4. STRATEGIC ANALYSIS
4.2 Porters Five Forces
The purpose of applying Porter’s model here is to determine the strength of the com‐
petitive forces and hence industry profitability.
4.2.1 Threat of new entrants
When determining the threat of new entrants, we assess the prevailing barriers to entry to which there are 6 major sources according to Porter, i.e. economies of scale, product differentiation, switching costs, access to distribution channels, cost disadvantage inde‐
pendent of scale, and government policy.
Economies of scale
Economies of scale are most certainly present in almost any aspect of the telecom indus‐
try. Given simply the nature of the industry, i.e. large‐scale investments in infrastruc‐
tures, the more RGU’s a company such as TDC can get onto its networks, the greater the revenue and – all else equal – the higher the EBITDA and EBIT margin. Another aspect of economies of scale can also be identified, i.e. those that are present in multi business firms in which there are joint costs among the different units. Different products can be provided through the same conduction, e.g. fixed line telephony and Internet and/or TV.
In the Telecom industry, it is in fact mirrored in the products, as HomeDuo and HomeTrio are examples of sharing the benefits from shared costs with the customer.
Product differentiation
Product differentiation is somewhat present. Clearly, we are not dealing with particu‐
larly differentiated products even though there is difference between qualities of differ‐
ent networks of course. There is more to the term than just the product. Brand identifi‐
cation and loyalty represents value for existing companies in the industry. Being per‐
haps not the most popular of companies, however, it is fair to state that the value is somewhat limited. Furthermore, there are some areas in which differentiation have played and in the future will continue to play a role. With services such as WiMP55 and PLAY, music available as an extra service for all customers of certain segments, or Telias movie Tuesday which gave all Telia customers the option of inviting a friend to the mov‐
ies for free, are all examples of how the companies are differentiating themselves even though the core product is basically the same. Also, quality of service is an option for
55 Wireless Music Player
differentiation, e.g. with web shopping, a physical store is not a necessity but on the other hand; a physical store gives the customer the option of “experiencing” the product and getting face to face customer service.
Switching costs
Switching costs are also present. Within mobile telephony and mobile broadband it is more than common for subscribers to commit themselves for 6 months when purchas‐
ing a new product in order to get a discount in return. Besides this general construction, switching costs are not the most serious barrier, as NITA has taken initiatives to make it easier for the customers.
Access to distribution channels
Access to distribution channels is present to some extent. In addition to TDC’s own dis‐
tribution channels, which consists of the online store and may physical stores, TDC sells its products through a number of retailers and sales agents and other distributers, of which some are also dealing with competitors of TDC.56
Cost disadvantage independent of scale
Cost disadvantage independent of scale is likewise present to some extent, in the form of knowhow, i.e. an accelerated learning curve. If the firms are able to keep their valuable experience proprietary, it represents an advantage, as costs for R&D and equipment should be lower. As Porter also notes, however, pursuing experience curve cost declines may well require substantial up‐front capital investments. Seeing that telecommunica‐
tion not is straight forward, it is clear, that know‐how is a prerequisite for actually oper‐
ating an infrastructure.
Government policy
Government policy is indeed relevant in the case of the Telecom sector. However, its interference represents more of a facilitating than prohibiting factor. Forcing TDC to provide access as wholesales, it is currently possible for any company to enter most of the markets in the telecom industry without any investment in infrastructure. This fac‐
tor has without a doubt taken its torn on the industry – the so‐called “Onfone war”
which it has been labeled, tells the story of “fortune hunters” aggressively chasing mar‐
ket shares through allegedly unsustainable business models, with the aim of gaining suf‐
ficient size in terms of subscribers for being an interesting object of acquisition. Accord‐
56 TDC A/S. TDC Annual Report 2010, p 109.
ing to JP Morgan, the likelihood of history repeating itself is improbable if Onfone’s strategy remains unchanged.57 This is basically due to a number of reasons, including the low acquisition price for one. Further more, in the accessed report, an argument goes, that if Telia and Telenor were to enter a partnership, it would eliminate the future competition from MVNOs, and this is exactly what has happened.
Assessment
Overall, exit barriers are strong mainly because of economies of scale and shared costs.
