Telecommunications

RECALL No11

Mature Markets

RECALL No 11 Mature Markets

Welcome ...
... to the 11th issue of RECALL, a publication that offers leaders in telecommunications actionable insights on the topics facing the industry. Much attention is being paid to the unprecedented opportunities found in emerging markets, but an equal amount of airtime should be given to the opportunities in mature telecoms markets. Basic service penetration has never been higher in these markets, forcing the traditional access-based approach to grow into antiquity. While this is a game changer, it doesnt mean that growth potential is nonexistent. It simply means that a shift from quantity to quality is mature-market operators only chance at a return to the type of revenue growth they once enjoyed. In this RECALL issue, we share our analysis of the industrys trends as well as our observations of its leaders, whose new world strategies are aiming at new horizons in a climate of seemingly shrinking business opportunities. We begin with a general look at what has led to revenue growth until this point and what is fundamental to successful competition going forward. This is followed by an exploration of customer satisfaction and an introduction to a tool designed to match customer perception to telco performance. Next, we take an honest look at brand excellence, suggesting how those at the top of the brand game can maintain their pride of place and presenting a realistic path for those whose strengths lie more in their propositions than in their brands. In addition to a customercentric approach to growth, we believe that an offerdriven strategy is also necessary. IPTV is a part of this paradigm shift, and our next article examines what is involved in developing an offer that places new demands on all of an organizations skills; from provisioning to customer care. We go on to discuss the skyrocketing growth of mobile data and elaborate on the key success factors for integrated and pure mobile players alike of cashing in on this phenomenon. Then we examine the role of sales channels, particularly stores, in revenue growth by introducing our store optimization program that has already brought dramatic increases in productivity to several operators in Europe and the US. In summary, our final article sheds light on how telecoms lags behind other industries marketing and sales capabilities and describes a comprehensive assessment tool that can put this sector back in the race. Zeinal Bava, CEO of Portugal Telecom, concludes with his perspective on life after acquisition and discusses in detail how he is leading his organization to new heights under the banner of innovation. We hope that this issue of RECALL provides you with insights that trigger ideas or discussions regarding the challenges and opportunities your organization may be facing. As always, we welcome your feedback on these articles as well as your ideas for topics you would like to see covered in future issues.

Jrgen Meffert Leader of McKinseys EMEA Telecommunications Practice

Nelson Killius Global Leader of External Communications for the Telecommunications Practice

Pedro Mendona Leader of McKinseys Marketing in Telecommunications Practice

Gloria Macias-Lizaso Leader of European Telecoms Mobile Pricing and Editor of this RECALL issue

RECALL No 11 Mature Markets

Contents
01 02 03 04 05 06 07 08 Mature marketing: A winning formula for a new era in telecoms Anchoring loyalty: The integrated customer experience No glitter, still gold: Branding for growth Attacker mindset: Making IPTV a residential success The mobile data dilemma: Securing profitable growth Shock the system: Driving sales via in-store execution Wrapping up: The need for a step change in telecoms marketing and sales Defying the status quo: An interview with Zeinal Bava, CEO, Portugal Telecom 7 15 21 27 33 41 47 53 61

Appendix

RECALL No 11 Mature Markets Mature marketing: A winning formula for a new era in telecoms

01 Mature marketing: A winning formula

for a new era in telecoms

Across developed countries, the penetration of basic telecommunication access services skyrocketed in recent years. But now it is beginning to flatten out. Even yesterdays high-growth services like fixed broadband and mobile voice are losing momentum in Western Europe, the US, and some Asian countries. This maturity level is setting into motion a dramatic shift in competitive landscapes. In response, telcos need to transform their current business models, while improving execution in an effort to differentiate themselves and sustain or even expand their margins. McKinsey recently took an in-depth look at telecoms operator performance in mature markets those where revenues have plateaued, prices have eroded, and EBITDA have come under pressure. The results are sobering. Up until now, growth and profitability have largely been driven by portfolio momentum (i.e., the specific markets and segments in which a company operates) rather than by operator-driven execution excellence. Sources of this traditional portfolio momentum, however, are dwindling. To make matters worse, new pockets of growth notably in applications and convergence are being disproportionately captured by nontraditional competitors such as device, overthe-top, and content players. In all mature markets, the growth pockets that do remain are insufficient to offset significant price erosion both in fixed and in mobile. This increases pressure on EBITDA margins which have been sustained in recent years by onetime efforts targeting cost reduction. This approach, however, just might be running out of steam.

Disturbingly, stagnation of revenue growth is taking place within the context of an exponential growth in telecoms services usage that operators have not been able to effectively monetize. For example, total data traffic is estimated to grow at a rate of 50 percent per year from 2008 up to 2011, whereas data revenues are expected to grow at a rate of only 8 percent. Even basic mobile voice minutes continue to grow across countries as price elasticity kicks in with a time lag. In order to derive the winning formula for mature markets, we sought to map the DNA of these markets by analyzing three questions: What currently drives growth in the telecoms sector, both for the market overall and for selected operators? What is myth versus reality in terms of threats and opportunities that arise from blurring boundaries along the telecoms value chain? What will be the key to competing in these markets going forward?

Current growth drivers in mature telecoms markets

A rigorous analysis of facts has unearthed several underlying drivers behind growth in mature markets from 2003 to 2008 (Exhibit 1) along with a set of conclusions and insights. Some of these may be less intuitive than others:

01

Several trends to varying degrees have contributed to revenue growth in Several trends mature markets to varying degrees have contributed to revenue growth in mature markets
2003 - 08 (+/-) Correlation of factor with revenue growth

1st order Overall telecoms revenues Mobile revenues Mobile revenue growth (+)

2nd order Presence of mobile broadband (BB) offers (-) ARPM growth (+) Mobile penetration growth (-) Presence of mobile BB offers (-) Mobile BB penetration growth (-)

3rd order Household growth (+) Number of MNOs (-) Disposable income growth (+)

Household growth (+)

Fixed revenues

Country regulation and socio-/ geodemographics (+)

Presence of pay-TV offers (+)

Note: Tree analysis in order to identify most important explanatory variables for mature markets growth (dependent variable: telecoms revenue pool independent variables: macroeconomic; industry structure in each market; disruptions in the market) SOURCE: McKinsey

First, overall growth in mature markets has been fundamentally driven by further penetration of wirelessbased services, with mobile broadband and data services representing the majority of that growth over the last four to five years. Interestingly, the markets with the highest penetration of mobile broadband and data services show the lowest growth rates for mobile and overall telecoms services revenues. This suggests that such penetration is the natural result of a strong push, given the absence of growth in traditional voice services. Second, GDP growth and disposable income are not sound predictors of telecoms growth. In fact, from 1981 to 2008, the correlation between sector growth and GDP growth was just 0.17. This is due to the small share of spending that telecoms represents for most consumers and businesses. It also results from the growing role of telecoms as a must-have basic service. Our analysis shows that regulatory conditions in particular, the number of MNOs for mobile and the socio- and geodemographics for fixed are better indicators of a particular markets ability to generate growth. Surprisingly, local demographics also explain local market performance. Those markets with higher immigration are experiencing greater revenue growth, especially in mobile services. In Spain, for example,

household growth was among the most dramatic in Europe between 2003 and 2008. There, revenue growth in mobile was well above the European average. Finally, in a few markets where local competitive conditions include multi-play-based offers, pay-TV services emerge as the next-generation growth driver. This reverses the negative wireline trend of declining revenues and fewer fixed lines. All of these trends reinforce the fact that the telecoms industrys growth to date can be largely explained by portfolio momentum, which has stimulated organic growth and a wave of mergers and acquisitions. When it comes to superior execution that was translated into increases in market share gains, telcos lag behind their counterparts in other industries. In telecoms, revenue growth differs widely across mature markets, while profitability varies across operators within each market. Even for players with a multinational footprint, it was the local strategies that led to growth. For example, Vodafones pricing strategy visibly differs across geographies in terms of ARPM, quite similar to weighted market average. This telcos ARPM is EUR 0.09 in France versus 0.15 in Spain, while its market share in both countries is around 30 percent.

RECALL No 11 Mature Markets Mature marketing: A winning formula for a new era in telecoms

02

Services players and handset manufacturers benefit from greater global Services players and share versus operators handset manufacturers benefit from greater global share versus operators
Revenues of top 3 players in each category USD billions, 2009E MNOs 20% 850

Handsets

66%

160

Equipment

63%

90

Online advertising

75%

24

Search

82%

30

SOURCE: McKinsey

Only a few operators were able to break the mold and achieve abnormal growth resulting from sustained market share gains in these maturing markets. Such was the case for Arcor in Germany, DNA in Finland, KPN in Belgium, Carphone in the UK, and a few others. In these cases, market share was mostly built on aggressive pricing rather than on real differentiation generated by other marketing levers.

Moreover, telcos have controlled a diminishing share of the total pie both in the B2C and in the B2B arenas. Despite the slowing forecasts for the sector as a whole, growth pockets clearly exist, as evidenced by device and over-the-top players. They have been able to capitalize on access assets to offer consumers and businesses leading-edge services. This growth in applications and services has resulted in fragmented consumer needs not due to the nature of the pipe or the equipment used, but because of the applications and services run on top. Large segments of consumers are tapping into the services they want across multiple devices, effectively implementing convergence at the applications and services layers. While operators struggle to implement convergence at the access layer, other players in the value chain are taking full advantage of the need for convergence in applications and services. As traditional industry boundaries blur, what emerges is both an opportunity for operators to access new growth avenues and a threat to their ability to contain value transfer to other players. On the one side, operators can leverage their current customer franchise to venture into new arenas such as service and content. On the other, service and device innovation is margin-

The reality of extending the telecoms business along the value chain
Much has been said about the opportunity for telcos to expand their footprint along the value chain as a way to capitalize on access and monetize traffic growth. This includes the potential for expansion into high-growth pockets of the value chain such as content and applications in consumer segments as well as ICT in the enterprise domain. With this opportunity comes a threat. Many operators worry that other industry players are better positioned to capitalize on the proliferation of bandwidth (based on equipment, content, applications, and services), ultimately diluting the franchise value linked to access. In reality, converging services have been growing much faster than core telecoms services in recent years.

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03

Pursuing the total customer experience scenario requires addressing Pursuing all levers the total customer experience scenario requires addressing all levers
Key value-creating drivers Strong Renewing revenue sources Technology (e.g., speed) will become a key competitive factor in the future Partnering along the value chain/ some vertical integration Capex discipline Transform the business model to crystallize growth opportunities Growth Pursue bold technological investments Consolidate partnerships along the value chain Competing based on total customer experience Innovation DNA Alternative positioning along the value system Operational excellence

Stagnating

Focus on innovation and excellence in execution Managing as a utility Leverage innovation New products do not bring incremental value role Telcos are not better positioned than other Focus on executing players to explore converging businesses marketing, strategic, Management focus on regulation and financial, and operalean operations tional levers Access-based Focus of competition

Becoming marketing boutiques All marketing levers gain importance (branding, products, pricing, etc.) Regulators will push for new entrants Customers do not require/are not willing to pay for faster technologies Customer-based

SOURCE: McKinsey

alizing operators in numerous ways. Despite operator efforts in the mobile world to control the interface, both equipment manufacturers and Web service providers are making significant advances. These players are leveraging their core strengths to increasingly occupy this space. Handset manufacturers, for example, are capturing significant consumer loyalty and increasingly bundling the services consumers most value in their offers. Also, Internet service providers are demonstrating the ability to replicate their success in the traditional online world to gain ground in the mobile arena. In spite of operators walled garden efforts, Internet brands in key European markets have already won the mobile search game. After the battle over Internet services has already been lost in the residential world, the new battleground increasingly focuses on enhanced TV services; in the future, it will include in-home services. Furthermore, service markets are developing as monopolies and duopolies, leaving operators marginalized in the process. In fact, leading operators have a much smaller global market share than leading service providers or handset manufacturers (Exhibit 2). At such a large scale, these players have the option to impose new standards and ways of doing business, squeezing operators into the role of a pipe. Up until now, convergence has been mainly a game for ISPs and OEMs who have conquered a growing share of the revenue pool.

