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Changing Engines in Midflight: The 2012 TMT Value Creators Report

How Technology, Media, and Telecom Companies Can Transform and Prosper in the Digital Economy
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Rapid, disruptive change has long been the norm in the technology, media, and telecom (TMT) world. But the fast pace of the past was merely prelude to the head-snapping acceleration over the past few years.

The digital economy—powered by TMT players—is changing the way in which businesses and consumers behave globally. The Internet economy accounted for 4.1 percent of the GDP of G-20 economies in 2010, with leading countries achieving double that share. There are now more than 2 billion Internet users, with a billion more expected to be online by 2016. There are over 5 billion mobile phones—and remarkably, already more smartphones than fixed connections—and social networks reach about 80 percent of Internet users throughout the world. Together, these developments are shaping commerce, culture, and communications and will permanently redefine sectors as disparate as health, education, banking, and government. The “new” Internet is different in many ways from the old Internet. (See Exhibit 1.)

exhibit

As machines such as cars and medical-imaging devices go online, an explosion of data is occurring. Cisco estimates that annual global Internet traffic will exceed one zettabyte—that is a billion terabytes—by 2015, a 35-fold increase over the volume in 2005. Video traffic is the primary driver: the online video traffic generated by the London Olympics, for example, was 20 times what it was for the Beijing Olympics.

While TMT players are central to the digital economy they are also buffeted by its turbulence. Over the five-year period from 2007 through 2011, TMT players, as a group, only achieved average total shareholder return (TSR) of roughly 3 percent annually. For every high-performing company there are laggards, late starters, or fallen heroes.

TSR is the product of a company’s strategic direction, execution, and overall market conditions. In past years, we have conducted our analysis of TMT companies primarily through a TSR lens. (For an explanation of our methodology, see the sidebar “The Basics of Value Creators and Value Creation.”) In this report, we continue that tradition but also look at some of the broader trends shaping the success of TMT companies.

The Basics of Value Creators and Value Creation

This report builds on the fourteenth annual report in the Value Creators series published by The Boston Consulting Group. It ranks the stock market performance of the world’s top TMT companies over a five-year period—from 2007 through 2011—and explores both the secrets of their success and the challenges ahead for their sectors.

Of the 133 TMT companies analyzed, 51 are from the technology industry, 38 from the media industry, and 44 from the telecom industry. To be ranked, companies needed to have been publicly listed for all five years of our study period, with at least 25 percent of their shares being publicly traded. We also imposed a minimum market capitalization of $9 billion for technology companies, $8.5 billion for telecom companies, and $3 billion for media companies.

The overall rankings track performance in local currency from 2007 through 2011; returns for the first nine months of 2012 are also listed in the exhibits. For companies that are listed in exchanges outside their home country, returns are calculated in the currency of the exchange.

In addition, we show the contributions of the six components of TSR in order to assess how each company creates value. The first two elements—sales growth and change in profit margin—represent a company’s fundamental value. The third element—the change in valuation multiple—conveys investor perception of the company. We calculate the multiple as the ratio of enterprise value (the combined market value of equity and debt) to EBITDA. All three elements contribute to establishing the change in a company’s market capitalization. The last three elements—cash dividends, share repurchases, and debt repayments— determine the contribution of cash payouts to a company’s TSR.

Waves of Change

In technology, media, and telecommunications, companies are vying for position in what has rapidly become known as the post-PC era—an age when portability and connectivity trump power and speed, and ecosystems of content and services drive value.

A transformation that began in the consumer market is shaking the foundations of enterprise IT and spilling over into other industries.

Consider the following trends: PC sales in 2012 will show their first annual decline in eleven years, according to IHS iSuppli, as consumers and businesses shift their spending to smartphones and tablets. In the United States, people now spend more time using apps in smartphones and tablets than browsing the Web, according to Flurry Analytics. Consumer cloud services, notably Apple’s iCloud and Amazon’s Kindle Fire ecosystem, have already changed the way consumers and media companies interact.

Furthermore, enterprise cloud services like Amazon Web Services (AWS) and salesforce.com are changing the game for enterprise software companies like SAP and Oracle. Media companies, especially those in print, are generally struggling to respond to the digital revolution. The shuttering of the print version of Newsweek magazine is only the latest example.

As these winds whip through the TMT world, companies are changing tack. Microsoft, the biggest beneficiary of the old paradigm, is integrating Windows 8, the Windows Phone 8, and Surface (a tablet) into a tight collection of software, services, and hardware. The world’s largest software company is also expanding its retail footprint in order to improve the customer experience.

The Surface tablet changes Microsoft’s relationship with original-equipment manufacturers (OEMs) and also with Intel. The first version of Surface runs on a chip design from ARM Holdings, an Intel competitor.

Google and Apple, meanwhile, have gone from being partners to fierce rivals. Google’s new handset business, based on its 2012 acquisition of Motorola Mobility, also changes its relationship with Android-reliant OEMs like Samsung and HTC.

