Ovum to telcos: Stay close to home

April 22, 2013
A new report from market research firm Ovum suggests that carriers with aggressive multinational expansion plans may want to rethink their strategies. Telcos who focus on growing customers in a fewer number of countries often do better than those spread out among many countries, Ovum reports.

A new report from market research firm Ovum suggests that carriers with aggressive multinational expansion plans may want to rethink their strategies. Telcos who focus on growing customers in a fewer number of countries often do better than those spread out among many countries, Ovum reports.

“Examining the Case for Larger Multinational Telcos,” compares the performance of 20 large telco groups from 2000 to 2011 whose international footprints expanded or contracted. The report treats the benefits of economies of scale and economies of scope, while also tackling profitability to shareholders and the cost of financial distress. It concludes that variations in footprint size strongly correlate with net debt, number of employees, revenues, capital employed, and EBITDA. But performance metrics such as EBITDA margin, return on capital employed, earnings per share, and net debt/EBITDA weakly correlate to footprint size.

“Conventional wisdom suggests that whenever a telco enters a new market, the resulting synergies will make the venture worthwhile. Telcos looking to boost their performance should focus on acquiring the needed assets and capabilities, which in some cases may come from expanding their footprints. However, in many other cases it won’t,” says Emeka Obiodu, principal analyst at Ovum. “In these cases, pursuing further expansion might actually spread a telco’s managerial resources too thin, which could lead to poorer overall performance.”

The report acknowledges the logic behind the idea that expanding a telco’s footprint will diversify business risks; this strategy has worked well for both developed and emerging market carriers that have been able offset poor performance in one market with success elsewhere. But the opportunities for economies of scale and scope via a larger footprint are not as great as is generally assumed, the report states.

“The benefits of economies of scale and scope are greater for an operator that has a larger customer base in fewer countries than one that has the same customer base spread across multiple countries. Our analysis has disproved the assumption that a larger international footprint should be a goal in itself,” concludes Obiodu.

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