Transcript verizon motorola phone

Internet Economics and the Creative
Destruction of Telecoms
A Fletcher School Short-Course
Instituto Superior Tecnico
Lisboa, Portugal
October 25-26, 2000
Lee W. McKnight
Associate Professor of
International Communications
Paul M. Vaaler
Assistant Professor of
International Business
1.1
Goodbye to the “Old Regime” of
Telecoms in the US...
TRADITIONAL TELECOMMUNICATIONS
INDUSTRY STRUCTURE
Telecommunications Industry
Structure Dominated by a HeavilyLocal Carriers
Long-Distance
Carriers
RBOCs
Regulated, “End-to-End” and
e.g., Bell Atlantic AT&T
“Natural Monopoly” Becomes...
Fringe Players
MCI/
1.2
Goodbye to the “Old Regime” of
Telecoms in the US...
POST “BREAK-UP” TELECOMMUNICATIONS
INDUSTRY SEGMENTS
Telecommunications Industry
Cable System
Operators
Segments Separated
Time-Warner Local Carriers
Long-Distance
Carriers
MediaOne
RBOCs
By Regulation and Transformed
e.g.Bell Atlantic AT&T Sprint
Williams
By Selected Competitive Entry,
RCN
MCI/WorlCom
Which Then Becomes…
Broadcasters
CBS
Fox
ABC/
Disney NBC
Telco Equipment
Suppliers
Lucent
Cisco
Motorola
Hello to an Emerging “New Regime” for
1.3
Telecoms in the US...
POST “BREAK-UP” TELECOMMUNICATIONS
INDUSTRY SEGMENTS
Telecommunications Industry
Cable System
Operators
Segments Separated
Time-Warner Local Carriers
Long-Distance
Carriers
MediaOne
Bell Atlantic
By Regulation and Transformed
AT&T Sprint
Williams
By Selected Competitive Entry,
RCN
MCI/WorlCom
Which Then Becomes…
DIGISPACE
Broadcasters
Telco Equipment
CBS
Fox
ABC/
Disney NBC
Suppliers
Lucent
Cisco
Motorola
Excel
Qwest
CBS
MediaOne/AT&T
Motorola
MCI
Zephyr
Microsoft
Lucent World
Com
RCN
Sprint
...A Single Super-Industry –Call
Level3
Cisco
Bell Atlantic/GTE/Verizon
It “Digispace”– With Few IntraABC/
Williams
Enron
Industry Barriers to Entry,
Disney
Fox
Time-Warner
Cable, Wireless and Internet-Based
Technologies Enabling Entry by Start-Ups, Industry Incumbents
And Firms From Other IndustriesThought Previously to Be “Unrelated.”
1.4
And The “New Regime” for Telecoms in the
US Means New Corporate Configurations...
TRADITIONAL TELECOMMUNICATIONS
INDUSTRY STRUCTURE
Local
Local Carriers
Carriers
RBOCs
RBOCs
e.g.,
e.g., Bell
Bell Atlantic
Atlantic
Fringe
Fringe Players
Players
Long-Distance
Carriers
AT&T
MCI Sprint
AT&T’s Vertically and HorizontallyIntegrated Monopoly on the US
Telecommunications Industry in
The 1970’s Drew Legal (Anti-Trust)
Challenge.
How Would AT&T Compete After the
Old Regime Was Destroyed?
1.5
And The “New Regime” for Telecoms in the
US Means New Corporate Configurations...
TRADITIONAL TELECOMMUNICATIONS
INDUSTRY STRUCTURE
Local
Local Carriers
Carriers
RBOCs
RBOCs
e.g.,
e.g., Bell
Bell Atlantic
Atlantic
Fringe
Fringe Players
Players
Long-Distance
Carriers
AT&T
MCI Sprint
AT&T’s Vertically and HorizontallyIntegrated Monopoly on the US
Telecommunications Industry in
The 1970’s Drew Legal (Anti-Trust)
Challenge.
How Would AT&T Compete After the
Old Regime Was Destroyed?
DIGISPACE
AT&T’s Corporate Acquisitions Since Break-Up:
•National Cash Register (Computers, Equipment)
•McCaw Cellular (Cellular Technology)
•TCI (Cable Services)
•Media-One (Cable Services)
•New York Local Telephone Services (CLEC)
•Tracking Stock for Wireless Group (Wireless)
Digi-Platfirm
AT&T
1.6
And The “New Regime” for Telecoms in the
US Means New Corporate Configurations...
TRADITIONAL TELECOMMUNICATIONS
INDUSTRY STRUCTURE
Local
Local Carriers
Carriers
RBOCs
RBOCs
e.g.,
e.g., Bell
Bell Atlantic
Atlantic
Fringe
Fringe Players
Players
Long-Distance
Carriers
AT&T
MCI Sprint
AT&T’s Vertically and HorizontallyIntegrated Monopoly on the US
Telecommunications Industry in
The 1970’s Drew Legal (Anti-Trust)
Challenge.
How Would AT&T Compete After the
Old Regime Was Destroyed?
DIGISPACE
AT&T’s Corporate Acquisitions Since Break-Up:
•National Cash Register (Computers, Equipment)
•McCaw Cellular (Cellular Technology)
•TCI (Cable Services)
•Media-One (Cable/Internet Services)
•New York Local Telephone Services (CLEC)
•Tracking Stock for Wireless Group (Wireless)
