some extent. However, operators are often reluctant or slow to ruthlessly dispose of underperforming “dogs” which weakens the benefits of a portfolio approach adopted by global players.
A global brand, in theory, should be stronger than a local one when it comes to technology based services. In practice, T-Mobile was less successful in achieving global brand equity compared to say, for example, Vodafone. However, in some markets customers have a great deal of loyalty to local brands. When Vodafone re-branded J-Phone in Japan the customer base deserted in droves. A global player can gain very significant brand synergies through successful sponsorship campaigns such as F1 motor racing or the world cup. When executed successfully a global brand can deliver global brand synergies.
In short, it all comes down to execution. Global scale is not in itself a guarantor of net synergies, however if well managed, a global company can extract significant strategic benefits. With the increasing complexity of the technological landscape in particular, having leverage with equipment and device manufacturers is key to ensuring they get what they need. Smaller operators are more likely to simply get what they are given.