Internet Economics and the Creative Destruction of Telecoms A Fletcher School Short-Course Instituto Superior Tecnico Lisboa, Portugal October 25-26, 2000

Internet Economics and the Creative Destruction of Telecoms

A Fletcher School Short-Course

Instituto Superior Tecnico Lisboa, Portugal

October 25-26, 2000

Lee W. McKnightAssociate Professor ofInternational Communications

Paul M. VaalerAssistant Professor ofInternational Business

Goodbye to the “Old Regime” of Telecoms in the US...1.1

TRADITIONAL TELECOMMUNICATIONSINDUSTRY STRUCTURE

RBOCse.g., Bell Atlantic

Fringe Players

AT&T

Carriers Long-Distance

MCI/

Local Carriers Structure Dominated by a Heavily-

“Natural Monopoly” Becomes...

Telecommunications Industry

Regulated, “End-to-End” and

Goodbye to the “Old Regime” of Telecoms in the US...1.2

Telecommunications IndustrySegments SeparatedBy Regulation and TransformedBy Selected Competitive Entry,

Which Then Becomes…

Broadcasters

CBS Fox

ABC/Disney NBC

Local Carriers

RBOCse.g.Bell Atlantic

RCN

Long-Distance Carriers

Telco Equipment Suppliers

Cable System Operators Time-WarnerMediaOne

AT&T Sprint

MCI/WorlCom

CiscoLucent

Williams

Motorola

POST “BREAK-UP” TELECOMMUNICATIONSINDUSTRY SEGMENTS

Broadcasters

CBS Fox

ABC/Disney NBC

Local Carriers

Bell Atlantic

RCN

Long-Distance Carriers

Telco Equipment Suppliers

Cable System Operators Time-WarnerMediaOne

AT&T Sprint

MCI/WorlCom

CiscoLucent

Williams

...A Single Super-Industry –Call It “Digispace”– With Few Intra-Industry Barriers to Entry, Cable, Wireless and Internet-BasedTechnologies Enabling Entry by Start-Ups, Industry IncumbentsAnd Firms From Other IndustriesThought Previously to Be “Unrelated.”

Excel

MediaOne/AT&T

MCI

Zephyr

Cisco

Lucent WorldCom

Bell Atlantic/GTE/Verizon

RCNSprint

ABC/Disney

Fox

CBS

Time-Warner

Qwest

Level3

Motorola Motorola Microsoft

Williams Enron

DIGISPACE

Hello to an Emerging “New Regime” for Telecoms in the US...1.3

Telecommunications IndustrySegments SeparatedBy Regulation and TransformedBy Selected Competitive Entry,

Which Then Becomes…

POST “BREAK-UP” TELECOMMUNICATIONSINDUSTRY SEGMENTS

And The “New Regime” for Telecoms in the US Means New Corporate Configurations...1.4


Fringe Players

Local Carriers

AT&T

Long-DistanceCarriers

MCI Sprint


Fringe Players

Local Carriers

AT&T’s Vertically and Horizontally-Integrated Monopoly on the USTelecommunications Industry inThe 1970’s Drew Legal (Anti-Trust)Challenge.

How Would AT&T Compete After the Old Regime Was Destroyed?




Fringe Players

Local Carriers

AT&T


MCI Sprint


Fringe Players

Local Carriers




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)

DIGISPACE

AT&T

Digi-Platfirm



Fringe Players

Local Carriers

AT&T


MCI Sprint


Fringe Players

Local Carriers




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)

DIGISPACE

AT&T

Digi-Platfirm

AOL/Time-Warner

Digi-Contentcorp

But AT&T is Not Alone..



Fringe Players

Local Carriers

AT&T


MCI Sprint


Fringe Players

Local Carriers




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)

DIGISPACE

AT&T

Digi-Platfirm1

AOL/Time-Warner

Digi-Contentcorp

But AT&T is Not Alone..

Verizon

Digi-Platfirm2

And The “New Regime” for Telecoms in the US Means Disruptive Technologies, Rivals

and Economics...1.8


Fringe Players

Local Carriers

AT&T


MCI Sprint


Fringe Players

Local Carriers

RBOCs Became “Baby Bells” With De Jure and De Facto Protection FromWould-Be Rivals

What Happened to These Babies?



and Economics...1.9


Fringe Players

Local Carriers

AT&T


MCI Sprint


Fringe Players

Local Carriers




Verizon’s Story Is Illustrative:•Mergers & Acquisitions (e.g., Bell Atlantic, NYNEX, GTE), But…

DIGISPACE

Verizon

Digi-Platfirm2


and Economics...1.10


Fringe Players

Local Carriers

AT&T


MCI Sprint


Fringe Players

Local Carriers




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?

