Large footprint doesn't equal performance

OvumJudging by the dominance of multinational telcos, it would be easy to conclude that having the largest possible operational footprint is always a good idea. This has become conventional wisdom and is always followed by the assertion that there are synergistic gains to be made from a new market entry.
Ovum decided to test this assertion empirically by using the financial metrics of 20 of the world’s top telcos between 2000 and 2011. Our findings were presented in the recently published report Examining the Case for Larger Multinational Telcos.
In the report, we showed that the performance ratios of a telco do not necessarily depend on the size of its footprint. It thus follows that it is more beneficial for a telco to have more customers in fewer countries than to have the same number of customers in more countries.
In other words, our findings indicated that vertical expansion is more important to a telco’s performance than horizontal expansion into additional countries. This is the most significant reason why AT&T and Verizon are outperforming their European peers, and sends an important message to Europe’s telcos and authorities as they consider consolidation, convergence, and the creation of a pan-European network or pan-European regulation/licensing.
The multinational telco is nothing new
Since the mid-1980s, market liberalization, privatization, and the opportunities provided by mobile telecoms have encouraged telcos to expand into new geographies. Most of Europe’s top telcos expanded into other European countries and then rode the mobile boom into additional international markets. US telcos also expanded internationally, although they have now mostly retreated back to their domestic market. In the past 10 years, a number of large emerging market telcos have expanded their presence so that they now dominate their regions and some of them are even taking tentative steps towards buying assets in Europe.
Traditionally, telcos have expanded their international footprints through M&A, participating in the privatization of a company, or setting up a greenfield operation in a new country. However, the opportunity for new greenfield operations is nearly exhausted today as many countries now have the optimal number of telco operations, especially for mobile services. Likewise, opportunities to expand through privatization are now limited as most former state-owned telcos have already been privatized. This leaves telcos with M&A as the primary means for expansion.
A telco’s performance metrics do not depend on footprint size
Expansion into foreign markets can help a telco to grow when its existing footprint is stagnant or can be used to offset poor performance in other parts of its footprint. However, expansion can also make it more difficult for management to oversee all of the operations. Given the claims about synergies whenever a new market entry is announced, we wanted to see if the size of a telco’s footprint influences its economies of scale, economies of scope, profitability, and the cost of financial distress.
Our findings from the analysis of 20 of the world’s largest telcos between 2000 and 2011 did not provide clear or consistent proof that having a larger international footprint is either better or worse for a telco’s business. Instead, we found that key performance metrics are weakly correlated with a telco’s footprint size, whereas absolute metrics are strongly correlated.
Telcos still have reasons to expand internationally
We acknowledge that politics and empire building often drive international expansion. However, aside from these motives, there are still operational reasons as to why a telco may choose to expand its footprint. The obvious one is that a larger footprint is likely to yield greater revenues and profits. For example, revenues of $1 billion at a margin of 20% are better than revenues of $500 million at a margin of 30%. Therefore, telcos that are struggling for growth in their existing markets will continue to pursue geographic expansion.
We also see the logic in telcos expanding their footprints to diversify business risks. This 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. There are also opportunities for economies of scale and scope in having a larger footprint, even if these are not as great as is generally assumed. In fact, 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. Nonetheless, our analysis has disproved the assumption that a larger international footprint should be a goal in itself.
Emeka Obiodu is a principal analyst for industry, communications and broadband at Ovum. For more information, visit