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Ovum warns telcos not to rush to expand into additional countries

(PresseBox) (London, ) It is more beneficial for telcos to invest in growing their customer numbers in fewer countries than to expand horizontally across more countries, says Ovum. This delivers an important message to Europe's telcos and authorities as they consider consolidation, convergence, and the creation of a pan-European network or regulation/licensing regime. The global industry analyst firm also believes that it explains why operators such as AT&T and Verizon are outperforming their European peers.

In a new report*, Ovum compares the performance of 20 large telco groups from 2000 to 2011 as they expanded or shrank their international footprints. The report outlines the benefits associated with economies of scale, economies of scope, profitability to shareholders, and the cost of financial distress. Its statistical analysis shows that variations in footprint size strongly correlates with net debt, number of employees, revenues, capital employed, and EBITDA. However, the findings also show that performance metrics such as EBITDA margin, return on capital employed, earnings per share, and net debt/EBITDA are weakly correlated 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."

Ovum acknowledges the logic in telcos expanding their footprints to diversify business risks, which it says has worked well for both developed and emerging market telcos that have been able to use strong performance in some markets to offset poor performance in others. However, the opportunities for economies of scale and scope in having a larger footprint are not as great as is generally assumed.

"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.

* Examining the Case for Larger Multinational Telcos

Ovum

Jointly awarded IIAR Global Analyst of the Year 2012, Ovum provides clients with independent and objective analysis that enables them to make better business and technology decisions. Its research draws upon over 400,000 interviews each year with business and technology, telecoms and sourcing decision-makers, giving Ovum and its clients unparalleled insight, not only into business requirements but also the technology that organizations must support. Ovum is an Informa business.