DIGISPACE

Verizon

Digi-Platfirm2

Zephyr Communications(Niche Internet Telephony

For USBusines: 1/9 Verizon’sUnit Operating Costs

Smaller,More Efficient

Rivals

And the “Ancien Regime” of Telecoms in Europe...1.11

In the 1980’s, Several TelecomsWere Still Organized Like PoliticalAgencies/Ministries; Some Had Become Corporatized SOEs; A FewHad Been Privatized; None FacedReal Competition. 20 Years On…

Italy

Telecom Italia

France

France TelecomSpain

Britain

Germany

DeustcheTelekom

Telefonica

British Telecom

EVEN MORE STAID, AND STATE-DOMINATED THAN IN THE US

Mercury

Has Been Replaced by Telecoms Industry Revolutions...1.11

In the 1980’s, Several TelecomsWere Still Organized Like PoliticalAgencies/Ministries; Some Had Become Corporatized SOEs; A FewHad Been Privatized; None FacedReal Competition. 20 Years On…

•Meaningful Privatization, Liberalization•Profitability Focus•Cross-Border Investment (andInvestors)•Assertive Corporate Overseers•Internal Diversification, Spin-Offs•Organizational, TechnologicalExperimentation (Alliances, WAP, GSM)

Italy

Telecom Italia

France

France TelecomSpain

Germany

DeustcheTelekom

Telefonica

MORE VARIED EXPERIMENTATION, MORE PROFOUND RATE OF STRUCTURAL CHANGE

COMPARED TO US

Britain

British Telecom

Mercury

Smaller National

Wireless Firms

Larger Regional Wireless Firms

Attempted Alliances

AttemptedMergers

1.12

Creative Destruction of Telecoms 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).

1.13

Creative Destruction of Telecoms 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

1.14

Outline of Sessions 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.




October 25-26, 2000

The Creative Destruction of TelecomsLee W. McKnightAssociate Professor ofInternational Communications


What Is Creative Destruction? 2.1

The Concept: New ConfigurationsThat Change (Favorably) A Firm’sProduction Function.•Innovation vrs. Invention•Subjective Definitions•“Ad-Man” Mis-Applications



Applications: Describe IndividualFirm and National Rivalry.Explain Changes In Industry Structure (Monopoly vrs. Non-Monopoly Structures).Justify Intellectual PropertyProtection Regimes.



Applications: Describe IndividualFirm and National Rivalry.Explain Changes In Industry Structure (Monopoly vrs. Non-Monopoly Structures).Justify Intellectual PropertyProtection Regimes.

Schumpeterian Articu-lation in 1930s-1940s

Neo-Schumpeterian

Revival (*Helpman,1998)

*Helpman, E. (ed.) (1998), General Purpose Technologies and Economic Growth, MIT Press, Cambridge, MA,

Market and Industry Concepts2.4

Market: Groupings of FirmsWhose Products Are CloseSubstitutes from Consumers’ Perspective.

Industry: Groupings of Firmswith Same or Similar Productsor Production Technologiesfrom Suppliers’ Perspective

Market: Cross-PriceElasticity of Demand

Industry: Standard IndustrialClassifications (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

Ec= dQx * Py

dPy Qx

High Elasticity (+ or -) Implies Inclusion in Same Market. Low Elasticity Implies Separate Markets

Also Think About Naïve Concepts ofof Market and Industry Definition:Ask Experts, Geography, Inspection

Market and Industry Measures2.5


Elasticity as Customer Loyalty in the Internet Economy

Structure-Conduct-Performance Model: Explained

Main Point: Structure Is Mainly About the Number of FirmsIn the Industry. Few Firms Mean the Ability to Coordinate onPrice, Quantity and Certain “Strategic Levers”, and the Abilityto Erect Entry Barriers and Gain “Above Normal” Returns Compared to Other Less-Concentrated Industries

Concentration Ratio (CR4)

25%

50%

75%

100%

1 2 3 4 5 Firms

% Sales

First 4 Firms in Industry (CR4)Comprise 77%of Industry Sales

Hirfendahl-Hirschman Index (HHI)

Sum the Squared Firm Market Shares:si

2

The higher the HHI number the moreconcentrated (and potentially collusive)the industry is.