Digi-Platfirm
AT&T
But AT&T is
Not Alone..
Digi-Contentcorp
AOL/
Time-Warner
1.7
And The “New Regime” for Telecoms in the
US Means New Corporate Configurations...
TRADITIONAL TELECOMMUNICATIONS
INDUSTRY STRUCTURE
Local
Local Carriers
Carriers
RBOCs
RBOCs
e.g.,
e.g., Bell
Bell Atlantic
Atlantic
Fringe
Fringe Players
Players
Long-Distance
Carriers
AT&T
MCI Sprint
AT&T’s Vertically and HorizontallyIntegrated Monopoly on the US
Telecommunications Industry in
The 1970’s Drew Legal (Anti-Trust)
Challenge.
How Would AT&T Compete After the
Old Regime Was Destroyed?
DIGISPACE
AT&T’s Corporate Acquisitions Since Break-Up:
•National Cash Register (Computers, Equipment)
•McCaw Cellular (Cellular Technology)
•TCI (Cable Services)
•Media-One (Cable/Internet Services)
•New York Local Telephone Services (CLEC)
•Tracking Stock for Wireless Group (Wireless)
Digi-Platfirm1
AT&T
But AT&T is
Not Alone..
Digi-Contentcorp
Digi-Platfirm2
Verizon
AOL/
Time-Warner
1.8
And The “New Regime” for Telecoms in the
US Means Disruptive Technologies, Rivals
and Economics...
TRADITIONAL TELECOMMUNICATIONS
INDUSTRY STRUCTURE
Local
Local Carriers
Carriers
RBOCs
RBOCs
e.g.,
e.g., Bell
Bell Atlantic
Atlantic
Fringe
Fringe Players
Players
Long-Distance
Carriers
AT&T
MCI Sprint
RBOCs Became “Baby Bells” With
De Jure and De Facto Protection From
Would-Be Rivals
What Happened to These Babies?
1.9
And The “New Regime” for Telecoms in the
US Means Disruptive Technologies, Rivals
and Economics...
TRADITIONAL TELECOMMUNICATIONS
INDUSTRY STRUCTURE
Local
Local Carriers
Carriers
RBOCs
RBOCs
e.g.,
e.g., Bell
Bell Atlantic
Atlantic
Fringe
Fringe Players
Players
Long-Distance
Carriers
AT&T
MCI Sprint
RBOCs Became “Baby Bells” With
De Jure and De Facto Protection From
Would-Be Rivals
What Happened to These Babies?
DIGISPACE
Verizon’s Story Is Illustrative:
•Mergers & Acquisitions (e.g., Bell Atlantic,
NYNEX, GTE), But…
Digi-Platfirm2
Verizon
1.10
And The “New Regime” for Telecoms in the
US Means Disruptive Technologies, Rivals
and Economics...
TRADITIONAL TELECOMMUNICATIONS
INDUSTRY STRUCTURE
Local
Local Carriers
Carriers
RBOCs
RBOCs
e.g.,
e.g., Bell
Bell Atlantic
Atlantic
Fringe
Fringe Players
Players
Long-Distance
Carriers
AT&T
MCI Sprint
RBOCs Became “Baby Bells” With
De Jure and De Facto Protection From
Would-Be Rivals
What Happened to These Babies?
DIGISPACE
Verizon’s Story Is Illustrative:
•Mergers & Acquisitions (e.g., Bell Atlantic,
NYNEX, GTE), But…
•Still Reliant on “Legacy” Telco Technology
•Not “Next Generation” Internet, Wireless Firms
•Forced by 1996 Act to Allow/Encourage Entry
•Will DSL Technology Save Verizon?
Zephyr Communications
(Niche Internet Telephony
For USBusines: 1/9 Verizon’s
Unit Operating Costs
Digi-Platfirm2
Verizon
Smaller,
More Efficient
Rivals
And the “Ancien Regime” of Telecoms
1.11
in Europe...
EVEN MORE STAID, AND STATE-DOMINATED THAN IN THE US
Germany
Deustche
Telekom
France
Spain
France Telecom
Telefonica
Italy
Telecom Italia
Britain
British Telecom
Mercury
In the 1980’s, Several Telecoms
Were Still Organized Like Political
Agencies/Ministries; Some Had
Become Corporatized SOEs; A Few
Had Been Privatized; None Faced
Real Competition. 20 Years On…
1.11
Has Been Replaced by Telecoms
Industry Revolutions...
MORE VARIED EXPERIMENTATION,
MORE PROFOUND RATE OF STRUCTURAL CHANGE
COMPARED TO US
Attempted Alliances In the 1980’s, Several Telecoms
Germany
Were Still Organized Like Political
France
Deustche
Spain
Agencies/Ministries; Some Had
Telekom France Telecom
Become Corporatized SOEs; A Few
Telefonica
Had Been Privatized; None Faced
Real Competition. 20 Years On…
Attempted
Smaller
Larger Regional
National
Mergers
Wireless Firms
•Meaningful Privatization,
Wireless Firms
Liberalization
•Profitability Focus
Britain
•Cross-Border Investment (and
Italy
Investors)
British Telecom
Telecom Italia
•Assertive Corporate Overseers
Mercury
•Internal Diversification, Spin-Offs
•Organizational, Technological
Experimentation (Alliances, WAP,
GSM)
Creative Destruction of Telecoms
1.12