However, NITA has loosened these barriers, which has resulted in a number of new en‐
tering MVNOs, e.g. Onfone, M1 etc. According to some experts, however, this door should be closed again with the new cooperation between Telia and Telenor.
4.2.2 Intensity of rivalry among existing firms
In relation to the intensity of rivalry among existing firms, Porter lines out a number of interacting structural factors, which combined result in more or less intense rivalry.
Slow industry growth
Slow industry growth is perhaps the most prominent factor when it comes to intensity of rivalry. The case is clear, where there is market growth, firms can grow without com‐
peting firms having to suffer directly from it. This does not mean however, that no ri‐
valry will exist if the industry growth is high; rather it simply implies that firms may not be as hungry and thus aggressive in their pursuit of snatching market shares from one another, as they otherwise could be.
The Telecom sector is made up of several sub markets as described in the company presentation. To speak of an overall growth, therefore, is a bit utopia. Generally speak‐
ing, though, this is not a stagnant industry. Developments in technology play an impor‐
tant role in relation to market growth, as future market growth with all probability lies in “new markets” – or i.e. new products/services for existing markets. If all technological progress were to stop this second, the Telecom sector would ultimately have to face a future of slow growth. E.g. there would not have been any need for higher speed in the mobile net such as what 4G technology supports if not the smartphone had been devel‐
oped. It is of course difficult to predict what will happen in the future; up until now, however, telecommunication has been an area of great growth. The unpredictability fac‐
57 Wittig, H., Morris, D., & Achtmann, T. (12. May 2011). TDC ‐ Improved visibility, p 3.
tor in itself actually makes rivalry more intense, as keeping what one has already got seems crucial when having to face the unknown.
As described in section 3.2.1, the market for fixed line telephony is in a phase of serious negative revenue growth, while mobile seems to be stagnating. The market for fixed line Internet is somewhat stagnating as well, while mobile broadband is experiencing growth. The most positive outlook currently lies in TV.
Numerous or equally balanced competitors
Numerous or equally balanced competitors is about whether or not companies within the industry will “fight” directly or indirectly one another, or alternatively live their own lives. In an industry characterized by duopoly the two firms are highly likely to follow each other’s every move, seeing that a move on one part almost inevitably will have in‐
fluence on the other. With TDC being the big dominator in Denmark, things are not as intense as they otherwise could be.
Figure 4‐3 stems from the European Commission, and was developed in the process of preparing recommendations for regulation of next generation’s access networks. It illus‐
trates the different levels of “in‐house” versus bought network a Telco can chose to pick from. Accordingly, the more refinement, actors aside the dominator chose to handle themselves, the more intense will competition be in a given market.
Figure 4‐3 The Investment Path58
58 Source: NITA. (2011). Markedsafgrænsning – Engrosmarkedet for bredbåndstilslutninger (marked 5), p 22.
Still having the “Onfone war” in mind, it could seem absurd, since competition in the mobile market has intensified by companies employing a business model based on re‐
sale, which according to the model does not imply intense competition. However, it may well be true, that these business models are in fact unsustainable; and in that case the market has clearly been disrupted in a most unfortunate sense for existing operators.
The relation should be acknowledged since it makes perfectly good sense. As companies move up the path of increased investments, they attain 1) economies of scale as com‐
pared to resale companies for instance, who pay per customer and therefore incur rela‐
tively high variable costs and 2) increased control over products and hence, there are options for differentiation. Both of these factors, naturally implies more intense compe‐
tition.
Recently, Telia and Telenor announced, that they plan to cooperate, i.e. share and co‐
build their mobile infrastructures. According to CEO of Telenor, Jon Erik Haug, they now aim at building Denmark’s best mobile infrastructure. Clearly it is unfavorable for TDC and 3 if carried out successfully. Only days before the announcement, however, a stock analyst named Paul Ernst Jessen expressed concern regarding the financial situation of the two companies; stating that the only solution would be to engage in cooperation.59 This certainly tells something about the size of investments necessary to compete with own infrastructure. Both companies are large on an international scale; however market shares are not won over night; and expending and sharpening an infrastructure is so costly, that it must be a gradual process.