A new telecoms paradigm a winning formula

Two major developments need to be kept in mind when considering what it will take to win in this new era of mature telecoms markets (Exhibit 3). The first is the coming-of-age of data services and video-related opportunities. This demands new business models that take on a more integrated view of the value chain. The second is the changing nature of competition from one of privileged access to customers to one of innovation and superior execution in the customer experience. Transforming telco business models takes some bold moves that may further jeopardize the core traditional offer and current revenue sources, but aim to expand total market size and open new growth avenues. This holds true not only for mobile, for mobile broadband (potentially at the expense of DSL), and for triple and quadruple-play bundles (potentially at the expense of voice and Internet access price), but also for fixedmobile convergence products and for fiber network deployment. To ensure that most of these initiatives succeed and drive true transformation of current business models, several success factors must be in place: Scale. Most initiatives must be developed at scale to drive transformation and total market growth while offsetting cannibalization. In fact, many negative side

RECALL No 11 Mature Markets Mature marketing: A winning formula for a new era in telecoms

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The mature market mix: A preview of RECALL No 11

This RECALL issue includes a selection of articles calling for action in a set of dimensions that we see as critical to winning in mature telecoms markets. Integrated customer experience management. McKinseys ICE benchmarking involved 45,000 customer interviews in 15 Western European countries to better understand how multiple touch points influence customer satisfaction and choice. Crossing these insights with the accurate assessment of telcos operational performance in each of those dimensions provides a clear map of action priorities. Channel optimization. Increasing productivity of consumer sales channels telecoms stores in particular often presents a low pain/high gain opportunity. Already implemented by 15+ operators in Europe and the US, a standard optimization program, combining operational discipline and commercial best practices, leads to an average 30 percent increase in an operators physical channels productivity. Mobile data monetizing. Turning the explosion of data traffic into a profitable business has now become the highest priority for integrated telcos and pure mobile players. In this article, we elaborate on the key success factors to cash in on mobile data. Prioritizing IPTV. The pay-TV business once reserved for a few markets where the local competitive context has led to faster development of 3P/4P strategies is now seen as the emerging growth driver in the consumer segments. From those earlier experiences we can learn what it takes to develop a new offer that requires a completely different set of skills and cuts across most traditional processes, from sales to provisioning and customer care. Brand realism. We also call for additional pragmatism, presenting hard evidence that telecoms brands have not achieved true differentiation. We frame the conditions for telcos to choose between developing hero brands that sustain a significant premium versus returning to a much closer monitoring of marketing spend and focusing on proposition-led brand strategies. Commercial transformation. Using a more than 200-variable assessment tool, we see that most telcos actually lag behind other sectors in terms of their marketing and sales capabilities. In that context, we suggest that developing and implementing a wide range of proven, commercial tools must be included in any capabilitybuilding program.

effects are likely to materialize when only incremental steps are taken toward innovative offers. The upside of creating new markets is attained by making extensive, wide-scale moves. Telcos need to take a lesson from the playbooks of technology companies that have experienced the power of scale and global standards. Organizational setup. Many of these initiatives cut across the traditional silos of a typical telcos organization. For example, in fixed-mobile convergence with product-based (fixed versus mobile) organizations evolving toward more customer-centric models (personal versus residential versus SMEs/corporate). This can even extend to more specific discussions on how to frame the development of TV services or even mobile

broadband within the current organization. What links these sizable projects is the need for a 360-degree review of a telcos operating model, eliminating roadblocks and allowing for a step change in efficiency and delivery across old silos. Ecosystem. To effectively deploy and monetize these nontraditional growth levers, operators will need to develop deeper, less transactional relationships with other players in the value chain ranging from OEMs to the media and over-the-top actors. Innovation and superior execution will make the difference in terms of customer experience and customer choice in markets that are less and less captive to the

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owner of the pipe. With few exceptions, telecoms operators will find that they can learn a great deal from other customer-facing sectors of the economy in terms of marketing and sales. *** All in all, we believe that competitive dynamics will fuel a permanent search for growth opportunities, representing a new era for telecoms operators. This new era will be one in which growth and profitability are primarily driven by individual corporate strategies rather than by substantial differences in local market regulation and sociodemographics. Those operators able to define their own ecosystem to monetize data services consumption and make a step change in their marketing and sales capabilities will secure a first-mover and perhaps an ongoing advantage.

Alexander Dahlke is a Principal in McKinseys Hamburg office. alexander_dahlke@mckinsey.com

Miguel Fonseca is an Associate Principal in McKinseys Lisbon office. miguel_fonseca@mckinsey.com

Gloria Macias-Lizaso is a Principal in McKinseys Madrid office. gloria_macias@mckinsey.com

Nimal Manuel is a Principal in McKinseys Kuala Lumpur office. nimal _manuel@mckinsey.com

Pedro Mendona is a Director in McKinseys Lisbon office. pedro_mendonca@mckinsey.com

Andrew Pickersgill is a Principal in McKinseys Toronto office. andrew_pickersgill@mckinsey.com

RECALL No 11 Mature Markets Anchoring loyalty: The integrated customer experience

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02 Anchoring loyalty: The integrated

customer experience

The age of wildfire growth for telcos is fading into a fond but increasingly distant memory at least in mature markets. Now, industry players are zeroing in on customer experience to keep the subscribers they have. A systematic approach will ensure operators can reap the full benefits from such efforts. Keeping customers happy and loyal has become the new mantra in telecoms. Operators have begun to accord customer experience as much importance as most service industries give it. McKinsey research in Western Europe shows that an increasing number of telcos are currently focused on improving their performance at key customer touch points. Better yet, some players envision a single cross-functional customer experience team responsible for all touch points across all customer segments. Far from an altruistic endeavor, this focus on customer experience stems from research that established its strong link with lower churn (customers switching providers) and the willingness to recommend a provider to friends. To capture the full potential benefits that surprised and delighted subscribers generate, telcos need to move beyond basic customer satisfaction plans and engage in integrated customer experience (ICE) management. McKinseys ICE approach is a proprietary methodology. It uniquely links the external customer perception with the internal delivery. The external perception is based on a combination of ongoing expectations and experiences at the touch points. The internal delivery is made up of the internal processes, metrics, and organization. Based on this, ICE helps clarify and focus improvement actions on two levers. When percep-

tion is misaligned with real performance, emphasis lies on communications. When perception is aligned with reality, actions target operations. This allows operators to prioritize efforts to achieve the highest churn reduction; thus, direct bottom-line impact (Exhibit 1). McKinsey recently completed a customer experience benchmarking exercise in Western Europe to support this framework with a robust set of proprietary data. This combined both internal and external views on the customer experience performance of top telecoms operators. To understand the external customer perception, McKinsey interviewed 45,000 consumers in 15 Western European countries, focusing on four product segments (mobile, fixed voice, broadband, and IPTV) and assessed customer perception and satisfaction across an exhaustive list of touch points and experience drivers. To understand the internal view, McKinsey benchmarked a set of key operational performance indicators across 12 leading European operators in the same countries and for the same set of customer touch points and experience drivers as in the external view.

Pinpointing customer perception

In essence, a customers service perception results from his or her experiences with a telco at each touch point (Exhibit 2), some being more critical than others. The ICE approach first identifies the key customer touch points. Then, one level deeper, it reveals which experience drivers boost satisfaction the most within each touch point. Finally, it determines the experience level that leads to greater customer satisfaction.

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01

McKinseys proprietary ICE approach links customer perception and McKinseys proprietary operational performance ICE approach links customer perception and operational performance
McKinseys ICE approach Key questions addressed Customer perception Integrated approach Operational performance How are we seen versus competitors? What are the most important touch points/experience drivers? What are the opportunities to improve from a customer perception standpoint?

Customer perception

How do we perform relative to others? What are the opportunities to improve from an operational performance standpoint?

Operational performance

Integrated approach

What is the potential impact of perception improvement? What is the most appropriate strategy for improvement? Operations or communications? What concrete ideas can make the difference?

SOURCE: McKinsey

The majority of touch points are common across product segments. For example, the offering, network quality, call center, activation/provisioning, Web site, retail store, and repair are all key across fixed, mobile, broadband, and IPTV. Nonetheless, their relative importance in determining customer satisfaction varies across products, countries, and customer segments. To fully understand customer perception and be able to improve it, operators need to analyze touch point issues at the customer experience level. The ICE approach allows operators to dig deeper down to the most important components of a touch point experience: its drivers. This makes it possible to understand the current satisfaction and determine how much each of these drivers contributes to the overall perception. More importantly, the actual customer experience at the touch point can be derived in very concrete terms thanks to a verbal description of the service level the operator provides (e.g., I had to wait less than a minute, I had to wait between one and five minutes). With this, a mobile operator might discover that the top drivers behind negative perception are lengthy waiting times (more than five minutes before call is answered). Other factors might be confusing automated instructions, having to make too many calls to resolve a problem (more than three), or being transferred too many times (more than twice). By correlating customers ver-

balized experience and satisfaction level, the methodology can identify the satisfaction breakpoints. These designate the experience level beyond which customer satisfaction drops drastically. Breakpoints are particularly relevant in setting a telcos internal customer operations objectives. They help the operator avoid spending too much or too little on a specific experience driver just the amount required to achieve the minimum service level needed to keep customers satisfied (Exhibit 3). Interestingly, our research shows relatively low gaps in overall customer satisfaction (typically 2 to 4 points), but at touch point level, we observed very large differences in scores (up to 15 points) across all markets. This clearly shows where to improve and where to differentiate. The external view on customer perception also helps identify relevant segments in the market and in an operators customer base with respect to customer experience. Indeed, each segment tends to assign different levels of importance to individual touch points, thus impacting their overall experience. Using the European average as an example, those in the value seeker segment place overwhelming importance on the actual offer itself. People in the best of breed segment place similar emphasis on the offer, activation and provision, and network quality. Because of this, resolving the customer experience issues in different segments could require vastly different solutions.

RECALL No 11 Mature Markets Anchoring loyalty: The integrated customer experience

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02

Customer perception is driven by the experience each customer has at every Customer perception is and its by importance touch point with an operatordriven net the experience each customer has at every touch point with an operator and its net importance
How satisfied are your customers? Customer experience Which touch points are most important for your customers? Which experience drivers influence satisfaction the most? Offering Satisfaction Derived importance Penetration Value Satisfaction Derived importance Penetration Verbalized scale Cheap Normal Expensive Too expensive
SOURCE: McKinsey

Overall customer experience

74.5

63.2 8% 100% 70.5 17% 100%

Touch points

Experience drivers

4-level verbalized scale

What criteria lead to a better experience?

Satisfaction, indexed Distribution 0 50 100 Percent 86.3 73.5 59.7 38.2 13 61 21 5

Discerning between operations and communications

Understanding customer perception in depth is the first step toward improvement. The second, fundamental step in selecting and prioritizing the right improvement actions is to understand whether a negative perception is caused by poor communications or operations. On average, customer perception correlates highly with operational performance only at specific touch points. Examples include call centers, activation and provisioning, retail stores, and overall network quality. Customers clearly know what they like and dont at these touch points. Most aspects are related to how well companies run their operations. Here, telcos should emphasize operational excellence to ensure the highest customer satisfaction. To achieve this, they need to understand their operational standing compared with competitors. For a call center, typical key performance indicators (KPIs) compiled by McKinsey in Western Europe include first-call resolution, the percentage of calls transferred, and average answer speed. In areas such as billing or offering, customer perception and satisfaction have a less tangible link to operational performance. Thus, telcos may need to focus on communicating more intensively with customers. In

billing, a telco may rely on a standard, seemingly logical procedure backed by flawless systems that result in highly accurate invoices. A confusing or counterintuitive invoice design, however, can hinder customers from understanding their monthly spending. This in turn can lead to dissatisfaction and eventually, to avoidable clarification calls. Similarly, partial or unclear communication regarding offer pricing at the time of sale will almost certainly generate complaints and dissatisfaction later on when customers receive the first invoice. In both cases, clearer communication is the key to dramatically enhancing customer perception and satisfaction, not operational improvements to internal processes. In each market, the key is to compare a companys own customer perception and operational performance with those of competitors. The ICE approach then combines insights into a strategy to prioritize touch points. If a telco is underperforming in both perception and operations, it should launch a turnaround program for touch point operations. For touch points where customer perception lags behind competitors but operational performance is fine, the focus should lie on improving communication. The combined ICE analysis could also reveal opportunities to further leverage above-average perception at specific touch points to spread positive word of mouth. This could even become a sales factor that differentiates the telco from competitors.

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03

Customer experience is positive only when the first call solves the problem Customer experience is positive only when the first call solves the problem
Experience driver satisfaction and distribution by service level Satisfaction level Indexed 0 10 20 30 40 Distribution of customer base Percent

Verbalized scale

50 60

70

80

90 100 88

The first agent I spoke to addressed my problem and solved it

45

The first agent I spoke to directed my call to another who solved my problem

60

32

I was transferred more than once before I reached the appropriate person or was asked to call another number

20

16

I decided to leave the problem unresolved because I was transferred too many times and the process took too long

17

SOURCE: European Customer Experience Market Research Survey, 2009; McKinsey

Measuring and delivering the impact

Telcos are increasingly investing human and financial resources in customer experience and even setting up new units to lead such improvement efforts. Given this unprecedented focus on customer experience, one critical capability for managers is to prioritize efforts with the highest expected impact. The ICE approach delivers this via a tool to simulate bottom-line impact. ICE also provides a structured set of proven actions to improve each touch point, addressing operational and communication issues. It includes both quick wins (ideas that can be implemented almost immediately with limited investment and visible impact) and more structural, transformational actions. The latter usually require higher investments, longer solution design periods, and much more cross-functional coordination, especially for implementation. In call centers, telcos often find improvement opportunities in staff friendliness. One relatively high-impact quick win that best-practice telcos use is to ask customers to rate this factor after each call. Then they adopt the average as a call-center KPI. If pickup time is perceived as too long versus competitors (essentially a communication issue), an automated message prior to pickup that highlights short waiting times could help build more

positive perception with very limited investment. If customer perception is one of low operational performance on the waiting time KPI, this would require more structural actions such as better alignment of work shifts to call patterns or broader transformation. A robust set of improvement actions for key touch points prioritized by expected impact and investment needed forms the core of ICE transformation. Still, ICE remains a change management journey where dedicated organizational capabilities need to be built to analyze the situation, pinpoint the priorities, and measure progress. As such, it will require full commitment and role modeling from top management to elevate customer experience to one of the companys most important metrics. *** Improving customer experience will be key to future competitiveness of telcos as it will directly impact the bottom line by lowering churn levels and boost cross-/up-selling. McKinseys ICE approach provides a new methodology based on a set of distinctive tools to accomplish this. Operators who embark in an optimal customer experience transformation journey will delight their core customers with the right perception and real performance levels, ensuring that investments made will have the highest impact possible.

