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.