High fixed or storage costs
High fixed or storage costs are other factors potentially affecting the rivalry. It is basi‐
cally the problem of sunk costs that comes into play here. Seeing that most of the prod‐
ucts are in fact “capacity” so to speak, storing it is not an option. Given that variable costs are low, any incremental increase in revenue equals contribution for covering the high fixed costs. Thus, firms in the industry should – all else equal – have greater incentive for e.g. lowering prices to conquer market shares.
59 Rasmussen, P. D. (14. June 2011). Telia og Telenor: Vi bygger Danmarks bedste net. Computerworld .
Price wars have been seen, which must be seen as a result of or in action intense rivalry.
On the other hand, it seems there is some sort of discipline among the large actors, probably because price wars in the long or perhaps even short‐middle run are unsus‐
tainable. The solution, it seems, has been brand diversification strategies. I.e. the market is divided into two, a low‐price segment and a high‐price segment; the large actors then
“fight” for both segments, only they use different names in each. So long as it works in keeping the high‐price segment a live; the problem is indeed reduced. However, it does seem a little too easy, and evidently the low‐price companies are continuously emerging.
Lack of differentiation or switching costs
The above notes on price discrimination very much relates to this point. For most peo‐
ple, a subscription is a subscription – it is the price and service that matters. In contra‐
diction to competition based on product differentiation that provides consumer prefer‐
ences and loyalty, this form of competition implies high volatility, and hence risk.
Assessment
The overall intensity of rivalry among existing competitors is moderately strong. We are not dealing with duopoly or perfect competition markets. TDC is dominating and some‐
what controlling and few competitors have climbed far up the investment path. Gener‐
ally this would imply little intensity. On the other hand; only few have real options of differentiation leaving price as the (sole) areaa of adjustment and competition. Slow in‐
dustry growth contributes a great deal to what should perhaps be termed intensified rivalry.
4.2.3 Threat of substitutes
For anything to become a real substitute for telephony and/or data communication, it would probably have to be based on a new technology. E.g. data communication such as MSN etc. are of course substitutes for telephony, however as those market opportunities were new, companies in the Telecom sector were the ones to bring it out and about. As such, the real threat is that coming from emerging technologies. There will always lay a danger in this industry, that other industries suddenly see opportunities for using what‐
ever they do to somehow gain a bite of this enormous market.
4.2.4 Bargaining power of buyers
Buyers in relation to TDC consist of a number of different segments, which all have dif‐
ferent characteristics, namely consumers, business customers, and wholesale customers.
Consumers
There are a number of circumstances under which a buyer group is powerful. First, if it is concentrated or buys in large scale relative to the company’s total sales, as this makes the buyer relatively important. In a general sense, this is definitely not the case in the Telecom industries; customers are acting on their own and their purchase represents a minimal fraction of total revenue. Second, if the purchase represents a large fraction of the buyers total purchases, as this provides greater incentive for the buyer to invest the time needed for finding favorable prices and they purchase selectively. Determining whether a fraction is large or small is a rather subjective task, judged by the preliminary success of price discrimination, it does not represent a fraction sufficiently high for lead‐
ing to action, not for most part (for now) at least. Another circumstance brings about the same effect, namely when buyers are earning low profit, or in this case when consumers have less money. Third, if there is no or little differentiation or few switching costs, as everyone, i.e. both the buyer and the company, knows that there is an equally good offer which the buyer can easily pursue instead. As discussed earlier, this is very much the case here, i.e. “a subscription is a subscription”.
Business customers
Business customers, in most cases being larger than a consumer RGU and in some cases even much bigger, have significantly more bargaining power. For these buyers, there is assumable a lot more value in product differentiation, both in terms of quality and qual‐
ity of service. Most companies cannot cope with unreliable equipment or network, nor will they have the incentive to cut the need for fast service in case of issues occurring in return of low prices. However, in the light of the financial crises, many are still strug‐
gling to keep the wheel going, implying greater incentive for searching the market for the best and cheapest possible solution. Nevertheless, the business customers have sig‐
nificantly more bargaining power than consumer due to the effect of their size.