RECALL No 11 Mature Markets Anchoring loyalty: The integrated customer experience

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John Churchill DeVine III is a Principal in McKinseys Miami office. john_devine@mckinsey.com

Nicolas Maechler is a Principal in McKinseys Paris office. nicolas_maechler@mckinsey.com

Silvia Rapallo is an Associate Principal in McKinseys Milan office. silvia_rapallo@mckinsey.com

Jasper van Ouwerkerk is a Principal in McKinseys Amsterdam office. jasper_van_ouwerkerk@mckinsey.com

RECALL No 11 Mature Markets No glitter, still gold: Branding for growth

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03 No glitter, still gold: Branding

for growth

Few telcos can successfully play the hero brand game. Is branding then irrelevant for all those who cannot? By no means. Distinctly branded and targeted propositions offer growth prospects for telcos unwilling or unable to embark on the quest for the hero brand. The telecoms sector is among the largest marketing spenders, typically among the three top-spending industries. Few marketers have more resources for brand building. However, the latest McKinsey research might disappoint telco CMOs. When asked to list great brands, only 20 to 30 percent of EU consumers award this distinction to a telecoms brand (Exhibit 1). In contrast, over 60 percent of EU consumers say Nokia is a great brand. Google ranks even higher with over 80 percent of consumers surveyed giving it great brand status. So why dont telcos make the cut? Lets start from the beginning. What matters to consumers? McKinsey research confirms that subscriber base size, price, network quality, and geographic coverage remain the core drivers behind telco brand performance. This picture is largely consistent across mature and emerging markets. Over the past decade, a number of telcos have invested in building brands that engage consumers emotionally and build true loyalty. Telcos have pursued intangible brand associations like innovative, simple, young, and caring. Results are mixed. The challenge with intangible brand positioning in telecoms turns out to be relevance. Consumer research and price comparison time series show that telco customers are rarely willing to pay a premium for intangibles. Price, network,

and service performance continue to determine brand strength in the telecoms industry despite significant investments and management focus on intangibles. Google, Nokia, Apple, and Facebook are all great brands with strong tangible and intangible brand drivers. This sort of brand strength yields loyal customers and provides a basis for premium pricing. Without telecoms networks, there would be neither iPhones nor any social networking sites. So why can telecoms infrastructure users create great brands, while telcos themselves fall short? Our research provides a few explanations. Low involvement. Telecoms is a low-involvement category for most consumers. Category involvement is typically driven by either the risk of a purchase (e.g., financial loss) or the image factor of a product (what does this brand say about me?). As prices fall and technical quality converges, the risk of the telco purchase has decreased, explaining the declining brand premium. The image factor has always been low in telecoms there is no such thing as a cool SIM card. Deciding on which social networking site to join, on the other hand, involves significant social risk, and handsets remain image items, at least for some consumer segments. Product similarity. Internet and media companies provide differentiated and engaging products and experiences. For example, Facebook and MySpace are both social networking sites, but their consumer propositions differ as much as those of Nokia and Samsung handsets. In the current telecoms space, however, products are quite similar across providers. Converging network quality/coverage and third-party infrastructure access

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01

Telcos lag behind handset and Internet brands in greatness Telcos lag behind handset and Internet brands in greatness
Percent of respondents1 to the question Which brands are great?

UK

Avg. telco Nokia Google

31 61 86 20 40 69

Germany

France

55 75 86

Spain

26 77 86

1 Weighted SOURCE: McKinsey Telecom Consumer Insight Survey, 2008

have all but eliminated opportunities to differentiate network-based telecoms products. Unpleasant customer experiences. Many consider the actual telecoms purchase unpleasant. Complex rate structures, crowded or messy shops, and inconsistent advising are among the most common drivers behind consumer dissatisfaction. Few look forward to repeating the purchase process. Once connected, consumer interactions with their telcos are often negative because of technical issues or invoicing complaints. Despite the efforts made by telcos, consumers tend to bad-mouth them, while leading handset and Internet brands enjoy a much more significant, influential, and positive word of mouth. Against this backdrop, it is not surprising that telcos increasingly align marketing spending with the consumer focus on tangibles like price or value for money. One concrete illustration is the shift from image building to sales-stimulating advertising gradually taking place in markets like the UK, Germany, and Scandinavia. The current economic climate has led to some telcos suspending or radically reducing advertising outlay. Several of these telcos claim ad suspension has not impacted revenue market share. Telco marketers warnings of negative brand impact have been proven wrong, at least in the short term.

An array of branding approaches

Most telcos pursue one of two distinct brand strategies. A handful, often incumbents, aim at building and sustaining hero brands. Most others pursue product and offering-focused strategies we call these propositionled brand strategies. Hero brand strategy. As mentioned earlier, top consumer priorities are network quality and coverage, price, speed (for broadband), and to a lesser extent, the quality of customer care. While these factors can be viewed as tangible, their summary abstraction for many consumers is trust. Although trusted telcos are not necessarily loved, trust will continue to be a major asset in the telecoms industry. In a complex world, a trusted brand that eliminates risk has an edge. In many markets, incumbents hold this position. Trust is in itself not enough for hero brand status. Our research is clear on this. Trust is, however, a platform on which to build. Trust is sustainable, relevant, and differentiating. To build hero brands, telcos must use the platform of trust to expand the brand experience. Mobile operators such as Orange use their own branded handsets and data services to reclaim differentiators often owned by handset producers and Internet companies. Reclaiming ownership of exciting parts of the value

RECALL No 11 Mature Markets No glitter, still gold: Branding for growth

23

chain can be a step toward brand greatness. In France, Orange is closer to Nokia and Google on the brand greatness index than any other European telco. Recognized and sustainable ownership of exciting customer experiences requires innovation. Simply put, telcos need differentiated and new products, services, or experiences that engage. This is not easy to achieve, but it is not impossible. There is no reason why a telco could not have been the first to create and deliver the Facebook or Google experiences. After all, telcos have, or should have, solid insight into consumer preferences and latent needs. A platform of trust and consumer insight is a sound starting point for digital innovations. Facebook, Twitter, and others have led the way. We do not know what the next generation of exciting Web experiences will entail, but new ideas will undoubtedly emerge. The question is: Will telcos have the foresight to shape the game? Innovation and brand expansion are relevant for all telcos looking for growth. Success in this space will be essential for telcos aspiring to maintain and build brands with hero aspirations. Proposition-led brand strategies. These are strategies where the brand is focused on building offer awareness and on communicating functional benefits; in other words, reasons to buy. The rationale for an offeringcentric approach is the insight that generating mass brand appeal is tricky for telcos, since many segmentspecific purchase triggers exist. Offering-centric brand strategies focus on specific consumer preferences and appear to be gaining momentum. Examples are: Price leadership. Virtually all telecoms markets have a clearly positioned price leader. Tele2 is an example of a company with a consistent price leadership focus across several European markets. Naturally, price leadership success crucially rests on sustained cost leadership. Ironically, the continuous price decline seen in many markets threatens the potency of a pure price play. When prices become sufficiently low, consumers start to shift focus, diminishing the standalone power of price leadership. Value for money. This is another offering-centric brand strategy and perhaps the most common in modern telecoms. A large variety of value-for-money strategies exists. Some are close to price leadership, while others rest on offering an attractive combina-

tion of price, product quality, and customer experience. In Italy, Wind stands out with a value-for-money position. Perceived quality is in line with the market, while prices are somewhat lower than the market average. Like other value-for-money telecoms brands, Wind offers a good deal without claiming to always have the lowest prices. Segmented propositions. One illustration of such propositions is when operators target sociodemographic groups like young people or immigrants with their branding. Another main group of segmented propositions is offerings that target segments with specific pricing preferences like unlimited call minutes or number of SMS. The scope for segmented offerings is significant market research typically reveals five to ten segments with distinctly different price preferences. Multi-branding. A natural proposition-led strategy for telcos targeting several segments with branded offerings. KPN is perhaps the best known example of a true multi-brand strategy. KPN uses a set of brands to target specific price segments like unlimited but also ethnic groups, such as Turks living in Germany. KPN has also struck partnerships with powerful distributors and media companies that have launched their own branded propositions. Multi-branding is complex but it works if the addressable segments are sufficiently distinct and large enough to warrant the additional investment. Multi-branding requires an organization that is able to identify new segments, craft profitable offers, and launch sharply-defined brand campaigns, focusing directly on the purchase lever of the segment targeted.

Choosing the right brand strategy

Limited past returns on brand building investments have forced more and more telco marketers to address fundamental questions. The role of the brand or brands is the most fundamental question known to marketers. Is the ambition to build hero brands capturing price premiums and stimulating brand loyalty, or should the brands role simply be to create awareness around propositions that sell themselves? The role of the brand question is increasingly relevant, but there is no silver bullet. We suggest telco leaders do two things: Give an honest answer to the question of who you are and what you can become: hero or proposition. As laid

24

out, very few telco brands occupy hero positions, creating consumer pull based on their flawless delivery on tangibles and exciting customer experiences. If you are, celebrate and start the search for the next differentiator. If you are not, be honest. Your focus should lie on identifying distinct consumer segments and serving them with clearly branded and well-targeted offers. This will not result in a hero brand, but can provide sustainable and profitable growth. Align the organization with the brand role and aspiration. Hero and proposition brand organizations are fundamentally different. Operational focus and performance must reflect the brand strategy. A strategy with less emphasis on the brand itself and more focus on propositions and products requires state-of-the-art consumer insight, enabling a continuous flow of differentiated and targeted propositions, potentially under a multi-brand umbrella. Organizations behind hero brands need to excel in three areas: customer experience management, product and service innovation, and branding. Meeting expectations at all customer touch points is fundamental. Hero brand subscribers should be positively surprised by service levels and the sales experience. As a consequence, they might recommend this brand to friends and family. Beyond this, the hero brand organization is able to identify and deliver differentiating and relevant customer

experiences. It might own parts of subscribers positive encounter with handsets and data services, and it is at the forefront of exciting innovations. Lastly, such an organizations marketing team has a core competence in effective brand building that converts positive experiences into lasting brand equity. Proposition-focused organizations are different very different. Teams are the experts in consumer segmentation and micromarketing. Segmented pricing built on deep market research is a core competence. Taking well-planned risks in serving new segments with new ideas is part of the game. Not all initiatives will pay off. Marketing is entirely ROI-focused. For example, such an organization would not sponsor a football team (unless it happens to be targeting male football enthusiasts in a given geographical area). Above all, the brands position must align with and support the value propositions a telco takes to market. *** Most telco brands will not achieve hero status. Branding can, however, be an instrumental part of growth. Telco leaders should focus on what role the brand should play in driving that growth. Which branded propositions will win in high-growth segments both today and in the future? Answering this question is an excellent starting point in defining future brand strategies.

Thomas Barta is a Principal in McKinseys Cologne office. thomas_barta@mckinsey.com

Nicolai Johannsen is an Expert in McKinseys Hamburg office. nicolai_johannsen@mckinsey.com

Ole Jrgen Vetvik is a Principal in McKinseys Oslo office. ole_jorgen_vetvik@mckinsey.com

RECALL No 11 Mature Markets Attacker mindset: Making IPTV a residential success

27

04 Attacker mindset: Making IPTV

a residential success

Most incumbents have made TV a fundamental part of their strategies; but so far, few have met with IPTV success. An attacker mindset can prove to be the missing piece in the multi-play puzzle. The convergence of media and telecoms is reshaping wireline operators. This is one reason most incumbents in Western Europe have made IPTV (Internet protocol television) a key element in their growth plans. But so far, most of these plans have met with only limited success. Typical explanations like multifaceted competition and difficult pay-TV market conditions across Europe only explain part of the shortfall. Both consumer demand for bundled offers (which can account for up to 80 percent of sales when available) and technology itself drive convergence. Today, multiple access technologies allow for the full range of tripleplay products (voice, broadband, and television). Given this context, access competition will likely persuade European households to choose single-access providers. Even in markets with limited interest in basic payTV such as Germany, a television offer remains a key factor when consumers select a multi-play provider. While this development poses a significant threat to incumbent operators, it does not have to knock them out of the game altogether.

terrestrial television) rollout in multiple countries and competition for pay-TV are driving TV services commoditization, resulting in falling prices and declining consumer willingness to pay. For example, in two European markets the prices for DTH (direct-to-home) entry TV offers dropped between 30 and 35 percent from 2007 to 2008. Although interest in and willingness to pay for basic and premium TV offers are either flat or declining in key markets across Europe, consumers are showing increased interest in new features such as HDTV, shift TV (live pausing), and personal video recording. In this context, IPTVs high interactivity potential puts incumbents in a very strong position to reinvent pay-TV business and capture a large share of it. To this end, telcos have set out on a number of different paths when rolling out IPTV, depending on market conditions (Exhibit 1). In some markets, the threat to a wireline incumbents telecoms business from other TV service providers is high and commoditization of pay-TV is still low. There, TV has become a key business for telecoms incumbents on par with other components of the triple-play bundle. In the reverse situation (i.e., high-commoditization, low-threat markets), TV is still relatively marginal and seen more as an up-selling tool to lock in customers and generate extra value.

The incumbents opportunity

Capturing the IPTV opportunity is not easy, as the pay-TV business itself is under significant pressure. McKinsey research shows that increased availability of free-to-air TV e.g., through aggressive DTT (digital

Act like an attacker

Successful incumbents in the more competitive markets often assume attacker-like mindsets and focus on making TV a core element of the residential segment business. One European incumbent faced significant challenges as 2007 drew to a close, with growing compe-

28

01

Wireline incumbents have started to offer TV in very different Wireline incumbents market environments have started to offer TV in very different market environments
High TV as a defensive strategy British Telecom (9%) France Telecom (27%) Telefnica (11%) TV primarily as an up-selling tool TV as a possible adjacent business Deutsche Telekom (n/a) TeliaSonera (31%) High Current value of pay-TV in the 3P market Number of available free-TV channels Penetration of pay-TV
SOURCE: Screendigest; Ovum; ITU; operators Web sites; press clippings; interviews; McKinsey

TV as a clear life-or-death factor Belgacom (56%) Portugal Telecom (57%)

(%) Penetration of TV clients in ADSL base, 2Q 2009

Maturity of 3P alternatives in market (i.e., incumbents exposure to an aggressive 3P offer) Cable 3P penetration Consolidated 3P attackers

Telecom Italia (6%) esk Telecom (n/a) Low

Low

tition, falling fixed-line voice revenues, and plateauing wireline broadband growth. In response, the incumbent launched a multi-platform television strategy under a separate brand with the goal of achieving TV market leadership. Offering both IPTV and DTH nationwide, the operator leveraged the functionalities of IPTV to differentiate its offer and reinvent the pay-TV concept. Resulting from this strategy, the operator enjoyed growth levels that significantly exceeded expectations, achieving double-digit household penetration in less than one year. Equally important, over 50 percent of IPTV customers are new to the incumbent. The new brand has also underpinned the recovery of the incumbents flagging broadband business, propelling it to first place in the market in terms of net broadband subscriber additions. By launching its new pay-TV brand based on tactics and techniques borrowed from the attackers playbook, the incumbent reversed the seemingly inevitable decline of its wireline business. Markets are diverse and the role of IPTV can differ significantly. Incumbents who want to use pay-TV offers to revitalize their wireline broadband businesses can learn from operators who assume six aggressive postures toward this business. They act like true attackers in pay-TV and in the process, they rethink several elements of their residential segment business models.

