Analysis of the Russian Telecommunication Industry at the Case of Mts Essays

Analysis of the Russian Telecommunication Industry at the Case of Mts Essays Analysis of the Russian Telecommunication Industry at the Case of Mts Essay Analysis of the Russian Telecommunication Industry at the Case of Mts Essay Course: Contemporary Strategic Analysis (fall 2011) Analysis of the Russian telecommunication industry the case of MTS 1. - Speculate on the distinctive features of the telecom industry and define their effect on the company strategy. Historical background To start with, the telecommunication industry for a long time seen as a provider of public goods, next to post service and railway, also involves heavy investments at a steady but relatively small cashflow income. Hence, it was seen that economics of scale are need to lead such a business successfully. Historically this industry was highly regulated in form of monopolistic companies owned by the government. According to Fransmann (2011) in the days of the Old Telecoms Industry the conventional wisdom was that telecoms was an example of ‘natural monopoly’, that is due to increasing returns to scale telecoms services could only be provided efficiently by a monopoly provider. Accordingly, in most industrialized countries was dominated by a monopoly network operator. The situation could be described as closed innovation system, very high entry barriers (in fact impossible to enter), very few innovators, fragmented knowledge base, medium-powered incentives, Slow, sequential, innovation process. Because of missing competition the price-quality relationship of telecom services in most countries was a disaster and companies still didn’t manage to operate profitably. This was the case in almost all countries before the 1980 and 90’s when liberalization made it possible for private â€Å"high-tech† players to enter the market when in the mid-1980s, for different political-economic reasons, Japan, the UK and US decided to end the monopolies of their monopoly network operators. The result was the birth of the original new entrants. The new era From the late-1990s, it was clear that a qualitative change had occurred in the Telecoms Industry in the early-1990s, signifying the birth of the New Telecoms Industry. The most evident sign of qualitative change was the rise of the new new entrants who quickly eclipsed the original new entrants and became the biggest threat to state enterprises. For the new entrants fast growth was needed in order to have economics of scale and cost-efficiency to pay back loans for investments and satisfy shareholders (Fransmann, 2011). With such low technological barriers to entry, the result has been a highly competitive market for network services. However, the contribution of specialist technology suppliers was not confined to the supply of technology. A significant bottleneck is the factor of human resources provided through the operations of the labor market to both the original new entrants and new ones. Moreover, financial markets have a big influence as they, firstly, facilitate the entry and initial growth of new entrants, in particular the new entrants and, secondly, facilitate the ‘re-shuffling of the capital stock’ that has taken place as both network operators and specialist technology suppliers with highly valued shares have used their valuable ‘paper’ (shares) to acquire the complementary knowledge and tangible assets of other companies. By so doing, financial markets have facilitated the process of consolidation in the Telecoms Industry The telecommunications industry nowadays provides a number of services such as data, voice services, graphics, television, and video at increasing speeds and through diverse channels. While landline telephonic communication is still the core service mode, wireless communication, internet, cable and satellite program distribution are increasing their share in overall industry earnings. The industry is experiencing rapid deregulation and technology disruption in service offerings. In many markets across the globe, governments are revoking monopolistic policies, and older players face a new breed of competitors. According to Gupter (2008) The market of this industry includes residential customers, small businesses, and big corporate customers. In the residential customers market, competitors rely heavily on price to increase their customer base. Success depends on branding, reputation, and investment in agile order management and billing solutions. The corporate market has different characteristics as compared to residential customers. Big corporate customers are ready to pay premium for the quality and reliability of their voice services and data delivery. They are less price-sensitive when special services like virtual private network, data security, and videoconferencing come into picture. Telecom operators also provide network connectivity services to other companies that need it. The players with far-reaching networks lend circuits to heavy network users like large corporations and internet services providers (Gupter, 2008). Porter’s five forces analysis In order to analyze the industry we can take Porter’s model and look at the five forces which dominate circumstances. Firstly, looking at the rivalry within the market, we can say that from the former monopolistic industry, as described before, the situation went to fierce competition with high price pressure in most markets. Moreover, technologies are changing very fast and, hence, operators