Schumpeter Meets the Globalizing Internet Economy:
– New Technological, Competitive, Organizational and Institutional
Arrangements in the Industry Destroy Traditional Positions and
Create New, More Fluid Ones. Telecoms Must Identify, Cope,
Encourage and Exploit this Dynamic.
– Survival Is At Stake: Death of the Lethargic; Riches for the
Internet-Agile (Not Internet-Dependent).
Creative Destruction of Telecoms
1.13
Schumpeter Meets the Globalizing Internet Economy:

– New Technological, Competitive, Organizational and Institutional
Arrangements in the Industry Destroy Traditional Positions and
Create New, More Fluid Ones. Telecoms Must Identify, Cope,
Encourage and Exploit this Dynamic.
– Survival Is At Stake: Death of the Lethargic; Riches for the
Internet-Agile (Not Internet-Dependent).

General Trends for Creative Destruction and Telecoms:
–
–
–
–
–
–
The Destruction of Traditional Industry Positions
The Destruction of Traditional Competitive Dynamics
The Destruction of Traditional Regulatory Approaches
The Destruction of Traditional Organizational Structures
The Destruction of Traditional Technological Cycles
The Destruction of Traditional Social Assumptions
Outline of Sessions
1.14

Organized into Two Sessions Today (Morning, October 25):
– This Session: The Concept of Creative Destruction and
Implications for Telecoms Industry.
– Later This Morning: Responding to Creative Destruction in the
Telecoms Industry with Innovation: Products, Technologies and
Organizational Forms.

Organized into One Additional “Application” Session
Tomorrow (Late Morning and Afternoon, October 26):
– Tomorrow: Simulated Negotiated Equity Offering to Foreign
Investors Interested in Privatizing State-Owned Telecoms: Anatolia
National Telecom.