Seek scale and focus on new customer acquisitions. Incumbents need to adopt an attackers stance in rolling out pay-TV in order to capture the significant economies of scale (within capex and ROI limits) that characterize IPTV economics. The underlying drivers are platform, network, content, and marketing costs. Beyond this and on par with scale, the percentage of subscribers acquired from outside an operators customer base is one of the most important key performance indicators for a successful IPTV rollout. The higher this percentage, the better. When incumbents acquire a triple-play customer from outside the base they gain the full incremental triple-play average revenue per user (ARPU). This amount can be several times greater than the income from upgrading a broadband customer to IPTV. While individual markets differ, research shows that all operators can benefit from aggressive penetration strategies that reach beyond their current customer bases. In situations where an incumbent faces limited competition, IPTV provides up-selling opportunities for broadband and new acquisitions in the mobile-only young segment. In markets where incumbents have lost significant broadband share, IPTV enables them to assume attacker-like approaches to win back customers. Choose optimal technology and footprint. Given the bandwidth limits of copper loops in current networks,

RECALL No 11 Mature Markets Attacker mindset: Making IPTV a residential success

29

leading telcos in the TV realm increasingly rely on multi-platform technology strategies to ensure sufficient service reach. To handle two IPTV streams in standard definition plus a 1 megabit per second (Mbps) minimum Internet connection, for example, a network requires 8 Mbps of bandwidth. Currently, this level is available in just over 40 percent of copper loops. To overcome this copper constraint, multi-platform strategies that mix copper with FTTH (fiber to the home), DTH, and DTT have become viable ways to deliver the core digital TV value proposition. Solutions like this focus on technological neutrality to facilitate communication. However, telcos do need to understand the acquisition economics behind each technology in order to design a workable multi-platform strategy. Such a strategy would employ an optimal mix of technologies to generate the maximum profit and highest penetration levels, while minimizing SACs (service admission controls). Given the variety of possible platforms and business models from which incumbents can choose, they often come up with very different multi-platform strategies. For example, one European telco focused almost entirely on low-priced digital TV (through DTT) and positioned IPTV service as a complement to broadband services. Another concentrated its efforts on IPTV via ADSL2+ service in urban areas and used satellite TV for other regions. Both players achieved high pay-TV penetration levels with very different business models. Create a zero-base offer structure. Conducting a zerobase redesign of all single-, double-, and triple-play offers can result in a simple, easy-to-understand offer structure. This optimizes the economics of the full residential segment portfolio and increases sales channel performance. To achieve this, telcos need to take new consumer-driven approaches to product development and portfolio management when optimizing multiplatform plays. Incumbents should emulate attackers, proactively cannibalizing traditional business with new models, setting their sights on acquiring new customers (not just retaining current ones), and working to sustain overall per-customer profitability by actively managing subscriber acquisition costs and network expenses. Managers intent on developing a great product design should focus on three principles: First, they need a deep understanding of key consumer buying factors, one driven by the value different

consumer segments attribute to each product feature. Understanding components like the number of TV channels, availability of premium content, broadband speed, voice bundles, and HDTV features is a key prerequisite when developing powerful, but simple, triple-play bundles. Second, operators should take a holistic, portfoliobased approach to designing offers. Incumbents frequently see IPTV as just another add-on to their offer. To the contrary, McKinsey research shows that the TV factor ranks high in a consumers decision on which provider to choose. Only by using a pure zero-base approach can operators maximize customer acquisition outside the existing base and fully optimize their entire portfolio profitability. Finally, they should strive for a deeply analytical and fact-based process, combining consumer preferences with full economic modeling and simulation. This approach is required to model the economic benefits from attracting new customers versus the possible cannibalization of the current business. When designing a triple-play offer to go along with its new fiber rollout, for example, one incumbent modeled several portfolio structures until it reached a structure that allowed for a 20 percent jump in potential revenues and 8 percent greater profitability in the entire residential segment. Only when armed with deep consumer understanding and the capabilities to fully model the impact of different zero-base portfolio structures can incumbents design simple but powerful product portfolios. The power lies in covering all market needs, while driving growth and profitability without introducing complexity into their systems. Develop a push go-to-market strategy. One clear hurdle many IPTV players struggle to overcome involves raising awareness of their pay-TV product on a broad scale. In one market, research into consumer purchasing patterns showed that the two biggest hurdles at the launch of an IPTV program are a lack of consumer awareness that pay-TV is available and getting shoppers to move from considering IPTV to actually purchasing it. Two years after the launch, the main stumbling block still involves moving potential customers from awareness to familiarity. Since the value proposition of IPTV is based on reinventing the TV business, a lack of consumer familiarity with product features is, of

30

course, a major barrier to success. To overcome this, one incumbent adopted an aggressive consumer education campaign that used both above-the-line (e.g., broadcast television, newspapers, radio) and below-the-line media (e.g., Internet, direct mail). By combining a massive above-the-line IPTV launch and a viral marketing campaign on the Internet, the telco turned its brand into one of the best recognized in the market. In parallel with aggressive communication, successful attacker-like strategies need a strong focus on direct distribution. This means using multiple overlapping channels in each region to reinforce the message coupled with an aggressive posture toward attracting new customers from outside the base. Such an approach can involve intensely leveraging shops and a door-to-door sales force (a must to achieve anything near 50 percent of sales from outside the existing customer base). Finally, telcos should use a proactive push model with newly acquired IPTV customers to up-sell content packages and video on demand. Combined, these can contribute up to 40 percent of television ARPU. Implement a new home networking operating model. Highly upgraded home installation and networking capabilities are essential for incumbents to handle the complexity of new TV technologies. In order to deliver high-quality service, telcos will need to interlink sales, field installation and maintenance, customer care, and equipment purchasing into one seamless end-to-end process. Accomplishing this will require a strong sales force, a highly skilled technical staff focused on quality of service, call centers capable of resolving issues the first time every time, and significant investments

in customer premise equipment (CPE). In fact, telcos should consider CPE purchasing a strategic function placing strong emphasis on both reliability and on driving costs down. Focus the organization on TV. All in all, the complexity of the required change forces incumbents to place an unequivocal organizational focus on the success of the TV rollout. This implies that senior managers (ideally the CEO) take on TV as their key responsibility; in the process, allocating the best resources in the residential organization to this business. Usually, IPTV rollout starts with a team (or unit) responsible for the initial product design and delivery. To ensure process success, however, operators need to move beyond this structure. Triple-play offers require holistic bundling strategies of voice, broadband, and TV backed by new sales channels and go-to-market models, and a full revamp of installation, maintenance, and customer care processes. Thus, the entire organization will need to change in order to successfully deliver the new value proposition. IPTV should become a core element in the DNA of all marketing, sales, and operating units that deal with the residential segment. This means full IPTV transformation of the wireline business model. *** IPTV holds promise that has yet to materialize for the large majority of wireline incumbents. In some of the most competitive markets, incumbents are assuming an aggressive attacker-like mindset. As experience in those markets shows: if incumbents are able to act decisively on all the levers described here, IPTV can become a major element in a profitable growth strategy.

Armando Cabral is a Principal in McKinseys Lisbon office. armando_cabral@mckinsey.com

Patricia Ferruz is an Associate Principal in McKinseys Madrid office. patricia_ferruz@mckinsey.com

Miguel Fonseca is an Associate Principal in McKinseys Lisbon office. miguel_fonseca@mckinsey.com

Sergio Osle is an Associate Principal in McKinseys Madrid office. sergio_osle@mckinsey.com

RECALL No 11 Mature Markets The mobile data dilemma: Securing profitable growth

33

05 The mobile data dilemma: Securing

profitable growth

Mobile data growth has exceeded expectations, but comparable profits have yet to emerge. Here are some tips for boosting datas bottom line. Mobile network operators (MNOs) face a data dilemma as they roll out broadband handset and datacard offers. Stated simply, customers want greater data availability, but they demonstrate a low willingness to pay for it. This quandary could starve MNOs of the investments they so urgently need to respond to customer mobile broadband demand (Exhibit 1). Nonetheless, McKinsey sees mobile data growth as a unique opportunity for operators to gain competitive advantage. If managed properly, the surge in mobile data demand can indeed generate significant value. When choosing a handset, customers seek mobile connectivity that goes beyond traditional voice and messaging. This coupled with the introduction of innovative, easy-to-use smartphones at reasonable prices is fueling an apparently insatiable demand for data. Apples userfriendly iPhone is one manifestation of such demand. Reportedly, iPhone Internet browsing usage rates compare to those originating from personal computers. Likewise, some MNOs have experienced broadband handset subscriber increases that have recently exceeded 85 percent per year. To date, the main barriers to smartphone data adoption have been rooted in perceived high monthly prices, low consumer awareness regarding the real benefits of data service, and anticipated complexity. Surveys of smartphone customers in the UK, Germany, and France, for example, all reveal extremely low levels of satisfaction

regarding the cost of monthly service a finding reflected in similarly low value-for-money ratings. When it comes to datacards, virtually all MNOs continue to enjoy huge take-up rates driven mainly by the positive browsing experience that 3.5G enables, offering quality levels some users find comparable to fixed-line service. In Spain, the number of datacards in use grew at a rate of nearly 140 percent per year from 2003 to 2008. Growth in the UK and France exceeded 90 percent per year during the same period. MNOs will have difficulties capitalizing on this growth, however. Surveys show that most users want simple pricing structures and that they prefer flat fees with unlimited browsing. Furthermore, consumers are not willing to pay premiums for mobile broadband that exceed fees for fixed-line service. As analysis reveals, the result is that data premiums in Western Europe continue to erode rapidly as players adopt high-usage plans and rate structures. While currently fewer than 5 percent of mobile data offers involve unlimited usage, a clear trend points toward limiting high usage (i.e., from 5 to over 15 gigabytes per month). Thus, mobile players face a clear challenge when attempting to bring the lack of subscriber willingness to pay into balance with their investment requirements. To date, examples from the industry show that mobile data has the potential to increase network traffic significantly. One MNO even experienced a 7 percent annual growth rate among heavy datacard users. Another case in Western Europe shows that the market for mobile data initially grew by 150 percent from a small base

34

01

The operators dilemma is to boost demand while ensuring profitability The operators dilemma is to boost demand while ensuring profitability
Customer demand increases, but with low willingness to pay On the handset side Customers increasingly value mobility Innovative, easy-to-use smartphones at attractive prices further increase demand for data Barriers to adoption are low awareness of real benefits along with perceived high prices and complexity On the datacard side Enormous take-up rates among nearly all operators, given the fixed-like browsing experience that 3.5G enables Most users look for simple pricing and prefer a flat fee with unlimited browsing; they are not willing to pay premiums higher than fixed-service fees How to balance these opposing forces? Huge investments required to support customer demand Significant increase expected in monthly data volume, in line with recent trends (i.e., heavy datacard users, new popular value-added services for handsets) Investment levels will likely dilute profitability unless usage take-up is managed effectively

SOURCE: McKinsey

over the course of around ten months, and then doubled from that level over the subsequent year. This perhaps confirms that the more users access mobile broadband, the more they want to use it. Consequently, operators are rapidly nearing mobile data network capacity levels, leaving them with two basic options make new investments to boost capacity or raise prices. To build up sufficient capacity, the industry will need to make huge investments over the coming years. Some observers estimate that these costs will match the nearly USD 70 billion that MNOs in Western Europe spent on 3G licenses from 1998 to 2002. At the same time, however, operators find their margins under pressure from a combination of high usage and a limited ability to enforce price premiums. The upshot is that the massive investments needed to increase capacity to cope with growing demand (especially from datacards) will likely dilute profitability unless operators find ways to manage usage take-up effectively. Operators need to clearly understand how their costs will evolve, then specify a costing strategy for their offers that will allow them to profitably penetrate the customer base. For example, datacard traffic often seems to be more peaky than ADSL, meaning certain times of the day show predictable high usage, but during the larger portion of the day, the network remains

underutilized. Pricing incentives that would drive demand during those empty slots could be a powerful way to reduce costs. Another potentially fruitful area involves managing the amount of traffic that flows through 3G networks by using femtocells (small cellular base stations that allow service providers to extend coverage indoors) or by limiting traffic to 2G networks. Operators need to analyze how they can best bundle these and other elements into successful costing strategies for their offers. McKinsey research shows that operator data strategies tend to differ depending on the market and service type (Exhibit 2). In developed markets, MNOs position datacard plays either as substitutes for fixed-line broadband or as complementary solutions. In emerging markets, the emphasis lies on substituting fixed-line broadband. With handsets, non-messaging data provides anytime Internet access in both developed and emerging markets and the flood of new data-related applications enables operators to target microsegment customers.