Wholesales
Sales in the wholesale segment are purely intersectoral; however it still makes sense to assess the power relationship in the non price‐regulated markets. The price‐regulated markets do not function regularly by market powers; moreover prices are decided by a third part and it therefore does not make sense to speak of bargaining power. Informa‐
tion on the non‐regulated products, however, is not available, since neither NITA nor TDC seems to put much focus on these areas. Seeing the size of TDC, it is fair to argue,
that the bargaining power of wholesale buyers is fairly vague. Returning to the Invest‐
ment Path, the more the buyer chooses to refine in‐house, the less dependent it is on the supplier, and hence, bargaining power is stronger.
Assessment
Overall, with regard to retail customers the buyers bargaining power is quite strong, mainly because switching costs are low. Product differentiation is in most cases of little significance/importance for the customer, and with economic downturn, many both consumers and business customers are attempting to cut down on expenses, just like TDC self is doing.
4.2.5 Bargaining power of suppliers
The circumstances under which suppliers are powerful have much resemblance with those under which buyers are powerful. First, if the supplier group is dominated by a few companies and is more concentrated than the industry it sells to, as the “other equally good offer” is not available. Second, if the suppliers are single source, i.e. no sub‐
stituting products are available. Third, if the industry is not an important customer to the supplier group, as suppliers in such case will have tendencies to not care. Fourth, if the purchase in case is of high importance for the industry (the buyer). Fifth, if the prod‐
uct is differentiated or switching costs are involved. Sixth if the supplier group repre‐
sents a credible threat as new entrant through forward integration. TDC has pointed to specific suppliers, of which they are critically dependent60; these will be discussed sepa‐
rately in the following sub sections.
Outsourced activities
First, operations and development within IT activities have been outsourced to CSC (Computer Science Corporation), and operation and expansion activities related to the mobile network have been outsourced to Ericsson. Since these are both critical elements of TDC’s operations, the dependency is of course very high. Both suppliers operate glob‐
ally, and therefore TDC is assumable to represents only a very small fraction of all cus‐
tomers. There are other available suppliers within these fields; however switching are high, in the sense that solutions often are specialized in such a way that it is difficult to transfer the task to a different supplier. Especially within IT solutions, it is often all or nothing kind of deals. Commitments, thus, are long term, and with good cooperation
60 TDC A/S. TDC Annual Report 2010, p 108109.
present, power may not be what settles the deal. Good cooperation is more than likely to be present, since outsourcing of these areas otherwise would be foolish to follow through with.
Mobile phone manufacturers
Second, TDC is highly dependent on supply of telephones, in particular smartphones.
There are several large companies competing in the smartphone industry. It is crucial for TDC, or any other given company for that matter, to be able to access a broad portfo‐
lio of supply, preferably including all the big manufacturers – simply because product differentiation is everything in the business of mobile phones. The suppliers here are global companies as well, which means that TDC also here represents a very small frac‐
tion of their business. The dependency is mutual, however it seems fair to claim, that TDC is somewhat more dependent than the other way around.
Recently, there was in fact an example of incapability of reaching a satisfactory agree‐
ment with a supplier of Smartphones, namely Apple with its iPhone. Allegedly, TDC stated back in December 2009 that the market for iPhones was thought of as full, and compared with existing suppliers the profitability was lacking, and the company found it sufficient to stick with those they already had.61 Tele analyst, Torben Rune argued that it was more likely to be the fact that a satisfactory agreement with Apple was unattainable that played the decisive role. Also, he predicted that iPhone would be to find in TDC’s product range at the latest by 2011, simply because TDC would be pressured by iPhones at that point growing market share. On August 13th 2010 TDC announced, that the new model iPhone 4 would become part of TDC’s products62. Interestingly, at the point of launch there were already 116.000 iPhones on TDC’s network63, which obviously sup‐
ports Torben Rune’s argument but also implies a somewhat level of customer loyalty.
On the domestic level, TDC is undoubtedly market leader in all areas; competitors such as Telenor and Telia are facing TDC’s many comparative advantages. From a global view, however, TDC is a small fish with revenue in 2010 amounting to 26.167 DKK millions.
61 Frederik Danvig. (18. December 2009). TDC kan blive tvunget til at sælge iPhone. Computerworld.
62 TDC A/S. (13. August 2010). TDC to launch iPhone 4. Press release.
63 TDC A/S. (17. August 2010). 116.000 iPhones i TDC's net. Press release.