As the Internet becomes increasingly global, developing countries are spawning their own global challengers—ambitious, fast-moving companies that bring an accelerator mindset to the global fray, focus on growth rather than immediate returns, and learn as they go rather than rely on preprogrammed business plans. Two Chinese Internet companies, Baidu and Tencent, top the list when large-cap companies in all industries are ranked by TSR from 2007 through 2011. (See the sidebar “TSR in TMT: A Tale of Leaders and Laggards.”)

TSR in TMT: A Tale of Leaders and Laggards

Most companies had a hard time creating shareholder value in the five-year period from 2007 through 2011, according to the fourteenth annual Value Creators report, a multi-industry study of company stock-market performance. The master study showed five-year average annual TSR across 1,003 companies in 21 industries of 2.4 percent. Nine industries had negative returns.

Against this backdrop, the overall performance of TMT industries was middling. The average annual TSR for technology companies was a little better than average, at 4 percent. Telecom TSR averaged 3 percent, and media TSR averaged only 2 percent. (See the exhibit “TMT Industries Eke Out Small Gains for Investors.”) These returns are all lower than the five-year averages in the period ending in 2010.

exhibit

But averages can be deceptive, masking an unusually wide range of value creation—and destruction. In technology, the big winners were companies taking advantage of mobile and ubiquitous computing, such as chipmaker ARM, Apple, and salesforce.com. In media, Baidu and Tencent, the Chinese Internet companies, led the field by a wide margin. In telecommunications, a trio of Asian mobile providers stood apart. The big TSR losers in all three TMT industries were companies that have failed to transform their business models.

Across the TMT industries, large-cap companies outperformed the field, posting an average annual 5.2 percent TSR. A handful of them did exceptionally well: Baidu, Tencent, and Apple hold the top three spots on the broader Value Creators list, with average annual TSR of 59.5 percent, 41.8 percent, and 36.7 percent, respectively. Amazon.com is fourth at 34.4 percent, with growing businesses in tablets, media, and cloud computing. Vodafone, the best-performing large-cap telco, with an 11.1 percent TSR, ranks twenty-ninth among all large-cap companies.

Sales growth powered the TSR performance of the technology and media companies, while price-to-earnings multiples sharply declined, removing 11 and 7 percentage points, respectively, from their average annual TSR performance. The telecom industry, meanwhile, benefited from growth in sales and dividends and suffered slightly less from declining multiples. (See the exhibit “Companies Find Many Ways to Create Value.”)

exhibit

We take a closer look at sector-specific TSR issues in the sidebars accompanying each chapter of this report.

 

China’s ZTE and Huawei have become leading smartphone players. ZTE is now the fourth largest global player, after Samsung, Apple, and HTC, according to newly released data from International Data Corporation. India’s Bharti Airtel and Infosys help set the global pace in telecom and IT services, respectively. Other developing-world telecom powerhouses include Mexico’s America Movil, Russia’s Vimpelcom, and Abu Dhabi’s Etisalat. In media, South Africa’s Naspers has a strong presence in many emerging markets in e-commerce, pay TV, and print.

In the post-PC era, just keeping score is a challenge. Step back a bit, however, and it is possible to view all this activity not in terms of what is ending, but in terms of what lies ahead: An era in which digital technology and services are embedded in nearly everything we do.

Digital Services and Big Data

Digital services are radically changing entire industries ranging from retail to banking, from games to music, and from health care to transportation. The market for digital services shown in Exhibit 2 will reach $1 trillion by 2015 and is growing at 13 percent annually. Soon it will be larger than the global telecom services market. This represents a huge opportunity for TMT companies.

exhibit

Venture capital is flooding into digital services—and mobile services, in particular. Venture capital firms invested $5.5 billion in mobile technologies from November 2011 to July 2012. (See Exhibit 3.) In 2011, mobile investment represented 42 percent of technology venture capital (up from 30 percent in 2010 and only 17 percent in 2009).

exhibit

Many of these digital services are built on various forms of data—for example, personal data volunteered knowingly or unknowingly by consumers, open data released by governments, or geospatial data gathered by satellites and other methods.

Data are becoming the new oil of the economy. When used appropriately, personal data can create new economic value by helping to achieve new efficiencies in business; tailor and personalize products; respond quickly to global challenges; and empower individuals to engage in social, commercial, and political activities more effectively. Personal data help drive the Internet economy and boost the recent valuations of many companies.

There is real risk, however, that this value will not be realized. High-profile security-data breaches are commonplace. Individuals are increasingly concerned about intrusions into their privacy and the possibility of data being used for unauthorized purposes. Many companies are unclear about what they can and cannot do and are either standing on the sidelines or forging ahead with an unclear understanding of liabilities and risks to their reputation. Governments are proposing various laws and regulations to protect privacy while also aiming to encourage innovation and growth.

In this turbulent and unpredictable environment, traditional notions of competitive advantage become fragile, and setting strategy based on long-term forecasts is perilous. A new way of thinking is required.