Datacards in mature markets

A key consideration for mobile operators in developed markets involves positioning datacard offers in direct comparison with fixed broadband. Decisions on whether to pursue a substitution or complementary strategy

RECALL No 11 Mature Markets The mobile data dilemma: Securing profitable growth

35

02

Mobile data strategies vary by market and service type Mobile data strategies vary by market and service type
Market type Developed Strong fixed broadband penetration Increasing usage PC primary device Good network coverage 1 Two options to position mobile broadband based on market conditions and company capabilities Go for substitution Offer a complementary/on-the-go solution Emerging Low fixed broadband penetration Phone primary device Relatively high cost of modem 3G network rollout in its infancy 2 Substitute fixed broadband either partially (e.g., focus only on high-end market) or extensively (go for the mass market)

Datacards Service type Handsets

3 Unleash the potential trapped in the longtail, raising awareness of and leveraging on-the-move Internet demand, smart pricing, and communication

SOURCE: McKinsey

will depend on a number of factors. Market dynamics, for example, include the penetration, quality, and speed of fixed-line broadband. MNOs in countries with highly developed broadband markets typically see low levels of mobile broadband usage because users consider it a complementary service to their fixed line. Those in countries with less-established fixed service view mobile broadband as a legitimate substitute. However, mobile broadband can also act as a strong substitute in mature markets. Markets like Austria, for example, have high-priced fixed broadband offers, low mobile price premiums, and strong mobile-for-fixedline voice substitution. These factors tend to attract a large share of users willing to substitute mobile for fixed broadband. In planning their positioning strategies, managers need to understand the impact of high datacard penetration on their core business. For integrated players, this could include the risk of cannibalization. MNOs also need to assess their own capabilities and preferences, such as financial and channel strength, and their ability to cross-sell in the customer base. In mature markets, operators have a variety of pricing options at their disposal to boost demand and manage mobile datacard economics. These include introducing a low-end entry-level product, developing prepaid offers so users can custom-order the amount of data

they need, and offering rate plans based on data speed and monthly allowances for data download volume. They can also establish unlimited off-peak usage plans with special pricing for times when traffic is relatively low. Complementing this are time-based rates priced by the hour or minute, roaming plans, and user-friendly, fair-use policies that involve no surcharges for excessive use but do allow for significantly reduced speeds. When pricing mobile datacard service, managers should address three major customer segments: Complementary adopters usually seek low-cost entrylevel products, possible fixed-line broadband offers, bundles, and prepaid or pay-as-you-go plans. Typically, users in this segment consume less than 1 gigabyte of data per month. Mobile-only adopters look for price positioning similar to that of traditional fixed-line broadband offers on the market. Mobile-only adopters consume from 1 to 8 gigabytes per month. Heavy users want high-speed offers packaged in flatrate, unlimited usage plans. They also seek strict fairuse policies, off-peak discounts, and speed-adapting packages. These users consume more than 8 gigabytes of data each month.

36

Choosing the right datacard branding strategy can be a key success factor in mature markets. Here, operators have a number of different branding approaches they can pursue, depending on their starting positions. They can, for example, create a complementary new brand, in effect treating mobile broadband as a separate entity with its own business model. One European MNO employed this strategy to make its mobile datacard brand a household word. In the process, this operator captured more than one-third of the datacard market. MNOs can also tap into existing brands an option primarily suited to companies with strong customer bases. Integrated players, in contrast, can engage in dual branding, as one telco in Western Europe did, using both its mobile and fixed-line brands to promote datacards with stand-alone or multi-access offers. This company bet strongly on its ability to drive mobile broadband penetration, heavily promoting and subsidizing laptops, and targeting schools (students and teachers) with special subsidies. Such an approach made it possible for this telco to maintain the mobile premium on broadband access. The companys willingness to push aggressively was rewarded with a more than twofold increase in mobile broadband subscribers. During the same period, its mobile and integrated competitors struggled to sustain their new broadband subscriber momentum. Thanks to this strategy, the company saw revenue increases in excess of 7 percent during the first half of 2008 and it could maintain a healthy EBITDA margin of 43 percent. Operators can distribute datacards through three major channels. The first option is to use traditional dedicated mobile dealers. This channel provides significant crossselling and bundling opportunities. Second, they can also make use of online channels for promotions, endto-end purchases, and customer education. Their third distribution option is to leverage electronic chains to take advantage of laptop sales traffic.

Critical considerations include the level of substitution they hope to achieve and how aggressively they want to proceed. Typical segments are: High-end users. These customers include both more affluent consumers and businesses. The operators goal is to defend the price premium, especially in a context of poor-quality fixed infrastructure. Mass market. In this much larger segment, operators need to facilitate adoption by offering small prepaid bundles and entry-level packages. Several success stories can already be told, revealing how operators have managed to target both of these segments. One mobile datacard player rolled out broadband in key economic areas, targeting homeowners with a dedicated box modem and reasonable prices compared with the fixed-line alternative. The company quickly acquired a significant number of users and is on track to capture 25 percent of the national broadband markets in the next five years. Another carrier targeted the high-end market with unlimited data traffic plans and free service speed upgrades. The result was overwhelming demand for this service. Operators should view laptop and netbook subsidies as key levers to increase affordability. They should also promote collaboration with specialized retailers and/or device OEMs, since this can play a fundamental role in driving datacard adoption. However, operators should carefully plan how they do this, since failed attempts are numerous. One player, for example, offered free laptops in conjunction with its mobile broadband service, but was ultimately forced to discontinue this after only several weeks due to unworkable economics. In many emerging markets, companies should actively and effectively use campaigns to raise awareness and communicate the benefits of mobile datacards. Such campaigns should clearly position mobile as a true alternative to fixed broadband.

Datacards in emerging markets

Emerging markets present unique challenges for mobile datacard marketing. Operators need to align their pricing structures and subsidy strategies to fit simple but vital segmentation approaches, realizing that effective brand positioning will be a key factor for success. In these markets, operators can base pricing plans on simple but effective two-part customer segmentation.

Handsets in mature and emerging markets

In both developed and emerging markets, many consumers remain unaware of what mobile Internet capabilities are available, or they perceive the service as complicated and expensive. McKinsey research reveals the need to push handset mobile data adoption further even in mature markets. In important Western

RECALL No 11 Mature Markets The mobile data dilemma: Securing profitable growth

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03

Operators need to identify the winning value proposition for each segment Operators need to identify the winning value proposition for each segment
Possible value propositions Segment Web socialites Conservative professionals Young socialites Handset iPhone Blackberry Key applications/content Facebook and other preloaded widgets Instant messaging capability E-mail Organizer Preloaded YouTube widget Music/video-on-device portal with broad library Games Medium-range smartphones (e.g., Google phone) Maps/preloaded navigator widget Broad news portal Directories, tourist services, etc. On-device betting/lottery portal Personalization portal (ringtones, logos, etc.) Games Adult content Price All-you-can-eat flat rate E-mail flat option Options for unlimited access to specific content (e.g., music) Voice and data bundle Entry options for unlimited access to specific services Entry options for Betting/gaming Unlimited access to specific content

Mobility-driven Utility-driven

Frivolous users

Housewives
SOURCE: McKinsey

ILLUSTRATIVE

European markets, for example, only about 10 percent of subscribers without mobile data service indicate any interest in subscribing to mobile phone data plans. The vast majority either does not know about mobile data or shows no interest in it at all. Effective segmentation will serve as a key tool in operator attempts to penetrate lower-income consumer groups. These users tend to be followers when it comes to mobile data adoption. Generally speaking, consumers see different reasons to adopt mobile Internet. For Western Europe, McKinsey broke down the consumer market for mobile data into seven distinct segments based on appetite for different content and services. These segments ranged from Web socialites (who make strong use of online social networking, instant messaging, photo sharing, and similar pursuits) to conservative professionals (who access e-mails and calendars, but are averse to online social networking). Each consumer segment uses the handset for different mobile applications. Given their clear position as key revenue pool for handset data, Web socialites should be every operators primary target. Data players must fully understand what makes this and most other segments tick in order to create a compelling value proposition for each that encompasses handsets, applications and services available, and pricing.

In developing and communicating these value propositions, messages should be kept simple to ensure they are effective. Handsets themselves often play a key role in specific value propositions targeting different segments (Exhibit 3). For example, one operator offers consumers in the Web socialites segment iPhones with different subsidies depending on the size of the service bundle they order. This operator also offers utility-driven segment subscribers Google phones, which it promotes as the Internet handset. Priced lower than the iPhone, the Google handset still provides the same functionality, bundled with unlimited data traffic plans. One mobile operator in a key emerging market targeted young socialites with music downloads and associated applications. Ordinary membership was free of charge with a small fee for individual song downloads. This plan ended up attracting 10 million members in only six months, then over 65 million more after that. Yet another mobile player took on a venture capitalist mindset when pushing new hit applications in emerging markets. The company set up its own major music portal, signed mobile TV contracts with major television stations in multiple countries, and now offers video telephony in selected markets. These efforts helped the operator develop hot ideas based on local preferences in emerging markets, such as an online matrimony site with over 40 million users. In essence, the company

38

focuses on the few applications with the highest potential and actively pushes the services included (such as preinstallation and free trials), while leveraging established concepts and partners. In pursuing segment-specific offers, operators can also establish partnerships with well-known brands. Orange, for example, has partnered with Google, eBay, Facebook, and other popular Web site operators to provide content for specific segments. In essence, operators need to build an ecosystem to develop new applications and to consolidate todays divergent and sometimes competitive efforts on the part of Internet and start-up players. Operators should aim to be at the center of all such activities. In such a position, they should prioritize which efforts they should nurture exclusively, which ones they should develop themselves and which ones as they continue to protect their most valuable asset: their customer base. When it comes to handset data pricing, markets across Western Europe seek simple, flat-rate plans that offer unlimited usage. MNOs in Europe and Japan have already introduced innovative flat-rate/unlimited-data experiments that could signal increased industry movement in this direction. To date, however, handset data plans lack the levels of sophistication common in voice offerings. Precisely this is what is needed to support the required business model economics. For example,

one MNO in Western Europe developed a handset data plan with a weekly fee for a maximum of 100 megabytes, while its voice pricing strategy included special options for off-peak usage, long talkers, and a host of other specific needs. Another MNO explored handset data possibilities further, offering options for maximum Internet access, unlimited instant messaging, and similar access to maps or music, in line with key customer segments. Once managers have formulated their handset data value propositions, they need to promote and communicate these consistently, emphasizing the benefits for end users. For consumers in the Web socialite segment, the message might include a free iPhone, free Facebook access, and preferred applications for a set monthly fee. The emphasis for utility-driven users, in contrast, would lie on the new Google phone and unlimited access to maps and directories. One key component of these marketing strategies should be increased investments in end-user education, especially at the point of sale. *** Non-messaging data has become a surprise hit in markets around the globe, but operators need to develop effective ways to protect their profits while giving subscribers the bandwidth they crave in both datacard and handset configurations. The ideas presented here can help managers generate returns that are just as impressive as datas dramatic growth.

Venkat Atluri is a Principal in McKinseys Chicago office. venkat_atluri@mckinsey.com

Can Kendi is an Associate Principal in McKinseys Istanbul office. can_kendi@mckinsey.com

Yavuz Demirci is an Engagement Manager in McKinseys Istanbul office. yavuz_demirci@mckinsey.com

Piero Trivellato is an Engagement Manager in McKinseys Milan office. piero_trivellato@mckinsey.com

RECALL No 11 Mature Markets Shock the system: Driving sales via in-store execution

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06 Shock the system: Driving sales via

in-store execution

Many telcos are witnessing a reduction in store transactions. McKinseys retail sales approach can serve to boost a telcos frontline results by 15 to 40 percent. When markets slow, telecoms players need some powerful retail magic to draw in new customers and drive up profits. To help them pull off this conjurers feat, McKinsey has developed the Storanomics approach to telco retail. In engagements across Europe, the US, and the Middle East, Storanomics has triggered surges in sales performance ranging from 15 to 40 percent. Whats more, experience shows that impact is both rapid and sustainable. One telco garnered an increase of over 10 percent in monthly gross subscriber additions (gross adds), while enhancing its customer satisfaction by over 30 percent. The Storanomics approach relies on rigorous execution that teams drive from the field with significant guidance from top managers.

service activations per store varied by over 50 percent, up-selling rates by more than 30 percent, and crossselling by nearly 180 percent. While these retail opportunities may seem challenging to capture, managers can seize them by taking a comprehensive approach that links objectives to a meticulous and sustainable frontline transformation process. Storanomics pilot projects can show impact within a single quarter and broader results within six months. Storanomics delivers an effective way to resolve the traffic/customer-handling paradox. Stores in dire need of traffic stimulation exist without question. However, high traffic alone will not ensure higher sales. This is because sales productivity has a strong negative correlation with traffic (i.e., high traffic levels reduce the time sales staff can spend with individual customers, thus limiting sales effort). Depending on the store, traffic stimulation might actually prove counterproductive. Store managers need to use other ways that complement or precede traffic growth. Such approaches might include efforts to manage existing in-store traffic, reduce walkouts, increase traffic-handling speed, or enhance staff skills to better capitalize on traffic.

Missed opportunities
In many cases, telco managers misread their retailing reality. They assume that opportunities out there are mostly small and that any large ones will be difficult to capture, take a long time to implement, and ultimately generate only a short-term effect. McKinseys experience tells a very different story (Exhibit 1). Even after retail improvement efforts, initial mystery shopper visits often reveal significant missed sales opportunities. They also expose high variability across shops, markets, and regions. In one instance, mystery shoppers noted 140 walkouts per day in one store and found that the network engaged in only limited proactive selling activities. In another case, an operator discovered that total

Storanomics fundamentals
McKinseys Storanomics delivers sales uplift by focusing on store-level retail improvements in three areas: Traffic generation seeks to increase store traffic from attractive shopper segments.

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01

The retail experience up front and behind the scenes is often unoptimized The retail experience up front and behind the scenes is often unoptimized
Up-front customer experience Competitor store or exclusive dealer right next door Store positioning, network architecture, merchandise Behind the scenes The responsibility for own and third-party retail is not coordinated

Dirty windows without product/service displays Lack of destination products or services Traffic generation

Three times more traffic per FTE in top quartiles compared with bottom quartiles Follow-up calls almost nonexistent Sales reps spend 30% of their time on administration; store managers, 30 to 50%, leaving less time for selling

Store layout prevents reps from approaching customers, leading to a high number of walkouts

Traffic/customer management

Sales reps taking orders, not selling proactively (< 30% closure attempt) Technical product explanations rather than structured need identification and interest raising

Frontline execution

40% of staff would not recommend own product to a friend High attrition rate (> 50%) among sales reps Little floor time (< 50%) per week for store managers Three to four times higher sales productivity in top quintile compared with bottom quintile

SOURCE: McKinsey

Traffic and customer management focuses on reducing the number of store walkouts, freeing up sales reps and managers to concentrate on selling, and improving customer interactions by reducing average waiting times. Objectives include increasing product trial rates, enhancing the speed and quality of service request handling, and lowering the number of stockouts. Frontline execution works to improve store and sales rep productivity in terms of offer rates (e.g., service versus sales requests), how often reps convert initial service requests into sales, the value captured per sale, and the service fulfillment rate. McKinseys modular approach to retail rejuvenation covers the entire flow of customer interactions (Exhibit 2), providing effective tools and techniques telecoms players can use to tackle their biggest retail challenges. The first step involves identifying the root causes behind issues. Traffic generation. One operator, for example, discovered that about 40 percent of its store and staff were underutilized, with traffic levels far below the average. Local promotions, improved signage, and street hunters directing passers-by into stores helped increase both traffic and sales by 17 percent.