Conclusion: Structure-as- Concentration Matters


5-Forces Expansion of the Entry (Mobility) Barriers Concept

IndustryRivalry

Customers

Substitutes

Suppliers

Potential Entrants

Each RelationshipMediated by Barriersand Bargaining Power

Primus Inter Pares

Market and Industry Analytics2.8

*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

Intra-Industry Strategic Groups


Intra-Industry Strategic Groups in RevolutionaryEurope


Common Problem with Traditional Market and Industry Analytics

Structure

Conduct

Performance

5 Forces

PotentialEntrants

Customers

Substitutes

Suppliers

Incumbents

All Three Models Assume that Structural Factors at Industryor Sub-Industry Level are Fixed. Creative DestructionImplies Greater Structural Fluidity, Industry Heterogeneity

2.11

Telecom’s Digispace Fluidity

In Telecom’s Digital Industry Space, Entry and Mobility Barriers Rise and Fall Unpredictably.

What If France Telecom Spins Off:•Media•Phone-Book•Wireless•Fixed Line Network

2.12

Telecom’s Digispace Fluidity

In Telecom’s Digital Industry Space, Entry and Mobility Barriers Rise and Fall Unpredictably.

What If Smaller Privatizing TelecomsAlly or Partially Merge :•Scale Economies•Regional Scope Economies

2.13

Digispace Trends: Mov’t Towards Content

Infrastructure Software/Content

OtherWirelessFirms

NTT-Do-Co-Mo

Industry Segment Becomes More Competitive and Less Profitable:Managers Look for New and More Profitable Segments

2.14

Digispace Trends: Mov’t towards Content

Infrastructure Software/Content

Other WirelessFirms

NTT- Do-Co-Mo

Mobility Barriers Suddenly Fall: Managerial Insight; LowCost Design Assets

2.15

Digispace : Cognitive Creative Destruction

CiscoLucent

AT&T

Bertelsmann Bell Atlantic-VerizonAnderson

Consulting

Alcatel

Toshiba

3Com

Sony

IBM

TCI

Intel

Time Warner

McCaw

Viacom

Computer Associates

Motorola

NBC

New York Times

Canon

Hitachi

NEC

Kodak

Matsushita

Nintendo

Hughes

Polygram

AppleLotus

Netscape

Silicon Graphics

Oracle

Microsoft

Siemans

Disney

Software Solutions Networking Equip Entertainment

Internetworking Software Imaging/Display Communications Services

EDS

2.16

Strategic Managers Make Investments Based onView of Industry and Sub-Industry Structures...

...And in the Process, TheyChange the Structure for TheirDirect and Indirect Rivals

Bottom Line: Strategic ManagersRecognize That Telecoms Industry and Sub-Industry Structures are Increasingly Turbulent Due Even to Managerial Cognition

Digispace : Cognitive Creative Destruction

2.17

The Importance of Unstable TurbulentFactors for Business Unit Performance

How much of the Variance in Profits of a Businessare Explained by: 1. Macro-Economic Factors2. Corporate Factors3. Stable Industry Factors4. Stable Strategic Group Factors5. Stable Business Unit Factors6. Turbulent (Year-to-Year) Industry Factors7. Turbulent Strategic Group Factors8. 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)

2.18


Verizon Wireless Communications

Telecoms

Wireless

BA-GTE--Verizon

Stable: ME1.___C2. ____ I3. _____ SG4. _____ BU5. ____Turbulent: I6.___ SG7. ____ BU8. _____

2.19


Stable: ME1. 1% C2. ____ I3. _____ SG4. _____ BU5. ____Turbulent: I6.___ SG7. ____ BU8. _____


Telecoms

Wireless

BA-GTE--Verizon

2.19


Stable: ME1. 1% C2. 8% I3. _____ SG4. _____ BU5. ____Turbulent: I6.___ SG7. ____ BU8. _____


Telecoms

Wireless

BA-GTE--Verizon

2.19


Stable: ME1. 1% C2. 8% I3. 2% SG4. _____ BU5. ____Turbulent: I6.___ SG7. ____ BU8. _____


Telecoms

Wireless

BA-GTE--Verizon

2.19


Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. ____Turbulent: I6.___ SG7. ____ BU8. _____


Telecoms

Wireless

BA-GTE--Verizon

2.19


Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. 4%Turbulent: I6.___ SG7. ____ BU8. _____


Telecoms

Wireless

BA-GTE--Verizon

2.19


Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. 4% Turbulent: I6. 17% SG7. ____ BU8. _____


Telecoms

Wireless

BA-GTE--Verizon

2.19


Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. 4%Turbulent: I6. 17% SG7. 35% BU8. _____


Telecoms

Wireless

BA-GTE--Verizon

2.19


Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. 4%Turbulent: I6. 17% SG7. 35% BU8. 29% = 100%


Telecoms

Wireless

BA-GTE--Verizon

2.19




Telecoms

Wireless

BA-GTE--Verizon

2.20 Bottom Line: In Turbulent IndustriesShort-Term Intra-Industry GroupStructures (e.g., Alliances), and Short-Term Idiosyncratic BusinessUnit Factors Matter Most.




