By Michelle Choi, an insider at Lease Advisors
Streaming media, cloud-based computing, the “internet of things”—with consistently emerging concepts and innovations, change seems to be the constant in the telecommunications industry. A few years ago, telecom executives focused on revenue and EBITDA growth, but accelerated growth has slowed down globally, with some segments even in decline. Leadership teams in the top telecom companies must continually update operating strategies, adapt, and ultimately maximize return on investment (ROI) in order to secure multiples. The largest service providers, Verizon, AT&T, Sprint, and T-Mobile, face crucial areas of decision-making in competitor collaboration, investments and divestments, corporate restructuring, and corporate financing in efforts to perform in the market, each with particular approaches to capturing ROI.
After paying $130 billion to acquire Vodafone’s 45% stake of Verizon Wireless and paying the FCC $10 billion for spectrum, Verizon’s strategy is clearly to invest in wireless and divest in wireline. With over $100 billion in debt and half of the company’s cash flow in dividend payments to shareholders, the strategy is less by choice than it is by necessity. Specializing in its wireless business, which constitutes 70% of its total revenue and most of its operating income, full ownership continues to bolster its superior network quality at the expense of growth opportunities. Specialization is a risky approach in a changing market.
AT&T, on the other hand, can afford to expand into new markets without divesting and limiting operating options. After DirecTV, Iusacell, and Nextel Mexico acquisitions, the #2 telecom company evidently has the inverse strategy to its #1 competitor, one characterized by international expansion and U-verse investment providing internet, phone, and TV services which make up 10% of AT&T’s revenue. Increasing broadband speeds, broadened networks, and an expanded customer base put the company at the hull of a developing market with new standards of internet and television. Investment in both wireless and wireline growth give AT&T an advantage.
In the past, Sprint approached operating strategy with what its CEO described as “nukes” with the potential to disturb existing conditions in the telecom industry which differentiated it from giants Verizon and AT&T. While it had, at one point, more spectrum than the two combined, Sprint continued to suffer from weaknesses in network, low customer satisfaction, delays in deploying LTE service, a declining customer base, a poor merger with Nextel, and regulator resistance against its plans to acquire T-Mobile. But lately, Sprint has made bold moves to change its strategy, trading in its confusing “Framily” plan with overhauls in advertising, employing new execs, and engaging in a pricing war, effectively eliminating what would be considered an oligopoly.
Finally, determined to surpass Sprint for the #3 spot, T-Mobile has been the boldest with its operating strategy, with some critics hailing its “uncarrier” approach as unsustainable. Selling reasonable phone plans without contracts has decreased profit rates, but the numbers speak for themselves: T-Mobile has garnered two times as many network connections as Sprint and earned $8.15 billion in fourth-quarter revenue, beating analysts’ expectations. Coupled with new LTE technology that combines both licensed and unlicensed spectrum, efficiencies to capture underutilized spectrum, hiring spokesmen like Macklmore, Twitter engagement between CEO and its customers, spearheading the rollover data plan, and a “treasure trove” of mid-band spectrum, T-Mobile is confident to rock the industry with a place swap in the next year. Its differentiated innovation and consumer-friendly strategies may propel it into the #3 spot.
With vastly different operating strategies, the largest players in telecom must understand the market environment and make key decisions to direct their organizations accordingly. Verizon’s superior network quality, AT&T’s expansion plans, Sprint’s pricing war, and T-Mobile’s “uncarrier” strategies tell a telecom narrative constantly adjusting to telecom market volatility.
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