Merlin Consulting
Latest Thought Papers

The Telecom Enabler

Why Private Equity funds should push for Telecom Enablers.

Over the past two years Private Equity (PE) has become a major part of M&A activity in the telecoms sector and several exits have shown the high values PE can extract. We believe PE is right to reactivate its interest in telecoms, as the sector is both attractive and PE goals and methods fits the current state of the sector: 

  • Telecoms is attractive, as it is the biggest part of the economy, and has growth faster than GDP.
  • Most telecom operating companies (telcos) still have low productivity relative to other service and Utility sectors so PE methods should be able squeeze more value out of them.

However the window of opportunity for standard PE methods is closing fast. The industry is striving for productivity improvement and so squeezing out more value by itself; the industry believes its traditional markets are saturated, so is going for growth in new services which are higher-risk and so more VC than PE investments; the increased interest in telco M&A is pushing up acquisition prices. 

The key question for PE is therefore: Are there value-extracting opportunities beyond traditional methods or should PE quickly sweep up the few remaining attractive telco M&A candidates, then move on? 

We believe: Private Equity investors should extend their traditional PE methods to open up many more Telco M&A candidates, and take the Telcos from the hunting to farming level by complementing the Net-co and Serve-co arms of a Telco with an Enabler arm, adding 50% to the Net Present Value (NPV) of investments in five years!

It's time to prepare bids for Wi-Max licenses
Since the start of telecommunications liberalisation, competition in the local loop has proven to be an elusive goal. 2nd operators and ISPs have suffered from having both the technical performance and the cost of access to their customers controlled by their strongest competitor, the incumbent local-loop operator. This has led to incumbents facing the wrath of regulators on the one side over access charges, and with resistance to tariff rebalancing on the other hand that would remove the arbitrage-based heat of competition taking away highly profitable long-distance and international business. A far from satisfactory situation for all. Suddenly the potential of Wi-Max as a low-cost, high performance access technology may resolve this situation. Examining this potential is urgent, as many countries have imminent plans to license wireless local-loop access.

The technological uncertainty is still high, and it is not clear whether it will trigger true competition in the local loop or not. However the size of the missed opportunity if it does take off much more than outweighs the relative small amount of time and effort that would be wasted now if WLL becomes a cul-de-sac. We have identified six short and cheap actions players should take now, to determine if they should get involved in WLL (e.g. Wi-Max) licensing.

Double the Value of Voice Customers
Depite the "common knowledge" that the voice market is saturated, telephony only captures 2% of a person's total speach (most is face to face) and mobile captures only 20% of telephony minutes. Voice services still have enough potential to justify a few quick, easy representative trials that would explore how effective a systematic programme to grow voice-ARPU (average revenue per user) could be. We have identified over 70 ways to increase voice APRU (many of which can also be applied to data and content services), grouped into 7 main types. Some of these can be as simple as changing the order of a menu on voice mail, which can increase a user's calls by over 10%.
MVNOs - The Good, The Bad and The Ugly
MVNOs – The Good, The Bad and The Ugly
Despite the discount-mentality driving the vast majority
of MVNOs today, the MVNO retailing model promises to add value
to underserved segments, reduce churn and increase market share and ARPU!
We discuss which aspects of MVNOs make sense for which goals
 and how operators can become the preferred partners for thousands of MVNOs.
Skype-VoIP Win-Win

Harnessing the value-creating power of Skype while avoiding the value-destruction

“I knew it was over when I downloaded Skype,” Michael Powell, chairman, Federal Communications Commission, explained. “When the inventors of KaZaA are distributing for free a little program that you can use to talk to anybody else, and the quality is fantastic, and it’s free – it’s over. The world will change now inevitably.”
Fortune Magazine, February 16, 2004

Skype’s performance so far, the compelling cost/benefit story, the short time over which massive disruption could occur and the pedigree of the Skype founders, are four good grounds to look seriously at the Skype phenomena.