Teaching Aims of These Sessions
– Teaching Aim 1: Provide Conceptual Overview of Current Issues
Upending Telecoms Industry and Compelling Managerial and Policy
Changes
– Teaching Aim 2: Apply Those Issues in Case Forcing Students to
Value (Quantitatively and Qualitatively) Their Impact on Firms and
States.
Internet Economics and the Creative
Destruction of Telecoms
A Fletcher School Short-Course
Instituto Superior Tecnico
Lisboa, Portugal
October 25-26, 2000
The Creative Destruction of Telecoms
Lee W. McKnight
Paul M. Vaaler
Associate Professor of
International Communications
Assistant Professor of
International Business
What Is Creative Destruction?
2.1
The Concept: New Configurations
That Change (Favorably) A Firm’s
Production Function.
•Innovation vrs. Invention
•Subjective Definitions
•“Ad-Man” Mis-Applications
What Is Creative Destruction?
2.2
The Concept: New Configurations
That Change (Favorably) A Firm’s
Production Function.
•Innovation vrs. Invention
•Subjective Definitions
•“Ad-Man” Mis-Applications
Applications: Describe Individual
Firm and National Rivalry.
Explain Changes In Industry
Structure (Monopoly vrs. NonMonopoly Structures).
Justify Intellectual Property
Protection Regimes.
What Is Creative Destruction?
2.3
Schumpeterian ArticuThe Concept: New Configurations
lation in 1930s-1940s
That Change (Favorably) A Firm’s
Production Function.
•Innovation vrs. Invention
Neo-Schumpeterian
•Subjective Definitions
Revival (*Helpman,1998)
•“Ad-Man” Mis-Applications
Applications: Describe Individual
Firm and National Rivalry.
Explain Changes In Industry
Structure (Monopoly vrs. NonMonopoly Structures).
*Helpman, E. (ed.) (1998), General
Purpose Technologies and
Justify Intellectual Property
Economic Growth, MIT Press, Cambridge,
MA,
Protection Regimes.
Market and Industry Concepts
2.4
Market: Groupings of Firms
Whose Products Are Close
Substitutes from Consumers’
Perspective.
Industry: Groupings of Firms
with Same or Similar Products
or Production Technologies
from Suppliers’ Perspective
Market and Industry Measures
2.5
Market: Cross-Price
Elasticity of Demand
Ec=
dQx * Py
dPy
Qx
Industry: Standard Industrial
Classifications (SIC’s).
1-digit:
1 = Primary (Mining)
2-3 = Secondary (Industrial)
4-7 = Tertiary (Services)
Usually Means 4-digit SIC’s
3652 = Telephony
3623 = Semiconductors
High Elasticity (+ or -)
Implies Inclusion in
Same Market. Low Also Think About Naïve Concepts of
Elasticity Implies
of Market and Industry Definition:
Separate Markets
Ask Experts, Geography, Inspection
Market and Industry Measures
2.6
Elasticity as Customer Loyalty in the Internet Economy
Market and Industry Measures
2.7
Structure-Conduct-Performance Model: Explained
Main Point: Structure Is Mainly About the Number of Firms
In the Industry. Few Firms Mean the Ability to Coordinate on
Price, Quantity and Certain “Strategic Levers”, and the Ability
to Erect Entry Barriers and Gain “Above Normal” Returns
Compared to Other Less-Concentrated Industries
Hirfendahl-Hirschman Index (HHI)
% Sales
100%
Concentration Ratio (CR4)
First 4 Firms in
Industry (CR4)
Comprise 77%
of Industry Sales
75%
50%
25%
1
2 3 4
5
Firms
Sum the Squared Firm Market Shares:
si2
The higher the HHI number the more
concentrated (and potentially collusive)
the industry is.
Conclusion: Structure-asConcentration Matters
Market and Industry Analytics
2.8
5-Forces Expansion of the Entry (Mobility) Barriers Concept
Primus Inter Pares
Potential
Entrants
Suppliers
Industry
Rivalry
Customers
Substitutes
Each Relationship
Mediated by Barriers
and Bargaining Power
Market and Industry Analytics
2.9
Intra-Industry Strategic Groups
*Firms within an Industry Using
Same or Similar Strategies and
*Enjoying Same or Similar
Performance.
*Industry Entry Barriers Are Low
*Intra-Industry Mobility Barriers Are
High
2.10
Market and Industry Analytics
Intra-Industry Strategic Groups in Revolutionary
Europe
2.11
Common Problem with Traditional Market and
Industry Analytics
Structure
Conduct
Performance
5 Forces
Suppliers
Potential
Entrants
Incumbents
Substitutes
Customers
All Three Models Assume that Structural Factors at Industry
or Sub-Industry Level are Fixed. Creative Destruction
Implies Greater Structural Fluidity, Industry Heterogeneity
Telecom’s Digispace Fluidity
2.12
What If France Telecom
Spins Off:
•Media
•Phone-Book
•Wireless
•Fixed Line Network
In Telecom’s Digital Industry Space, Entry and Mobility
Barriers Rise and Fall Unpredictably.
Telecom’s Digispace Fluidity
2.13
What If Smaller
Privatizing Telecoms
Ally or Partially Merge :
•Scale Economies
•Regional Scope
Economies
In Telecom’s Digital Industry Space, Entry and Mobility
Barriers Rise and Fall Unpredictably.
Digispace Trends: Mov’t Towards Content
2.14 Industry Segment Becomes More Competitive and Less Profitable:
Managers Look for New and More Profitable Segments
NTTDo-Co-Mo
Other
Wireless
Firms
Infrastructure
Software/Content
Digispace Trends: Mov’t towards Content
2.15
Mobility Barriers Suddenly Fall: Managerial Insight; Low
Cost Design Assets
NTT- Do-Co-Mo
Other Wireless
Firms
Infrastructure
Software/Content
2.16
Digispace : Cognitive Creative Destruction
Computer
Associates
Anderson EDS
Consulting
Time Warner
New York Times
Bertelsmann Polygram
Disney
Viacom
NBC Sony
TCI
Nintendo
Motorola
Siemans
Intel McCaw IBM
Cisco Alcatel 3Com
Lucent
Hughes
Toshiba
Canon
NEC
Matsushita
Kodak
Hitachi
Software Solutions
Networking Equip
Internetworking Software
Imaging/Display
Bell AtlanticVerizon
AT&T
Lotus
Apple
Silicon
Graphics Microsoft
Netscape
Oracle
Entertainment
Communications Services
Digispace : Cognitive Creative Destruction
2.17
Strategic Managers Make Investments Based on
View of Industry and Sub-Industry Structures...
...And in the Process, They
Change the Structure for Their
Direct and Indirect Rivals
Bottom Line: Strategic Managers
Recognize That Telecoms Industry and SubIndustry Structures are Increasingly
Turbulent Due Even to Managerial Cognition
The Importance of Unstable Turbulent
Factors for Business Unit Performance
2.18
How much of the Variance in Profits of a Business
are Explained by:
1. Macro-Economic Factors
2. Corporate Factors
3. Stable Industry Factors
4. Stable Strategic Group Factors
5. Stable Business Unit Factors
6. Turbulent (Year-to-Year) Industry Factors
7. Turbulent Strategic Group Factors
8. Turbulent Business Unit Factors
Data: U.S. FTC Line of Business Data (U.S. Firms)
Data: French Sesame Business Data (French Firms)
Data: US Compustat Industry Segment Data (U.S. Firms)
The Importance of Unstable Turbulent
Factors for Business Unit Performance
2.19
Telecoms
BA-GTE--Verizon
Wireless
Verizon Wireless Communications
Stable: ME1.___C2. ____ I3. _____ SG4. _____ BU5. ____
Turbulent: I6.___ SG7. ____ BU8. _____
The Importance of Unstable Turbulent
Factors for Business Unit Performance
2.19
Telecoms
BA-GTE--Verizon
Wireless
Verizon Wireless Communications
Stable: ME1. 1% C2. ____ I3. _____ SG4. _____ BU5. ____
Turbulent: I6.___ SG7. ____ BU8. _____
The Importance of Unstable Turbulent
Factors for Business Unit Performance
2.19
Telecoms
BA-GTE--Verizon
Wireless
Verizon Wireless Communications
Stable: ME1. 1% C2. 8% I3. _____ SG4. _____ BU5. ____
Turbulent: I6.___ SG7. ____ BU8. _____
The Importance of Unstable Turbulent
Factors for Business Unit Performance
2.19
Telecoms
BA-GTE--Verizon
Wireless
Verizon Wireless Communications
Stable: ME1. 1% C2. 8% I3. 2% SG4. _____ BU5. ____
Turbulent: I6.___ SG7. ____ BU8. _____
The Importance of Unstable Turbulent
Factors for Business Unit Performance
2.19
Telecoms
BA-GTE--Verizon
Wireless
Verizon Wireless Communications
Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. ____
Turbulent: I6.___ SG7. ____ BU8. _____
The Importance of Unstable Turbulent
Factors for Business Unit Performance
2.19
Telecoms
BA-GTE--Verizon
Wireless
Verizon Wireless Communications
Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. 4%
Turbulent: I6.___ SG7. ____ BU8. _____
The Importance of Unstable Turbulent
Factors for Business Unit Performance
2.19
Telecoms
BA-GTE--Verizon
Wireless
Verizon Wireless Communications
Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. 4%
Turbulent: I6. 17% SG7. ____ BU8. _____
The Importance of Unstable Turbulent
Factors for Business Unit Performance
2.19
Telecoms
BA-GTE--Verizon
Wireless
Verizon Wireless Communications
Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. 4%
Turbulent: I6. 17% SG7. 35% BU8. _____
The Importance of Unstable Turbulent
Factors for Business Unit Performance
2.19
Telecoms
BA-GTE--Verizon
Wireless
Verizon Wireless Communications
Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. 4%
Turbulent: I6. 17% SG7. 35% BU8. 29% = 100%
The Importance of Unstable Turbulent
Factors for Business Unit Performance
2.20
Telecoms
Bottom Line: In Turbulent
Industries
Short-Term Intra-Industry Group
Structures (e.g., Alliances), and
BA-GTE--Verizon
Short-Term Idiosyncratic
Business
Unit Factors Matter Most.
Wireless
Verizon Wireless Communications
Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. 4%
Turbulent: I6. 17% SG7. 35% BU8. 29% = 100%
The Importance of Unstable Turbulent
Factors for Business Unit Performance
2.21
Telecoms
Wireless
Bottom Line: In Turbulent
Industries
Short-Term Intra-Industry Group
Structures (e.g., Alliances), and
BA-GTE--Verizon
Short-Term Idiosyncratic
Business
Unit Factors Matter Most.
Surprisingly,
Corporate Effects Matter
Little
Verizon Wireless Communications
Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. 4%
Turbulent: I6. 17% SG7. 35% BU8. 29% = 100%
Creative Destruction and the Telecoms
Industry: Implications
2.22