Traffic and customer management. One telco discovered that up to half of the people entering its stores with the intent to buy something ultimately left emptyhanded. Surveys revealed the key reasons behind this. These included not finding the desired product, needing more time to consider the purchase, finding that waiting times were too long, being in a crowded store, or discovering that items desired were out of stock. Another case had to do with a lack of available sales rep time during peak periods. Here, the team analyzed how the sales reps worked and found that they spent just under half of their time actually involved in the sales process (e.g., speaking with customers, inputting sales data). Furthermore, product activation times tended to be high. ADSL broadband activations, for example, took as long as one full hour. To ensure shoppers are promptly and properly engaged when visiting the telcos stores, managers can apply a segmentation strategy to both traffic and the staff who serve them. Instead of treating all customers and reps the same, shoppers identified as having high sales or care-to-sales potential (e.g., those lacking current postpaid service with the telco) are handled by skilled sales specialists. Less promising shoppers (e.g., angry customers), in contrast, are served by care specialists. In some cases, they are even directed to care hotlines if

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02

The Storanomics toolbox covers the entire customer flow The Storanomics toolbox covers the entire customer flow
Customer touch points Store positioning, product portfolio, network strategy (e.g., store density), and channel strategy Store positioning, network architecture, merchandise Enablers Store ownership model, retail organization

Store appeal, national/local trade marketing, in-store services, outbound calls, hunters, referrals Traffic generation Opening hours, triage (ticketing, meeter-greeter), in-store channel diversion, live experience, services as retail SKUs Selling and servicing skills Frontline execution

Processes and organization for store support, campaign management, merchandising

Traffic/customer management

Staffing, staff segmentation, activity management, PoS/order management and other systems/processes, inventory management Sales tools, people management, and performance management

SOURCE: McKinsey

their issues cannot be resolved in the store. By applying this segmented approach, the telco increased its total sales conversion rate from 18 to 29 percent. Operators can further reduce waiting times and walkout rates via lean techniques. One telco noted differences in average handling times per request type of 40 to 50 percent between medium and low performers. Increased automation and changes in processes were designed to reduce average waste time by about 20 percent. Finally, staffing levels always need to reflect customer traffic. Successful operators deploy scheduling tools to optimize agent staffing as well as store-manager time. Measurements show that productivity can vary by up to 50 percent depending on whether the store manager is on the shop floor or not. Frontline execution. As an example in this dimension, one telecoms player noted a high level of performance variability across its store network. By conducting further investigations into why this was happening, the operator discovered that the problem centered on poor area management capabilities, since 6 of 18 area managers were responsible for 16 of the bottom-20 stores. In order to address this, the company instituted a rigorous performance management approach, involving dialogues during three different types of staff interactions:

At sales meetings (best practice: 70 percent of meetings on sales topics, the rest on peer training, finding root causes, and working out action plans) In informal huddles (to energize and set objectives) During individual discussions (to set development goals and career objectives). Structural elements of performance management include setting sufficiently stretched targets at the individual level, establishing a daily tracking and reporting system including SMS notifications, and offering incentives that really mean something (e.g., best performers earn at least twice as much as their lower-performing counterparts). In one case, increasing the granularity of reporting and breaking store sales down into separate offer/success rate per type of traffic, followed by rigorous discussions, helped increase pilot store sales by 16 percent. Other helpful techniques are sales coaching, where managers intensively coach the coaches during rollout, applying peer-to-peer coaching and other effective methods. Companies can also increase staff sales capabilities by using tools tailored to specific situations, e.g., laminated sheets to guide customers through need identification and proposition or cheat sheets providing responses to the most frequent customer objections or effective cross-selling catch phrases. Other

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Ten golden rules to ensure substantial, sustainable sales impact

1. Move fast pilot in stores after two to four weeks 2. More ideas early on, narrow down before rollout 3. Focus on people-related actions (mindsets, skills, performance management) 4. By the field, for the field rapid iteration and design lead that is adjusted by store staff on a daily basis 5. Visible results early on clear measurement and communication of pilot results

6. Shock the system radical ideas delivered to stores packaged in a big-bang rollout (all ideas in one package for each store), but sequenced over time to manage complexity 7. Lead by the line the line assumes implementation responsibility: store and area managers with strong project support from staff 8. Effective SWAT team in place from day one 9. Actions to ensure sustainability beyond the obvious (e.g., link bonuses to sustainability) 10. Proactively manage opinion leaders in the network in line with the local context

must-have programs include frequent in-store training sessions and advanced skill-building workshops (e.g., applying irrational-buyer techniques).

into a single, radical big-bang package yields longterm results. The overall rollout effort is still sequenced, i.e., stores are addressed one after the other, not all at once, in order to manage complexity. The sustain phase is in fact an ongoing effort, where continuous monitoring and tweaking are key. Here, the line assumes continuous implementation responsibility (i.e., store/area managers). An effective SWAT team is also established and drives stores toward attaining Storanomics certification. Levers such as linking bonuses to in-store sales improvements and actively managing opinion leaders at the store level help attain the performance and attitudinal buy-in of everyone involved and ensure that early gains are sustained. *** Storanomics incorporates new ideas based on field data and insights from other industries with the intent of shocking the system with outside influences at all levels. Storanomics is tailor-made to provide that extra uplift telecoms players need in the current economic situation.

Storanomics at work
McKinseys experience is that successful Storanomics launches tend to adhere to several principles throughout the three phases of this sales stimulation approach. In the test and refine phase, telcos seeking to drive up sales tend to move fast, typically piloting solutions in their stores just two to four weeks after beginning with Storanomics. They also commit to idea generation, narrowing down the set of potential actions before the rollout. One final aspect of the test and refine phase is that it is highly people-centric. Not only do the improvement activities focus on retail staff skills and mindsets, it is their responsibility to make rapid, daily adjustments as needed in preparation for rollout. The rollout phase commences with clear communication of the pilot results and prioritization of stores. Multivariate regression allows operators to explain more than 60 percent of store performance variability with structural reasons, so that an initial focus can be placed on stores with significant operational underperformance. Then, the ideas are implemented in the stores in ways that completely shock the system. Experience shows that incremental approaches to boosting sales are suboptimal, but bundling the tested and refined ideas

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Duarte Braga is a Principal in McKinseys Lisbon office. duarte_braga@mckinsey.com

Branislav Klesken is a Principal in McKinseys Prague office. branislav_klesken@mckinsey.com

Jan Mischke is an Associate Principal in McKinseys Zurich office. jan_mischke@mckinsey.com

Steven Rudolph is a Principal in McKinseys Boston office. steven_rudolph@mckinsey.com

RECALL No 11 Mature Markets Wrapping up: The need for a step change in telecoms marketing and sales

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07 Wrapping up: The need for a step change

in telecoms marketing and sales

As revenues level off and prices erode, operators must leave their comfort zone and seek new ways to achieve attractive margins. The traditional telecoms business model is under pressure. In the top 15 EU markets, EBITDA margins a preferred measure of operator health declined by 4.5 and 0.3 percentage points in mobile and fixed respectively from 2004 to 2008 (Exhibit 1). The margin crunch is a consequence of the diminishing power of the historic access-based competitive advantage. In fact, telecoms access is under threat from three forces. First, massive deregulation is aimed at accelerating convergence among platforms (e.g., the sizeable cut in mobile termination rates across Europe). Second, convergence at the device and media level opens up a new competitive arena with Internet service providers, original equipment manufacturers, and media players. These have grown 1.7 percentage points faster in revenues than traditional telecoms services. Finally, the maturing traditional telecoms growth driven by significant penetration levels leads to a wide gap in revenue growth relative to high-growth markets (3 versus 13 percent CAGR respectively from 2004 to 2008). All in all, wireline and mobile go-to-market models are still typically rooted in a growing-market scenario with primary focus on driving gross-add volumes. This volume-based mindset is deeply ingrained in how performance is measured, how incentives are set, and how management decisions are made. In the face of a more demanding business context further reinforced by the current economic situation

telecoms operators must tackle the challenge presented by the shift from access-based to customer-focused competition and the perspective of growth from nontraditional drivers. These shifts will require operators to focus both on transforming their business models to seize growth opportunities through significant technological investments and from superior execution on all business levers and innovation. The latter is mainly driven by the need to create a sustainable competitive advantage that leverages the access asset. In fact, leading operators are increasingly deploying a value-based management practice that underpins an upgrade in all marketing and sales capabilities from advertising and distribution to pricing and customer experience (Exhibit 2). To achieve success in such an effort, the review of the business system as a whole must be considered. This includes the introduction of a standard set of leading-edge marketing and sales methodologies, tools, and data; rigorous performance management built on truly insightful metrics, candid action-oriented performance dialogues, incentives in line with the new priorities and ambitions, and ensuring that the right people with the right skills are in the crucial positions.

Commercial strategies: Current and future

Telcos have traditionally been heavy spenders in abovethe-line advertising, e.g., magazines, newspapers, outdoors, TV, radio, and Internet. In the US for example, AT&T, Verizon, and Sprint have the largest media spend, above brands such as Ford, Macys, Toyota, and McDonalds. Nonetheless, spending has not resulted in a competitive advantage or a differentiation among telecoms operators. As mentioned earlier in this RECALL

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01

Pressure is mounting for telcos in mature markets Pressure is mounting for telcos in mature markets
3 Revenues seem to have reached a plateau Revenue CAGR Percent 2004 - 08 2 2008 - 13E

with price erosions both in mobile and fixed

ARPM, 2003 - 08 Percent

Mobile

Fixed

-25.50 -45.25 EBITDA margins are under pressure, mostly in mobile, EBITDA margin, 2004 - 08 Percentage points -0.3

-4.5 7.0

with cuts in fixed business costs offsetting declines in the revenue base

Cost CAGR, 2004 - 08 Percent

-1.3

Note: Mature markets definition includes Australia, Austria, Belgium, Denmark (e), Finland (e), France, Germany, Greece (e), Ireland (e), Italy, Japan, Netherlands, Norway (e), Portugal, Singapore, South Korea, Spain, Sweden (e), Switzerland, United Kingdom, USA; (e) = extrapolated from mobile revenues, since fixed revenues are unavailable SOURCE: McKinsey

issue in No glitter, still gold: Branding for growth, telco brands are at a clear disadvantage vis--vis other players in the value chain: Google and Nokia/Sony Ericsson are perceived to be great brands by more than twice the number of consumers who grant that same status to mobile and fixed operators throughout Europe. These brands complement their smaller communication budgets by leveraging their clients as marketing agents. Through their excellence in providing a positive customer experience, these brands are able to instill frequent and highly impactful word-of-mouth communications. Moreover, operators brands scarcely differentiate among themselves. Operators must upgrade their performance from a mass marketing campaign generator, focusing on awareness and brand recall, to a value-driven investor by acting on three levers to ensure marketing ROI: (1) delivering the right message to target segments with significant impact on effectiveness 200 percent difference in recall between most and least effective messages across segments; (2) optimizing the vehicle mix by targeting the highest-quality vehicles for each message and segment proactively managing word of mouth; and (3) right-sizing total spend across geographies or regions with improvement of up to 30 percent in total budget efficiency. Smart purchasing is another, often underleveraged lever to optimize marketing ROI. The value here is in

identifying the common ground in more marketingintensive sectors such as retail and in making improvements in how to purchase and not just price. Defining discriminatory rules for media mix according to campaign context, unbundling negotiations for non-prime seasonal discounts, and integrating the management of media trade-offs are just a few components of the purchasing levers that other industries are already pulling at a large scale and that can lead to savings in total ad spend of 10 to 20 percent. Also, several opportunities exist for telcos to manage their current distribution channels. A strong case exists for value-based channel management, not only, but particularly in todays economic climate. Conventional wisdom says operators today must choose to optimize either market share or EBITDA based on the SAC level. Nonetheless, operators that have managed to make goto-market decisions in a more informed and structured way have been able to make EBITDA improvements of over 20 percent, achieved through additional revenue growth and SAC savings. This impact comes from optimization of both strategic and operational decisions, namely overall SAC/SRC budget, spend optimization between units, and optimization within units between products and channels (i.e., prioritize price plans/channels and set SAC rates/retail prices based on ROI, payback period, or gross-add sensitivity versus targets).

