Management Professional Essay

Submitted By mb92975
Words: 4657
Pages: 19

Bringing Wal-Mart Scale Economics to Network Operators
Every competitor wants to be the Wal-Mart of its industry. Wal-Mart’s ability to scale rapidly from a single profitable unit way past the $300 billion mark in sales is the envy of every company on the plant. For more than 30 years, Wal-Mart has created equity value for its shareholders in ways that its competitors have not. Arguably the company has the most dominate strategic model of any major company in any industry, worldwide. But, in telecom there is no model for scaling quickly and profitably like Wal-Mart. This depresses levels of profit and growth, significantly diminishes opportunities, and drives market revenues into the hands of non-telecom companies, like Apple. Today, network economics do not begin to approach the cost effectiveness of Wal-Mart’s distribution network. Operators use a highly variable cost structure that increases linearly with network traffic growth. To grow you have to flame off profits. This is the single biggest challenge facing the industry. Failure to overcome this challenge means limits to growth and profitability, poor exit options, and serial financial crises for the foreseeable future. Telecom’s linear cost structure inhibits operators’ abilities to improve margins and capitalize on the explosive growth of bandwidth-intensive applications and services. In the battle for profitable market share between cable MSOs, telcos, satellite companies, and wireless carriers, and media empires, the winner will have Wal-Mart-like distribution economics. The number one priority of C Level management in every carrier worldwide, therefore, is to replace its linear cost structure with Wal-Mart-like scale economics. Wal-Mart’s supremely efficient distribution network is the single most important enabler of its “Everyday Low Prices” mass marketing strategy. This White Paper will focus on bringing Wal-Mart’s peerless distribution strategy to communications carriers so they too can achieve Wal-Mart’s scale economics, deliver everyday low prices to their customers, and grow and make money while doing so.
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Today we are at the dawn of a dramatically reshaped telecom landscape. When North River Ventures began creating growth models for the telecommunications industry over a decade ago, they observed that the lack of Wal-Mart scale economics would implode first the IXC business and then force consolidation on the wireless carriers and the IECs. This process has unfolded exactly as NRV predicted and consolidation has accelerated throughout 2004-2005 as the strong devoured the weak and repositioned themselves for their next looming battles. WorldCom devoured MCI, collapsed, renamed itself MCI, and was in 2005 acquired by Verizon in an $8.5 billion merger. SBC acquired AT&T for $16 billion and renamed itself AT&T. Sprint merged with Nextel in a $35 billion deal. SprintNextel in turn acquired its affiliates for $6.5 billion. In 2004, Cingular, a joint venture between BellSouth and SBC, acquired AT&T Wireless for $47.5 billion. Almost every penny of that $113+ billion shareholder money was spent to achieve elusive scale economies. Each of these deals was an attempt to position companies against competitors by offering a broader array of “seamless” services in order to aggregate user demand, gain scale economies, and improve profitability. In effect: become a mass marketer of communications services. In short, the goal is to replicate Wal-Mart economics in telecom. The critical question is this possible given existing business models? As North River Ventures pointed in 1995, Wal-Mart’s growth engine is so efficient that Wal-Mart doesn’t need to make acquisitions. In fact, Wal-Mart acquired nothing until it expanded overseas, and only then once its own management system was so effective that it could easily absorb, and…