For Managers:
– Creative Destruction As Risk/Opportunity-Filled Dynamic Driven by
More Than Just Technology. Organizational Even Cognitive Drivers
Matter.
– The Fluidity of Industry-Wide Factors, and the Relative
Unimportance of Industry Structure and Corporate
Strategy/Management.
– Focus on Transitory Group and Individual Business Unit Factors As
the “Industry” Changes. Experimentation Within Corporation Is
Brief. Spin-Off Happens Sooner Than We Think.

For Policy-Makers:
– Industry Regulatory Approaches Have Fewer Broad, Long-Term
Effects on the Entire Industry. Effects Tend to Vary Substantially
Across Intra-Industry Groups, and Even More Across Individual
Businesses in the Groups.
– The Cost of Regulatory Avoidance May Be Low. When There Is a
Choice Between Less or More Regulation, Choose Less. Market
Dynamics Will Exert Its Own Discipline Helpful to Economy.
Internet Economics and the Creative
Destruction of Telecoms
A Fletcher School Short-Course
Instituto Superior Tecnico
Lisboa, Portugal
October 25-26, 2000
Responding to Creative Destruction
Lee W. McKnight
Paul M. Vaaler
Associate Professor of
International Communications
Assistant Professor of
International Business
Creative Destruction and the Telecoms
Industry: Firm Responses
3.1

Firm Responses:
– Privatizing and Deregulating Telecoms to Induce Search for
Efficiency and Opportunity
– New Product Pioneering: First-Mover Advantages and
Disadvantages in Creative Destruction