RECALL No 11 Mature Markets Wrapping up: The need for a step change in telecoms marketing and sales

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02

As the access-based advantage diminishes, operators need to take their As the access-based advantage diminishes, operators need to take commercial strategies to the next level their commercial strategies to the next level
From Advertising Mass marketing campaign focusing on awareness and brand recall Volume-based channel management geared toward a growing market Store: focus on geographic coverage for pull-based sales Contact center: maximizing sales in outbound and efficiency in service calls Online: communication and self-care channel Bundling products and services directly related to access with additional add-on services and features Focus on customer care as key driver of customer satisfaction To Return-oriented investments in advertising effectively managing message, channel, and spend Value-based channel management actively controlling customer lifetime value as well as acquisition and retention costs Store: driving sales via in-store execution Contact center: maximizing sales in every call Online: manage as key channel for sales, retention, and service Building value propositions along the value chain that cater to the usage profiles of various market segments Brand greatness by further claiming ownership of positive end-user experience

Distribution channels

Product and price Customer experience

SOURCE: McKinsey

Furthermore, channel optimization proves to be an attractive opportunity to improve transformation ratios within physical channels, maximize sales from service calls to call centers, and increase online sales. In physical channels, there is a big opportunity to increase transformation ratios: from 1.0 to 1.5/2.0, by optimizing poor store fronts and promotional actions; from 0.4 to 1.0 between store visits and buying intentions by making sales attempts during service visits; and from 0.5 to 1.0 regarding customer intention to buy and actual purchase by eliminating negative operational factors such as long queues, out-of-stock items, or poor service. Lastly, the value per transaction might also benefit from increasing cross- and up-selling efforts. McKinsey has developed the Storanomics approach to telco retail relying on rigorous execution on all of the above that has triggered sustainable surges in sales performance ranging from 15 to 40 percent. Contact centers are the primary contact point for mobile and fixed. According to McKinseys 2009 European Telecom Call Center Benchmark, service calls make up the majority of incoming traffic 90 to 95 percent of inbound calls in mobile and 65 to 85 percent in fixed and revenue potential is not being captured. This missed opportunity is partly due to the fact that no sales pitch is executed 0 to 5 percent of service

calls with sales attempt in mobile and 2 to 21 percent in fixed although best practices show great room for improvement with attempt rates being multiplied by a factor of 2 to 17 in a one-month time frame. This improvement can yield revenue benefits for the average operator of up to EUR 1.4 million per million fixedline subscribers and up to EUR 10.3 million per million mobile subscribers. The revenue generation opportunity in inbound service call centers service-2-sales represents a significant lever for telcos both in fixed and mobile. Online sales represent a growing channel for telcos that should not be underestimated in their reach and effectiveness. Many telecoms players have started to capture the potential upside from this channel. Some incumbents already achieve 30 percent online sales; one lean telco enjoys even more than 80 percent. Nonetheless, many telcos still fail to capture this potential opportunity with the average operator only seeing about 15 percent of its sales from the online channel. This gap can be of concern to operators for two key reasons: Prospective telecoms customers increasingly use the Internet not only for product information, but also for purchases and aftersales services. For 21 percent of mobile customers, online is the only touch point for product research and purchase. In fact, about 48 per-

50

cent of consumers use the Web for pre-purchase research in telecoms, just below airline and train tickets with 56 percent. The Web makes for an attractive business case with sales, retention, and service transactions via the online channel, offering significant cost-saving opportunities and carrying additional revenues. Seizing the online opportunity requires a Web transformation journey, which should focus on three building blocks. Strategic positioning defines the Web business strategic role, channel objectives, value proposition, and go-to-market model. Excellence in execution along the entire sales funnel, i.e., in traffic generation/presales, sales, service, fulfillment, and aftersales, is key to capturing the full potential of the online channel. And the enabler backbone is a necessary prerequisite, which needs to ensure a sound basis in terms of IT platform and systems, organizational anchoring, and analytical capabilities and transparency. Pricing is still largely managed by operators as a simple formula of access plus traffic. In light of the growing fragmentation of consumer behaviors, the traditional approach of analyzing the market through basic attributes such as speed, traffic, and access may not be capturing the full trade-off management consumers are engaging in during the purchase process. In response to the exploding diversity of available applications and services, telecoms consumers are fragmenting their needs not by the nature of the pipe or the equipment that they need but by the applications and services they run on top of operator-provided access and equipment. In reality, up to seven segments of distinct applications and services usage profiles have been identified as strong drivers of choice for mobile plans, equipment, and residential services. The segmentation categorizes consumers by, among other things, their relative usage of various service types (e.g., professional, utilitarian, and social) and their level of technology savvy. In fact, many consumers are using their desired services across multiple devices, implementing convergence at the applications and services layers. As operators struggle to implement convergence at the access layer, a deep understanding of these consumer segments can help them catch up to the other players in the value chain and take full advantage of the need for application and service convergence. Operators will need to determine the full range of applications and services that consumers are using rather than just look at access-based features.

Lastly, one of the key challenges operators face regarding customer experience is the increasing momentum of competition along the value chain and the fact that their performance is lagging. It used to be that customer care was the only performance assessment factor in the area of customer satisfaction. Telcos now need to take a holistic view of what can differentiate them from the competition. Customer perception and satisfaction go well beyond customer care, encompassing all touch points from pre- to post-purchase. Subscribers perception of operators has been biased toward hygienic factors such as billing, installation, prices, and reliability that are typically taken for granted by customers. Key positive differentiating factors such as functionality, device, content, and innovation are not currently leveraged to their full extent. By building an enlarged ecosystem of partnerships with other players along the value chain, telcos can create new opportunities to attach positive end-user experience to their brands.

Transformation: Seamless and sustainable

Based on McKinsey experience, and given the complexity of the task at hand, the approach to deliver on such an aspiration must span three steps: Diagnosis. A diagnostic that aims at identifying key gaps in marketing and sales capabilities throughout the organization is the first step of the commercial transformation. This step also identifies the relative importance of each capability as it relates to delivering the envisioned strategy. During the diagnostic, McKinsey conducts a capability assessment using a comprehensive 200-question tool that covers all areas of marketing and sales consumer insights, marketing strategy, goto-market, and alignment with business strategy providing an important source for benchmarking and selfassessment. Stakeholders and key success factors are identified, and top management will reach agreement on key organizational objectives. Design. Having run the diagnostic, a plan to close the gaps on the most important levers must be put together, defining specific content and delivery mechanisms. These mechanisms will include sessions for basic foundational training, discussion forums (new and off-theshelf content), and fieldwork where participants have the chance to implement on their own what they have learned. Core to the process is the design and implementation of a coaching regimen to support teams through formal and informal interactions. Guidance in develop-

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51

ing the business initiative is also critical as the program is linked to actual business performance. Implementation. The third step is the programs sustainable implementation supported by a central team responsible for developing and adapting materials, feedback, and program delivery tracking. Effective program delivery requires strong team dedication. Orchestrators act as lead faculty, mobilizing and involving commercial areas in program design and execution. Instructors deliver theory sessions and provide guidance on the application of tools, concepts, and techniques, while coaches support teams in assimilating and applying concepts learned to business initiatives. *** Operators are facing new challenges in their current commercial strategies, which is placing a great deal of pressure on existing business models and squeezing margins. These hurdles cannot be addressed through incremental change, but will require both fixed and wireless telcos to make a step change in capabilities at all levels, which will require a shift in mindsets and behaviors to make the change sustainable. Applying a three-step transformation approach that is both seamless and stable can help operators reposition their marketing and sales functions within the organization to boost EBITDA margins and secure future growth.

Alexander Dahlke is a Principal in McKinseys Hamburg office. alexander_dahlke@mckinsey.com

Lars Engel Nielsen is an Associate Principal in McKinseys Copenhagen office. lars_engel_nielsen@mckinsey.com

Miguel Fonseca is an Associate Principal in McKinseys Lisbon office. miguel_fonseca@mckinsey.com

Steven Rudolph is a Principal in McKinseys Boston office. steven_rudolph@mckinsey.com

RECALL No 11 Mature Markets Defying the status quo: An interview with Zeinal Bava, CEO, Portugal Telecom

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08 Defying the status quo: An interview with

Zeinal Bava, CEO, Portugal Telecom

Portugal Telecom (PT) is the leading telecommunications services provider in Portugal. Its business areas are fixed, mobile, and multimedia communications; information systems, research, and development; satellite communications and international investments. Although based in Portugal, PTs reach goes far beyond the Iberian peninsula, well into the four corners of the globe. Beyond a strong presence in Angola, Namibia, Cape Verde, So Tom and Prncipe, Macao, and East Timor, PT also stands out in the Brazilian market, where it is a 50 percent shareholder of Vivo, South Americas top mobile operator and among the worlds 40 largest mobile telecommunications companies. Zeinal Bava, CEO of PT, has a bold mission: to grow the company by reinventing the future. After defeating a hostile takeover and spinning off a valuable cable business, he revitalized PT. An ambition for undisputed leadership in its domestic market, based on a track record of execution and innovation, and a focus on growth in Brazil and Africa underpin PTs ambitious strategic objectives that include growing its customer base to 100 million. McKINSEY: In a saturated market such as Portugal, where do you believe growth will come from? ZEINAL BAVA: In the telecommunications industry as in many others growth and innovation have always gone hand in hand. After all, the industry emerged over 100 years ago on the back of a great innovation: the telephone. It perfected this technology for decades and saw it become part of everyones lives. This formed

the basis for the next wave of growth opportunities: data traffic and mobile phones. Just like fixed lines before them, mobile phones emerged as a tremendous innovation that drove industry growth only this time faster, reaching a peak level of penetration in less than two decades. We believe that future growth will come from similar innovative paths that arise and will peak even faster than before in unforeseen areas. To capture future growth, companies will have to focus on identifying and acting on industry trends by leveraging the creative potential of the organization and using innovation to develop new products and services. This is especially true for Portugal, where the market for traditional services is almost saturated and the focus is increasingly moving to bundles of services (voice, data, TV) and convergence of technology (fixed and mobile). Despite an increasingly mature traditional telecoms market, the wider entertainment market has continued to expand. Access is no longer the name of the game. Internet service providers and equipment manufacturers are leveraging open telecoms networks and capturing growth driven by consumer demand. In the end, consumers determine who is successful. Having recognized the growing importance of being responsive to our customers, we have reorganized PT around four market segments consumer, residential, SME, and corporate. Furthermore, we have adopted an attacker mindset based on continuous innovation and increased understanding of the shifting customer behaviors and preferences.

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McKINSEY: What role exactly do you foresee for TV and its fit with incumbents strategy? ZEINAL BAVA: At PT, achieving a leading position in the pay-TV and triple-play markets is crucial for the long-term prospects of our business. The importance and role of the TV offer differ depending on the market structure, namely cable TV penetration and commoditization of TV content. In Portugal, where cable has a high penetration and TV ranks high in consumer preferences, we believe that it is essential for us to anchor our triple-play offer (voice, data, video) around a distinctive TV offering. We decided to evolve our double-play offer to triple play by launching a disruptive TV offer. We leveraged the unique advantages of an IPTV platform of non-linear TV and interactivity, and PTs engineering know-how to provide superior quality of service. In less than 18 months, we have become the most successful telco-originated pay-TV operator in Europe with over 20 percent market share and an ADSL penetration in our customer base of more than 50 percent. Retail revenues have been growing for the last three consecutive quarters, since we are still gaining market share in pay-TV and broadband and have also seen a significant improvement in fixed-line disconnections. The success of our IPTV and DTH pay-TV offer has transformed the positioning of our residential business and given a whole new meaning to our consumer brands, which today enjoy the highest notoriety in our market and the recognition that our offers stand for best value for money in the sector. McKINSEY: Does increased competition in mature markets create or constrain business opportunities? ZEINAL BAVA: We believe that competition is a key enabler of growth if companies are able to take advantage of discontinuities and change in market dynamics to transform themselves. Competition forces the whole company to engage as a team in the execution of the strategy and pushes us to look beyond our traditional view of the boundaries of our business and to reach further than what we thought was our limit. It can also become a key driver of innovation and performance while promoting market growth. In 2007, PT survived a hostile takeover. This resulted in us taking on ourselves a number of stringent financial commitments and the spinoff of our cable business, which overnight became a formidable competitor of our

traditional fixed-line and broadband ADSL businesses. Our response to this discontinuity was to develop our own pay-TV offer known as Meo, which is now the main anchor of our wireline business transformation. The success of Meo is also providing the rationale for the investments we are making in rolling out a fiber-optic network (fiber to the home FTTH) to cover one-third of TV households in Portugal within 12 months. This will make a substantial difference to the lives of our customers. McKINSEY: Which role will fiber-optic networks play in your opinion? ZEINAL BAVA: My view is that the fiber investment is not an if but a when issue for the sector. I have no doubt that we need fiber to satisfy the increasing bandwidth requirements of our customers, both corporate and residential. Moreover, FTTH is also the right technological investment for those companies that believe that the network is not a commodity and that network architecture can become a structural competitive advantage in the corporate and residential markets. Broadband speeds will increase substantially over the next few years. This transformation will take much less time than we have witnessed in the past. In 2001 and 2002, customers were being offered download speeds of 512 kilobits per second (Kbps), compared with dial-up at 64 Kbps. Nowadays, the standard offer in our market is at least 8 megabits per second (Mbps), a 16-fold increase in seven years. We have launched our FTTH offering starting with download/upload speeds of 100/10 Mbps and are already testing 1 gigabit per second (Gbps). The pressure on the fixed-line and cable operators will come from customers and from mobile operators, rolling out LTE (long-term evolution) in the next few years. LTE will provide speeds of 150 Mbps and be complementary to a fiber offer, but it will cannibalize any other offer out there that does not provide higher and more symmetrical speeds. McKINSEY: PT has committed a significant investment in FTTH rollout compared to other incumbents. What is different for PT? ZEINAL BAVA: We decided to invest FTTH after proving to our shareholders that we could execute successfully a triple-play strategy and use it to enhance our competitive position in the market, creating value. I believe the business case for fiber is there for all