Telecoms

Wireless

BA-GTE--Verizon

2.21 Bottom Line: In Turbulent IndustriesShort-Term Intra-Industry GroupStructures (e.g., Alliances), and Short-Term Idiosyncratic BusinessUnit Factors Matter Most.

Surprisingly,Corporate Effects Matter Little

2.22

Creative Destruction and the Telecoms Industry: Implications

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.




October 25-26, 2000

Responding to Creative DestructionLee W. McKnightAssociate Professor ofInternational Communications


3.1

Creative Destruction and the Telecoms Industry: Firm Responses

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

Telecommunications Privatization: A Spectrum of PolicyChoices

Manage- ment

Contracts(MC)

Perfor- mance- Based

MCs

BOT and Con- cession

Leasing

Supply and Civil

WorksContracts

Technical Assistance

Contracts

Sub- Contract-

ing BOO

Dives- titure

Public Responsibility for Investments and Risk Allocation Private 0 Duration (Years) of Private Involvement

3.2

Privatization: What Is It?

Shift In Control and Ownership Rights From State to Private Hands

Privatization: Economic Theory

Costsand Revenues

0

Demand

Price(PrivateMonopolist)

Marginal Cost (MC=AC)(State-Owned, Welfare Maximizing)

Marginal Cost(Private-OwnedProfit Max’ing)

Quantity QuantityProduced Produced(Private (State Monopolist) Monopolist)

MarginalRevenue

Price(StateMonopolist)

Important Model Assumptions:Price and Quantity Marginal Cost Meets Demand(For State-Regulated Monopolist)Price and Quantity Marginal Revenue Meets Marginal Cost (For Unregulated Private Monopolist)

3.2


Costsand Revenues

0

Demand





MarginalRevenue



Overall Revenue for State-Owned Monopolist

3.3


Costsand Revenues

0

Demand





MarginalRevenue



Overall Costs for State-Owned Monopolist

3.4


Costsand Revenues

0

Demand





MarginalRevenue



Overall Revenues forPrivate Monopolist

3.5


Costsand Revenues

0

Demand





MarginalRevenue



Overall Costs for Private Monopolist

Overall Profits forPrivate Monopolist

3.6


Costsand Revenues

0

Demand





MarginalRevenue



3.7


Costsand Revenues

0

Demand





MarginalRevenue

Welfare Gain From ProductiveEfficiency Increase Due To:1) Simplified and Alligned Incentives.2) Market for Managerial Talent3) Highest Use (for Shareholders) of Assets



3.8


Costsand Revenues

0

Demand





MarginalRevenue




3.9


Costsand Revenues

0

Demand





MarginalRevenue


Welfare Loss From Allocative Efficiency Decrease Due To:1) Diminution of Non-Shareholder Interests2) Drop Less Profitable Routes



3.9


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)

3.10

Privatization: Organizational Theory

ExecutiveManagement

LineManagement

Looking Out forEnterprise’s Interests(Agents)

Enterprise’s Board(Corporatized or

Newly-Privatized)

Looking Out forFirm’s Interests(Principals)

3.11

Privatization: Empirical Implications

ExecutiveManagement

LineManagement

Looking Out forEnterprise’s Interests(Agents)

Enterprise’s Board(Corporatized or

Newly-Privatized)

Looking Out forFirm’s Interests(Principals)

Implication 1But The Board MayHave State RepresentativesUltimately Responsible toa Minister Rather Than toPrivate Individual or Institution. Result: Misalligned Incentivesand Poor Oversight of Management

Other ImplicationsLingering State OwnershipMay Be Positively (Shleifer & Vishny, 1998) or Negatively (Vaaler, 2000) Correlated WithPerformance.