Implications and a Glance At Tomorrow
– What Are the Implications for Managers and Investors Seeking to
Create and Measure Value? Valuing the Privatizing Telecoms in an
Emerging Market.
– Negotiating For Value Creation in the Creative Destruction of the
Telecoms Industry: The ANT Simulation
Privatization: What Is It?
3.2
Shift In Control and Ownership Rights From State to Private Hands
Telecommunications Privatization: A Spectrum of Policy
Choices
Supply
Manage- Perfor- Leasing BOT
Technical Suband Civil
ment
manceand
Assistance ContractWorks
Contracts Based
ConContracts ing
Contracts
(MC)
MCs
cession
Public
0
Responsibility for Investments and Risk Allocation
Duration (Years) of Private Involvement
BOO
Divestiture
Private

Privatization: Economic
Theory
3.2
Demand
Costs
Marginal
and
Revenue
Revenues
Price
(Private
Monopolist)
Marginal Cost (MC=AC)
(State-Owned, Welfare Maximizing)
Price
(State
Monopolist)
0
Quantity Quantity
Produced Produced
Important Model Assumptions: (Private
(State
Price and Quantity 
Monopolist) Monopolist)
Marginal Cost Meets Demand
(For State-Regulated Monopolist)
Price and Quantity 
Marginal Revenue Meets
Marginal Cost (For Unregulated Private Monopolist)
Marginal Cost
(Private-Owned
Profit Max’ing)
Privatization: Economic
Theory
3.3
Demand
Costs
Marginal
and
Revenue
Revenues
Price
(Private
Monopolist)
Marginal Cost (MC=AC)
(State-Owned, Welfare Maximizing)
Price
(State
Monopolist)
0
Overall Revenue for
State-Owned Monopolist
Quantity Quantity
Produced Produced
Important Model Assumptions: (Private
(State
Price and Quantity 
Monopolist) Monopolist)
Marginal Cost Meets Demand
(For State-Regulated Monopolist)
Price and Quantity 
Marginal Revenue Meets
Marginal Cost (For Unregulated Private Monopolist)
Marginal Cost
(Private-Owned
Profit Max’ing)
Privatization: Economic
Theory
3.4
Demand
Costs
Marginal
and
Revenue
Revenues
Price
(Private
Monopolist)
Marginal Cost (MC=AC)
(State-Owned, Welfare Maximizing)
Price
(State
Monopolist)
0
Overall Costs for
State-Owned Monopolist
Quantity Quantity
Produced Produced
Important Model Assumptions: (Private
(State
Price and Quantity 
Monopolist) Monopolist)
Marginal Cost Meets Demand
(For State-Regulated Monopolist)
Price and Quantity 
Marginal Revenue Meets
Marginal Cost (For Unregulated Private Monopolist)
Marginal Cost
(Private-Owned
Profit Max’ing)
Privatization: Economic
Theory
3.5
Demand
Costs
Marginal
and
Revenue
Revenues
Price
(Private
Monopolist)
Price
Overall Revenues for
(State
Private Monopolist
Monopolist)
0
Quantity Quantity
Produced Produced
Important Model Assumptions: (Private
(State
Price and Quantity 
Monopolist) Monopolist)
Marginal Cost Meets Demand
(For State-Regulated Monopolist)
Price and Quantity 
Marginal Revenue Meets
Marginal Cost (For Unregulated Private Monopolist)
Marginal Cost (MC=AC)
(State-Owned, Welfare Maximizing)
Marginal Cost
(Private-Owned
Profit Max’ing)
Privatization: Economic
Theory
3.6
Demand
Costs
Marginal
and
Revenue
Revenues
Price
(Private
Monopolist) Overall Profits for
Private Monopolist
Price
Marginal Cost (MC=AC)
(State-Owned, Welfare Maximizing)
(State
Monopolist)
Overall Costs for
Private Monopolist
0
Quantity Quantity
Produced Produced
Important Model Assumptions: (Private
(State
Price and Quantity 
Monopolist) Monopolist)
Marginal Cost Meets Demand
(For State-Regulated Monopolist)
Price and Quantity 
Marginal Revenue Meets
Marginal Cost (For Unregulated Private Monopolist)
Marginal Cost
(Private-Owned
Profit Max’ing)
Privatization: Economic
Theory
3.7
Demand
Costs
Marginal
and
Revenue
Revenues
Price
(Private
Monopolist)
Marginal Cost (MC=AC)
(State-Owned, Welfare Maximizing)
Price
(State
Monopolist)
0
Quantity Quantity
Produced Produced
Important Model Assumptions: (Private
(State
Price and Quantity 
Monopolist) Monopolist)
Marginal Cost Meets Demand
(For State-Regulated Monopolist)
Price and Quantity 
Marginal Revenue Meets
Marginal Cost (For Unregulated Private Monopolist)
Marginal Cost
(Private-Owned
Profit Max’ing)
Privatization: Economic
Theory
3.8
Demand
Costs
Marginal
and
Revenue
Revenues
Price
Welfare Gain From Productive
Efficiency Increase Due To:
1) Simplified and Alligned Incentives.
2) Market for Managerial Talent
3) Highest Use (for Shareholders) of Assets
(Private
Monopolist)
Marginal Cost (MC=AC)
(State-Owned, Welfare Maximizing)
Price
(State
Monopolist)
0
Quantity Quantity
Produced Produced
Important Model Assumptions: (Private
(State
Price and Quantity 
Monopolist) Monopolist)
Marginal Cost Meets Demand
(For State-Regulated Monopolist)
Price and Quantity 
Marginal Revenue Meets
Marginal Cost (For Unregulated Private Monopolist)
Marginal Cost
(Private-Owned
Profit Max’ing)
Privatization: Economic
Theory
3.9
Demand
Costs
Marginal
and
Revenue
Revenues
Price
Welfare Gain From Productive
Efficiency Increase Due To:
1) Simplified and Alligned Incentives.
2) Market for Managerial Talent
3) Highest Use (for Shareholders) of Assets
(Private
Monopolist)
Marginal Cost (MC=AC)
(State-Owned, Welfare Maximizing)
Price
(State
Monopolist)
0
Quantity Quantity
Produced Produced
Important Model Assumptions: (Private
(State
Price and Quantity 
Monopolist) Monopolist)
Marginal Cost Meets Demand
(For State-Regulated Monopolist)
Price and Quantity 
Marginal Revenue Meets
Marginal Cost (For Unregulated Private Monopolist)
Marginal Cost
(Private-Owned
Profit Max’ing)
Privatization: Economic
Theory
3.9
Demand
Costs
Marginal
and
Revenue
Revenues
Price
Welfare Gain From Productive
Efficiency Increase Due To:
1) Simplified and Alligned Incentives.
2) Market for Managerial Talent
3) Highest Use (for Shareholders) of Assets
(Private
Monopolist)
Marginal Cost (MC=AC)
(State-Owned, Welfare Maximizing)
Price
(State
Monopolist)
0
Quantity Quantity
Produced Produced
Important Model Assumptions: (Private
(State
Price and Quantity 
Monopolist) Monopolist)
Marginal Cost Meets Demand
(For State-Regulated Monopolist)
Price and Quantity 
Marginal Revenue Meets
Marginal Cost (For Unregulated Private Monopolist)
Marginal Cost
(Private-Owned
Profit Max’ing)
Welfare Loss From Allocative
Efficiency Decrease Due To:
1) Diminution of Non-Shareholder
Interests
2) Drop Less Profitable Routes
3.10