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telecoms players customers demand it and it will allow us to increase revenues and reduce churn and operating expenses. In the case of PT, competitive and market dynamics are simply pressing us to move ahead sooner than other operators. The fact that Portugal is a TV-driven market and we are competing against an established cable operator, ADSL2+ was a limiting technology and this led us to accelerate investments. Our focus now is on offering services that leverage the bandwidth available. Deciding which technology to use is more important than the technology itself. We are increasing the number of HD channels on offer, testing 3-D content, and making content available on multiple screens, namely TV, PC, and mobile. We are also developing new services for the corporate market to leverage the full potential of FTTH and fixed/mobile convergence and to continue growing our revenues. Even if it is still the early days, our commercial and financial performance has been proving us right. We recently announced our 3Q results, which were ahead of market consensus across all our divisions, with growing revenues and increasing RGUs in our wireline business. McKINSEY: Specifically how will this investment impact the Portuguese way of living? ZEINAL BAVA: The challenge we face is to improve the value proposition to customers by providing more and better services as well as a unique experience with this unlimited bandwidth. For example, both for corporate and residential customers, cloud computing and virtualization will improve their experience while reducing our capex per customer as well as overall CO2 emissions. For residential customers, what will fiber and 100 Mbps do for them? Downloading a high-definition movie (5 gigabytes) on an 8 Mbps connection takes about 90 minutes. With 1 Gbps the download will take less than a minute! For 3-D TV, every household will require even more bandwidth. But it is not only about download speeds. As social networking becomes an integral part of our day-to-day lives, and since all Internet users are increasingly developing their own content, upload speeds will become critical to the value proposition of any operator and only FTTH enables upload speeds of +50 Mbps. In the public sector, advantages of optic fiber will become clear in the provisioning of basic services such as education and health. In Portugal, we are engaged in a number of projects that involve connecting schools

with high-speed networks, enabling a more effective learning and sharing environment among students and professors. In health services, the advantage provided by remote collaboration and universal availability of patient information will allow for a significant increase in medical effectiveness while reducing the cost of providing the service. McKINSEY: What do you believe to be the new business frontiers in mobile? ZEINAL BAVA: In mobile, we will continue to experience exponential growth in data services and usage. As in the past, the evolution of the interface and the services available are fueling a shift in customer behavior that will revolutionize the mobile business. Advancement in adoption of mobile broadband and smartphones is driving a new space for mobile services for consumers and businesses. Image overlay navigation, instant video sharing, online gaming, and mobile shopping are already part of the lives of mobile consumers as are intelligent M2M communications. For businesses, real-time fleet control, remote CRM access, or real-time backup are becoming important services. Portugal has witnessed strong and unprecedented growth in mobile broadband. The mass distribution of PCs with mobile datacards at a lower price focusing on students, professors, and trainees has been key in increasing the PC population as well as driving the growth of wireless broadband. Recognizing the convergence opportunity, we have bundled wireless broadband and ADSL with PCs for our residential and SME/ SOHO customers. As a result of all these efforts, Portugal currently has the third largest penetration rate of wireless broadband in Europe. The number of wireless broadband users in Portugal is today higher than ADSL and cable modem users. Portugal has evolved from a country with low PC penetration to full convergence with Europe while it is clearly leading the pack on pay-TV take-up, FTTH, and wireless broadband. McKINSEY: Does LTE have a role to play? ZEINAL BAVA: The quick ramp-up in mobile data services and new applications for consumers and businesses is pushing mobile data traffic. We expect mobile data traffic growth to exceed 100 percent per annum from 2009 to 2013. In light of such a change, LTE is present-

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ing itself as a solution (rather than as the opportunity, as in the case of 3G eight years ago) to increasing network costs and capacity constraints. We will introduce LTE because we can see the demand for it and the operating cost benefits. LTE presents clear advantages over 3G, such as spectrum flexibility, enhanced performance in peak rates and latency, and lower cost through an all-IP architecture that is already proving attractive to many operators worldwide. To date, there are over 39 soft commitments to the rollout of LTE networks in America, Europe, Asia, and Oceania. In fact, 14 operators are likely to provide commercial offers already in 2010. PT is also planning to pilot LTE in Portugal and Brazil in 2010. These pilots will allow us to assess the real benefits of this technology versus HSDPA and we are still deciding on our partners. The timing for the change will be dictated by the prices for the upgrades, handsets, and datacards. McKINSEY: How will innovation continue to underpin growth? ZEINAL BAVA: At PT, we had extensive discussions on innovation and its role in our business and positioning as a company. It is our belief that we can build a structural competitive advantage if we can bring to bear our investments in leading-edge technology to provide more and better quality services more quickly to our customers. It can be a key driver for growth in a continuously changing and evolving market. PT has a very strong innovation track record, with milestones such as leading Portugal to become the worlds first country with a fully automated fixed network (1985), introducing the first prepaid mobile in the world (1995), and becoming the third country in the world to achieve 100 percent broadband coverage in 2000. We built on PTs innovation culture to implement new processes and programs aimed at building a balanced portfolio of investments along the temporal axis (long-term structural projects, medium-term business development, and short-term business optimization). To achieve this, we leveraged three key factors: wisdom of the crowds, boost of R&D capabilities, and open partnerships with suppliers. Regarding the first, we have a short-term innovation ideas program leveraging the wisdom of crowds, i.e., a factory that builds on contributions from all PT employees based on their experience, knowledge, and

creativity. To execute on this, we have implemented an ideas market that allows us to incorporate everyones input into the innovation process a Web portal that mimics the behavior of capital markets, enabling employees to enter new ideas, assess each others ideas, and monitor the implementation of the best ideas. Regarding the second, we are focusing on long-term innovation ideas that explore technological trends based on new social behaviors and disruption of technological or regulatory patterns. Our R&D division, PT Inovao, plays a pivotal role as our factory of exploratory innovation. Its role in game-changing projects such as our fiber infrastructure and service rollout has proven to be a key factor in our success. Regarding the third factor, PT as a global innovation leader with a proven track record has been able to attract leading global and local suppliers to create partnerships that aim at accelerating the development of new technologies, services, and products for our customers. We have signed collaboration agreements with six companies, all leaders in their own fields, and we expect this to be a collaborative process whereby PT secures access to state-of-the-art technological solutions and provides feedback and input to the innovation process of our partners based on the experience in mass fiber rollout and wireless network upgrades. These are some examples of the transformation journey we embarked on 18 months ago. It is, however, an ambitious transformation plan that encompasses 16 different initiatives and 40 workstreams, most of which are still ongoing. But we are confident that it will build a structural competitive advantage for us in the market and create value in the long term for all of our stakeholders. McKINSEY: What examples of these partnerships are already visible to consumers? ZEINAL BAVA: We run regular market research in mobile to understand usage behaviors and handset preferences. Last year, we came across the opportunity to break the mould in the smartphone arena in terms of penetration. Smartphones generate more revenues and build customer loyalty. Having first understood the needs for software and hardware of corporate and retail customers in Portugal, it became clear to us that the main barrier to accelerating the penetration of smartphones was price. We found a partner to launch a TMN-branded smartphone called Bluebelt with all

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sought-after features at a price 50 percent lower than equivalent phones in the market. As a result of this, smartphones net additions in the Portuguese market have been doubling quarter on quarter and we are commanding a market share of sales in excess of 50 percent. Bluebelt is a success beyond price. Its customers are heavy Internet users and more than a third view mobile TV as well. Furthermore, customer satisfaction is high and 66 percent of Bluebelt users consider the experience to be superior compared to other phones on the market. Consumer recognition is reflected in the Bluebelts adoption levels, which already account for over 20 percent of PT smartphone sales with over 72 percent of these customers being first-time smartphone users. McKINSEY: How is a player with the scale of PT able to compete internationally? ZEINAL BAVA: I believe that operators can compete internationally based on either pure operational global scale or international specialization and innovation. PT has centered its international strategy on Portuguesespeaking countries and on a distinctive vision of continuous customer-driven innovation. This has enabled us to push well beyond our home base. We have 68 million customers and our international businesses account for around half of our revenue base. We are clear leaders in consumer preference in all the markets in which we operate. Through innovation, we also benefit from the scale effect. For example, we are the biggest purchaser in Europe today of IPTV set-top boxes, fiber cabling, and network components; thus, we benefit from a first-mover advantage. McKINSEY: How do you see your international operations evolving? ZEINAL BAVA: We have specialized in two core international geographies: Brazil and Africa markets that will be driven by significant growth in penetration of wireless services, and where we enjoy close cultural ties. We focus on transferring best practice and product innovation across countries, and achieving the scale benefits to secure access to leading-edge technology at competitive prices. Our international operations are mainly wireless and a source of very strong organic growth both in voice and data. We intend to manage and expand our footprint depending on opportunities and our ability to create value.

McKINSEY: How has PT been able to attract and develop talent in a context where telecommunications is perceived as a mature business? ZEINAL BAVA: We are aware that having the best talent will allow us to outcompete in the market. Our capacity to attract the right people results from three key factors: attractiveness of working for PT, a very well organized recruitment program, and a strong investment in employee career and personal development. First, we have been able to attract the best talent in the market because of the leading-edge nature and growth potential of our business as well as the international career opportunities we can offer. PT has set ambitious business objectives for the next three years and our growth profile creates a large number of opportunities both domestically and internationally. In this context, we are able to combine the expertise from people already working for us with the excitement of those seeking an opportunity to join our company. Second, we have designed a recruitment program that gives us an edge in the market. The program is composed of the PT Academy for non-graduates and a trainee program for graduate students. Both include on-the-job training where we pair the newcomers with experienced workers and exposure to the leadership team so that all feel immediately part of PT and engaged with the strategy and business objectives. Third, we have invested in building a unique value proposition in terms of professional and personal development. We are fostering a culture that drives performance while aligning rewards to individual, team, and company results. Fourth, our international presence allows us to offer opportunities to our employees to rotate among operations and experience different culture and business settings, hence develop a broader professional curriculum. Finally, I would like to stress that all of this is of no use unless we create the conditions that contribute to the well-being of our employees. We have defined sustainability (social, economic, and environmental) as one of our five strategic business objectives. In that regard, we actively promote the participation of all our employees in all initiatives. Particular attention is also paid to ensuring that we provide equal opportunities to all employees independent of their gender, race, or religion.

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The end goal for us is to create a happy work environment to promote prosperity and increase the value of our human capital. McKINSEY: How do you perceive the role of regulation? ZEINAL BAVA: I believe that the market is the most efficient way of defining and governing the interactions between operators and consumers. We are in favor of better regulation as opposed to more regulation. We do not see regulation as a barrier to growth, but we believe it has an important role in ensuring that conditions exist to protect and promote investment-based competition. This is even more important as we move into high-speed networks and multi-service platforms rollout. Generally speaking, most mature markets are already quite competitive, with consumers and companies having ample choices of services, operators, and prices. Portugal is a good example of successful liberalization, since it promoted strong competition as well as innovation in the offer of new services to customers. We believe that the Portuguese market is at a turning point in terms of regulatory policy and we hope that it will be in the direction of allowing operators to compete in the market while promoting investment in the sector and better services for customers. The Portuguese mobile market is one of the most developed and competitive markets in the world, with high levels of penetration and a diversified service portfolio. The new mobile technologies are allowing new services not just mobile broadband, but also mobile TV. As for fixed services, the Portuguese regulator recently determined that around 60 percent of the broadband market is very competitive; thus, there should not be any ex ante obligations. McKINSEY: How will regulation impact fiber in fixed services? ZEINAL BAVA: Fixed services, especially broadband, are now moving into high-speed networks, such as optical fiber. The impact of these networks will spread beyond the telecommunications industry, with positive effects on the economy, society, and the environment. The characteristics of the fiber-optic market are also completely different to those of legacy networks, given its different starting position: the market is very competitive and there are no horizontal barriers for network

implementation. In our opinion, Portugal is a case study regarding competitiveness in broadband and highspeed services, given the strong position of cable operations and regulated offers for access to PTs ducts. This is why we believe that the regulatory environment must promote investments in optical fiber and the regulatory guidelines should anticipate the new market conditions, moving from ex ante to full ex post regulation. Regulation for investment in optical fiber should ensure predictability to promote further investment, and establish differentiated and segmented regulatory measures, in line with the preliminary Portuguese telecoms regulators report on the subject. Portugal pioneered with offering a commercial duct in 2004. The openness of ducts is an important element to create a common starting point for all operators as they decide to implement their fiber solutions and support infrastructure competition. Regulators should have a forward-looking perspective regarding new market challenges. It is crucial to have a predictable regulatory policy that clarifies the market ground rules, balances the interests of the citizen and the consumer, and enables sound investment. McKINSEY: If I were planning to be your shareholder, what would you have to say? ZEINAL BAVA: We have set an ambitious growth agenda along five strategic business objectives for the next three years: (1) achieve 100 million customers from our current base of 68 million; (2) increase the contribution of revenues from our international business to twothirds of PTs total revenues; (3) reinforce our leadership in all the markets in which we operate; (4) achieve top quartile operational and financial performance among European peers; and (5) become a reference in sustainability in all the geographies where PT has operations. In light of our business vision, which is underpinned by long-term investments to build a structural competitive advantage, we are defying the status quo as a solution in our industry and laying the foundations for lasting growth and prosperity. Delivering results to our shareholders will not be a trivial feat, but we are fired up and focused on execution to seize the growth opportunities in our business.

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Our track record in execution has also been translated into upper-quartile remuneration for our shareholders. While markets still remain volatile, PT shares have outperformed the sector and delivered the second most attractive total shareholder return among European telecoms operators with +47.7% in 2009 YTD versus an average of +19.6 percent among our peers. I feel that all of us at PT are involved and want to stay involved in the execution of our five strategic objectives. This gives me great confidence that we will deliver on our vision, secure lasting growth and prosperity for our company, and create value for our shareholders. Mr. Bava was interviewed by Pedro Mendona, a Director in McKinseys Lisbon office.

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News, views, insights

McKinseys Telecommunications Extranet is the gateway to some of the best information and most influential people in the telecommunications industry. The Extranet offers selected McKinsey-generated information that is not available in the general Internet. Extranet users have access to selected McKinsey articles on subjects relating to Industry & Regu lation, Growth & Innovation, Sales & Marketing, Services & Operations, IT & Technology, Corporate Finance, Organization & HR, Corporate & Enterprise, and Equipment & Devices. Direct communication channels ensure that your questions and requests will be addressed swiftly. The site is updated weekly with new articles on current issues in the industry. McKinseys Telecoms Extranet lets you: Obtain exclusive information free of charge and use an Internet portal specifically designed for the industry Access cutting-edge know-how, interact with experts to gain new insights, and contact industry leaders Stay well-informed with daily industry news from factiva that you can tailor to your needs and interests. General information about the site is available at: http://telecoms.mckinsey.com Contact: telecoms@mckinsey.com

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Serving clients around the world

McKinseys Telecommunications Practice serves clients around the world in virtually all areas of the telecommunications industry. Our staff consists of individuals who combine professional experience in telecommunications and related disciplines with broad training in business management. Industry areas served include network operators and service providers, equipment and device manufacturers, infrastructure and content providers, integrated wireline/wireless players, and other telecommunications-related businesses. As in McKinseys work in every industry, our Practices goal is to help our industry clients make distinctive, substantial, and lasting improvements in their performance. The Practice has gained deep functional expertise in nearly every aspect of the value chain, e.g., in capability building and transformation, product development, operations, network technology and IT (both in strong collaboration with our Business Technology Office BTO), purchasing and supply chain, as well as in customer lifetime management, pricing, branding, distribution, and sales. Furthermore, we have developed perspectives on how new business models and disruptive technologies may influence these industries.

Telecommunications Practice January 2010 Copyright McKinsey & Company, Inc.

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