3.11

What’s A New Product Pioneer? AnExample 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” AssetsThe First to Enter and Invest in “Complementary” Assets(Pioneer):(Pioneer):•Distribution ChannelsDistribution Channels•Components Manufacturing AgreementsComponents Manufacturing Agreements•Marketing and Equipment StandardsMarketing and Equipment Standards

3.12

First Mover AdvantagesCase 1 Case 2

Innovation:

Rankings:

1st

2nd

3rd

4th

Micro-Miniature Cell Phone 2nd Generation Cell Phone

Learning Curve Barriers Pre-emption Barriers

Behavioral Barriers Behavioral Barriers

Scale Economies Barriers Scale Economies Barriers

Pre-emption Barriers Learning Curve Barriers

3.13

Understanding First Mover AdvantagesConceptual Framework

Environmental Opportunity

3.14

Understanding First Mover AdvantagesConceptual Framework


First Mover•Resources•Capabilities

CompetitiveStrategy

Late Entrant•Resources•Capabilites

CompetitiveStrategy

3.14



CompetitiveStrategy

Late Entrant•Resources•Capabilities

CompetitiveStrategy

First Mover Positional AdvantagesCost Differentiation

LearningCurve

Behavioral•Reputation•Switching Cost

ScaleEconomies

Preemption•Legal•Non-Legal

Understanding First Mover AdvantagesConceptual Framework3.14



CompetitiveStrategy


CompetitiveStrategy


LearningCurve


ScaleEconomies

Pre-emption•Legal•Non-Legal

Late Entrant Advantages•imitation costs•free-rider effects•shifting industrial and techno-•logical factors•learning from first mover




CompetitiveStrategy


CompetitiveStrategy


LearningCurve


ScaleEconomies

Pre-emption•Legal•Non-Legal

Late Entrant Advantages•imitation costs•free-rider effects•shifting industrial and techno-logical factors•learning from first mover

Overall Magnitude of competitive Advantage

First Mover Performance -Profits -Market Share -Pricing -Other

+ + + + -

+ -


What if Two Pioneers Innovate Simultaneously But With Incompatibility?

The Hold or Fold Game

British Satellite Broadcasting (“BSB”) vs. Sky TelevisionIn the 1980’s.

Fog of War- Establishing Standards- Guessing Your Rivals Intent- Reputation for Toughness

3.15

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

3.16

Key Implications: Creating and Measuring Value in Telecoms3.17

T u r k e y

P o l i t i c a l S t a b i l i t y

B u d g e t a r y C o n c e r n s

F o r e i g n P o l i c y ( e . g . , E U )

T e l e c o m s S e c t o r

R e g u l a t o r y R e g i m e

I n d u s t r y S t r u c t u r e

T e c h n o l o g i c a l F a c t o r s

L o w T e l e c o m s D e v e l o p m e n t

A N T - T h r e e D i m e n s i o n s o f I d i o s y n c r a s i e s

- T h r e e D i m e n s i o n s o f I d i o s y n c r a s i e s

A N T

P r o d u c t a n d P r i c i n g A u t o n o m y

O r g a n i z a t i o n a l E ff i c i e n c y

C o r p o r a t e G o v e r n a n c e

C a p i t a l I n v e s t m e n t

C o r p o r a t e D i v e r s i fi c a t i o n

P o t e n t i a l I n v e s t o r P e r c e p t i o n s : 1 ) S t r a t e g i c I n v e s t o r s ( e . g . , E U T E L ) 2 ) F u n d I n v e s t o r s ( e . g . , B O W ) 3 ) S l e e p i n g I n v e s t o r s ( e . g . , N A L I )

Key Implications: Creating and Measuring Value in Telecoms3.18

T u r k e y

P o l i t i c a l S t a b i l i t y

B u d g e t a r y C o n c e r n s

F o r e i g n P o l i c y ( e . g . , E U )

T e l e c o m s S e c t o r

R e g u l a t o r y R e g i m e

I n d u s t r y S t r u c t u r e

T e c h n o l o g i c a l F a c t o r s

L o w T e l e c o m s D e v e l o p m e n t

A N T - T h r e e D i m e n s i o n s o f I d i o s y n c r a s i e s

- T h r e e D i m e n s i o n s o f I d i o s y n c r a s i e s

A N T

P r o d u c t a n d P r i c i n g A u t o n o m y

O r g a n i z a t i o n a l E ff i c i e n c y

C o r p o r a t e G o v e r n a n c e

C a p i t a l I n v e s t m e n t

C o r p o r a t e D i v e r s i fi c a t i o n

P o t e n t i a l I n v e s t o r P e r c e p t i o n s : 1 ) S t r a t e g i c I n v e s t o r s ( e . g . , E U T E L ) 2 ) F u n d I n v e s t o r s ( e . g . , B O W ) 3 ) S l e e p i n g I n v e s t o r s ( e . g . , N A L I )

Given the Turbulence Engendered by Creative DestructionWe 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

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

3.20

Documents

Internet Economics and the Creative Destruction of Telecoms A Fletcher School Short-Course Instituto Superior Tecnico Lisboa, Portugal October 25-26, 2000