need to constantly adapt and to investment into RD. In addition, there are quite high exit barriers as companies have a lot of technical investments which usually cannot be devested without considerable losses. To sum it up, we can say that this industry compresses a highly competitive and difficult environment. When looking at possible substitutes, we can find that the internet makes a huge competition for classical telecom providers. Especially free-internet call services like Skype offer a very good alternative. Anyway, right now there is no real 100% substitute possibility for mobile phone services which could offer the same satisfaction of needs at reasonable cost. Hence, we can conclude that there is only little till medium competition for telecom providers at the very moment. Speaking of suppliers’ power we can conclude that main actors are technology companies selling equipment plus governmental agencies giving licensees which is done usually only once this is not a constant pressure on telecom enterprises. Moreover, we can state that there is a vast number of technology suppliers which decreases their power. On the other hand, the power of buyers strongly increased during the last years as their choice of providers, fighting each other, grew a lot. In some segments or markets customer power can be lower because of less competition (e. g. France, Germany) whereas in other markets it is huge (e. g. Austria, Estonia). To conclude, we can say that the overall situation in the industry is challenging for telecom providers but, nevertheless, many people keep saying that competition is good for business. One approach to deal with these tricky circumstances within the industry is an extensive expansion strategy, which is discussed consequently by the case of MTS. 2. - Summarize the advantages and disadvantages of the company strategy in Russia and in CIS; think of possible ways of improving it. MTS nowadays is the number telecommunication player in the CIS. During 1993-2001, MTS was developing on the domestic market, increasing its coverage area by regional expansion within Russia. In 2002-2004 the company started its internationalization by expanding to neighboring CIS countries and has used a very aggressive strategy driven by mergers and acquisitions. Starting from its home market, Russia, the operator firstly entered Belarus and, consequently, Ukraine by acquiring and development a big local player. Entering new markets According to Lisitsyn (2008), for any company in the mobile communication sector, entering new markets to extend its network largely through the usage of existing infrastructure in the country of destination. From that point of view, the higher the level of its technological development the more attractive is the target market. This factor also strongly favors acquisitions of existing companies, which operate on the local mobile communications market and have their own infrastructure and subscriber base. In addition to that, a regulatory factor is rather important for mobile communications sector as the state quite often tries to protect it from foreign operators. In general, a combination of technological and regulatory considerations largely predetermines foreign market entry mode for the companies in the sector. Entry modes for MTS were predetermined by technological and regulatory considerations. As for target markets, they largely resulted from historical and cultural traditions, common infrastructure network, similar business practices, and development of re-integration process within the framework of the CIS. As the company started its internationalization already in 2002 by entering several markets in the region, it could gradually increase its experience and build up competence and use its knowledge and existing positions as â€Å"the platform† for future expansion to other CIS countries. Due to various types of similarities between Russia and its neighbors MTS may better understand market environment in the region in comparison with Western counterparts, and therefore use this understanding as its competitive advantage. At the same time, the main threats would most probably come not from national telecom service suppliers, but from large Western telecoms with huge financial recourses. Regarding regulatory issues, it is necessary to mention that without the political will of the national authorities MTS could not get access to their privatization processes. In addition to that, due to the high level of monopolization in most of the countries under review, in order to be successful MTS should establish a good relationship with local anti-monopoly agencies. MTS positions itself as an international company and the leading mobile service provider in Russia and the CIS countries. Hence, in three cases (out of four) it entered foreign countries by purchasing the most successful national mobile companies with prominent market shares. Only in Belarus it partly made greenfield investments and then the company did its best to gain the leading position in the local telecom sector. Drawbacks of the acquisition strategy In order to discuss the disadvantages of MTS’ growth strategy we firstly need to sum up its pluses. As discussed before the advantages of external growth, in our case acquisition of already existing telecom firm in new markets, the growth is not limited by internal resources. This means that the company does not need to invest in building up new infrastructure, getting state licenses and creating a first