Privatization: Economic
Theory
The Organizational Effects:
– Lower Employment: In Line With Curtailed Production in
Established Lines of Business. Also, Former-State-Owned
Enterprises Often Have Highly-Unionized, High-Cost Labor
– Capital Investment: In Line With Increased Productive Efficiency
in Established Lines of Business. Also, Former-State-Owned
Enterprises Often Have Legacy of Constrained Choice in Capital
Investment Suppliers
– Corporate Diversification: Harder to Explain. Management
Reaction to Environmental Uncertainty. Diversify Into Related and
More Profitable Industries (Good). Diversify Internationally to
Make Re-Nationalization More Difficult (Good/Bad). Diversify
Either Way Because of Managerial Ignorance and or Hubris and
Poor Shareholder Oversight (Bad)
3.11
Privatization:
Organizational Theory
Enterprise’s Board
(Corporatized or
Newly-Privatized)
Looking
Out for
Enterprise’s Interests
(Agents)
Executive
Management
Line
Management
Looking Out for
Firm’s Interests
(Principals)
3.11
Privatization: Empirical
Implications
Enterprise’s Board
(Corporatized or
Newly-Privatized)
Looking
Out for
Enterprise’s Interests
(Agents)
Other Implications
Lingering State Ownership
May Be Positively
(Shleifer & Vishny, 1998)
or Negatively (Vaaler,
2000) Correlated With
Performance.
Executive
Management
Line
Management
Looking Out for
Firm’s Interests
(Principals)
Implication 1
But The Board May
Have State Representatives
Ultimately Responsible to
a Minister Rather Than to
Private Individual or
Institution. Result:
Misalligned Incentives
and Poor Oversight of
Management
3.12
What’s A New Product Pioneer? An
Example From Router Business
The Inventor: IBM Invented Router Technology for the
Internet in the mid-1980’s...
The First Entrant With a Model for the Military and Government:
But…
Cisco Bought Router Technology, Mass-Marketed It in the
1990’s…and Won.
The First to Enter and Invest in “Complementary” Assets
(Pioneer):
•Distribution Channels
•Components Manufacturing Agreements
•Marketing and Equipment Standards
First Mover Advantages
3.13
Case 1
Innovation:
Micro-Miniature Cell Phone
Case
2
2nd Generation Cell Phone
Rankings:
1st
Learning Curve Barriers
Pre-emption Barriers
2nd
Behavioral Barriers
Behavioral Barriers
3rd
Scale Economies Barriers
Scale Economies Barriers
4th
Pre-emption Barriers
Learning Curve Barriers
Understanding First Mover Advantages
3.14
Conceptual Framework
Environmental Opportunity
Understanding First Mover Advantages
3.14
Conceptual Framework
Environmental Opportunity
Competitive
Strategy
First Mover
•Resources
•Capabilities
Late Entrant
•Resources
•Capabilites
Competitive
Strategy
Understanding First Mover Advantages
Conceptual Framework
3.14
Environmental Opportunity
Competitive
Strategy
First Mover
•Resources
•Capabilities
Late Entrant
•Resources
•Capabilities
First Mover Positional Advantages
Cost
Differentiation
Scale
Preemption Learning
Economies •Legal
Curve
•Non-Legal
Behavioral
•Reputation
•Switching
Cost
Competitive
Strategy
Understanding First Mover Advantages
Conceptual Framework
3.14
Environmental Opportunity
Competitive
Strategy
First Mover
•Resources
•Capabilities
Late Entrant
•Resources
•Capabilites
First Mover Positional Advantages
Cost
Differentiation
Scale
Pre-emption Learning
Economies •Legal
Curve
•Non-Legal
Behavioral
•Reputation
•Switching
Cost
Competitive
Strategy
Late Entrant Advantages
•imitation costs
•free-rider effects
•shifting industrial and techno•logical factors
•learning from first mover
Understanding First Mover Advantages
Conceptual Framework
3.14
Environmental Opportunity
Competitive
Strategy
First Mover
•Resources
•Capabilities
Late Entrant
•Resources
•Capabilites
First Mover Positional Advantages
Cost
Differentiation
Scale
Economies
Learning
Curve
+
+
Pre-emption
•Legal
•Non-Legal
+
Behavioral
•Reputation
•Switching
Cost
Competitive
Strategy
Late Entrant Advantages
•imitation costs
•free-rider effects
•shifting industrial and technological factors
•learning from first mover
+
-
Overall Magnitude of competitive Advantage
+
First Mover Performance
-Profits
-Market Share
-Pricing
-Other
3.15
What if Two Pioneers Innovate Simultaneously But
With Incompatibility?
The Hold or Fold Game
British Satellite Broadcasting (“BSB”) vs. Sky Television
In the 1980’s.
Fog of War
- Establishing Standards
- Guessing Your Rivals Intent
- Reputation for Toughness
3.16
What if Two Pioneers Enter A Turbulent
Industry at the Same Time?
The Hold or Fold Game
Some of the Fog of War Is Irreducible, But:
•Reputations May Be Built
•Uncertainty Can Be Used Against Rivals
3.17
Key Implications: Creating and
Measuring Value in Telecoms
ANT - Three Dimensions of Idiosyncrasies
- Three Dimensions
of Idiosyncrasies
Potential
Investor Perceptions:
1) Strategic Investors (e.g., EUTEL)
2) Fund Investors (e.g., BOW)
3) Sleeping Investors (e.g., NALI)
Product and Pricing Autonomy
Organizational Efficiency
Corporate Governance
Capital Investment
Corporate Diversification
ANT
Telecoms Sector
Turkey
Political Stability
Budgetary Concerns
Foreign Policy (e.g., EU)
Regulatory Regime
Industry Structure
Technological Factors
Low Telecoms Development
3.18
Key Implications: Creating and
Measuring Value in Telecoms
ANT - Three Dimensions of Idiosyncrasies
- Three Dimensions
of Idiosyncrasies
Potential
Investor Perceptions:
1) Strategic Investors (e.g., EUTEL)
2) Fund Investors (e.g., BOW)
3) Sleeping Investors (e.g., NALI)
Product and Pricing Autonomy
Organizational Efficiency
Corporate Governance
Capital Investment
Corporate Diversification
ANT
Telecoms Sector
Turkey
Political Stability
Budgetary Concerns
Foreign Policy (e.g., EU)
Regulatory Regime
Industry Structure
Technological Factors
Low Telecoms Development
Given the Turbulence Engendered by Creative Destruction
We Are Less Interested in Any One “Right” Point Estimate of
Value. We Are More Interested in Understanding the Range of
Reasonably Foreseeable Valuations for the Enterprise
3.20
Conclusion of the Presentation

Today’s Two Sessions Today (Morning, October 25):
– Point 1: The Telecoms Industry Concept Requires Revision to
Remain Relevant to Strategic Decision-Making.
– Point 2: In Some Telecoms Industrial Contexts the Strategic
Manager Can Influence the Currents of Creative Destruction
Through Structural Transformation (Privatization) and Through
Strategy Transformation (New Product Pioneering).
– Point 3: In Many Other Contexts, the Strategic Manager Can Only
Plan for Creative Destruction Without Knowing its Specific
Direction.

Organized into One Additional “Application” Session
Tomorrow (Afternoon, October 26):
– Session 8: Simulated Negotiated Equity Offering to Foreign
Investors Interested in Privatizing State-Owned Telecoms: Anatolia
National Telecom.
– Teaching Aim: Give You the Opportunity to Apply Creative
Destruction Ideas to Valuation, Management and Policy Issues
Associated with Telecoms Enterprise Privatization in Emerging
Economies