customer base. Moreover, there is not such an extensive pressure on the working capital for such initial investments– instead the firm just acquires another full-functional company which can be seen in the balance sheets and increases the enterprise value. Another point it, that it may reduce the number of competitors on the market. The acquisition can include the managerial skills, customers, goodwill, patents, and other intangible assets of the acquired business. Also, there may be tax and accounting elements which could be available. Added economies of scale may result from the elimination of duplication in facilities, management personnel, purchasing practices, and improved utilization of fixed assets. Nevertheless, the strategy of growth through acquisition has also its drawbacks. This includes that the company also acquire assets specific to the business, meaning that MTS had to acquire the whole target in one piece even if some business units or assets were completely useless and difficult to resell again. Another point is that there might be creditors or minority shareholders of an acquired business. In the case of MTS there are other shareholder in Georgia, Kirgizstan and Armenia, holding each between 25 and 49 percent of the local company’s stock. Such shareholders not only absorb profits but also can bring in their personal interests which might conflict with the group’s expansion strategy. Moreover, in the course of such an MA expansion strategy the company must go through costly negotiations and the problems of corporate valuation. This risk especially applies to MTS’ situation as it is assumed that the operator paid too much for some of its assets acquired. Prices of stakes are usually not evaluated on an asset-based approach but on the basis of discounted future cashflows. Since this take a look in the future and estimate such cashflows is an impossible task, such evaluations are based on assumptions and personal expectations. Recent outlooks – new product markets entry As MTS managed to capture a huge market within the CIS region, they now focus on extending their business field in those markets. By doing so, they again use the MA strategy by building partnerships and closing mergers with expert companies in order to avoid unnecessary investments in RD and infrastructure which can increase entry barriers which may discourage new competition. According to Andrey Dubovskov, the new MTS Groups’ President and CEO (since 2011), the company the merger with Comstar, the leading fixed broadband and cable television provider in Russia, allowed the company to enter the promising fixed line market. Given the low levels of Internet penetration and positive socio-economic factors, as well as the strong brand and large subscriber base of MTS, they believe in a good chance of capturing significant growth in this market. Following the completion of the merger and the integration of Comstar’s operations, wants to offer their customers a wide range of convergent products with quality customer care. On the operational level, the merger will allow MTS to realize hundreds of millions USD in synergies as they cut on SGA and infrastructure-related expenses. As Andrey Dubovskov says, further mergers are planned to expand in other business of such kind. Conclusions According to Lisitsyn (2008), the growth could be explained by two main reasons: An urgent need for modern communication tools on the one hand, and aggressive marketing campaigns of mobile service providers on the other hand. Of course this kind of aggressive expansion strategy could only be achieved by huge capital investments. This capability is bound to a strong and big home-market (Russian Federation) as well as a big and financially solid owner (Sistema). As those factors are fulfilled MTS’ business expansion and growth strategy is absolutely successful. There were some drawbacks mentioned before among which the problem of corporate evaluation plays an essential role. It can be assumed that MTS paid too high prices for some of its acquisition as expectations at the time of transaction were too optimistic. Anyway, capturing a top market position in markets with high potential growth, at least in the long-term perspective (even Ukraine will recover and become a solid economy one day) will pay off. An alternative and more conservative way of growing would have been to use its own experience in terms of technology and marketing by going for the slower â€Å"green-field† approach and fighting local players directly. This sounds good in theory, but as mentioned before the market conditions in CIS are affected by protectionism, entry-barriers and corruption. Hence, to acquire an already existing successful player avoids a lot of troubles. References Gupta, Aman; BPTrends: ‘Pursuit of the Perfect Order: Telecommunications Industry Perspectives’, November 2008 * Fransman, Martin; Telecoms Policy Magazine: Mapping The Evolving Telecoms Industry: The Uses And Shortcomings of The Layer Model, 2011 * Business Monitor International; Canada Telecommunications Report: Regulatory Environment Industry Developments, Canadian Radio-television and Telecommunications Commission (CRTC), 2010 * Dubovskov, Andrey; Financial times: Company interview: MTS Group (MBT); 2011 * Lisi tsyn et. l, Journal of East-West Business: ‘Russian Telecommunication Company MTS Goes to the CIS’, 2008 * Huyghebaert, Nancy; Universiteit Leuven Academic papers: Determinants of Growth through Mergers and Acquisitions An Empirical Analysis, 2008