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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
RBOCse.g., Bell Atlantic
Fringe Players
Local Carriers
AT&T
Long-DistanceCarriers
MCI Sprint
RBOCse.g., Bell Atlantic
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?
TRADITIONAL TELECOMMUNICATIONSINDUSTRY STRUCTURE
And The “New Regime” for Telecoms in the US Means New Corporate Configurations...1.5
RBOCse.g., Bell Atlantic
Fringe Players
Local Carriers
AT&T
Long-DistanceCarriers
MCI Sprint
RBOCse.g., Bell Atlantic
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?
TRADITIONAL TELECOMMUNICATIONSINDUSTRY STRUCTURE
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
And The “New Regime” for Telecoms in the US Means New Corporate Configurations...1.6
RBOCse.g., Bell Atlantic
Fringe Players
Local Carriers
AT&T
Long-DistanceCarriers
MCI Sprint
RBOCse.g., Bell Atlantic
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?
TRADITIONAL TELECOMMUNICATIONSINDUSTRY STRUCTURE
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..
And The “New Regime” for Telecoms in the US Means New Corporate Configurations...1.7
RBOCse.g., Bell Atlantic
Fringe Players
Local Carriers
AT&T
Long-DistanceCarriers
MCI Sprint
RBOCse.g., Bell Atlantic
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?
TRADITIONAL TELECOMMUNICATIONSINDUSTRY STRUCTURE
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
RBOCse.g., Bell Atlantic
Fringe Players
Local Carriers
AT&T
Long-DistanceCarriers
MCI Sprint
RBOCse.g., Bell Atlantic
Fringe Players
Local Carriers
RBOCs Became “Baby Bells” With De Jure and De Facto Protection FromWould-Be Rivals
What Happened to These Babies?
TRADITIONAL TELECOMMUNICATIONSINDUSTRY STRUCTURE
And The “New Regime” for Telecoms in the US Means Disruptive Technologies, Rivals
and Economics...1.9
RBOCse.g., Bell Atlantic
Fringe Players
Local Carriers
AT&T
Long-DistanceCarriers
MCI Sprint
RBOCse.g., Bell Atlantic
Fringe Players
Local Carriers
RBOCs Became “Baby Bells” With De Jure and De Facto Protection FromWould-Be Rivals
What Happened to These Babies?
TRADITIONAL TELECOMMUNICATIONSINDUSTRY STRUCTURE
Verizon’s Story Is Illustrative:•Mergers & Acquisitions (e.g., Bell Atlantic, NYNEX, GTE), But…
DIGISPACE
Verizon
Digi-Platfirm2
And The “New Regime” for Telecoms in the US Means Disruptive Technologies, Rivals
and Economics...1.10
RBOCse.g., Bell Atlantic
Fringe Players
Local Carriers
AT&T
Long-DistanceCarriers
MCI Sprint
RBOCse.g., Bell Atlantic
Fringe Players
Local Carriers
RBOCs Became “Baby Bells” With De Jure and De Facto Protection FromWould-Be Rivals
What Happened to These Babies?
TRADITIONAL TELECOMMUNICATIONSINDUSTRY STRUCTURE
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.
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 TelecomsLee W. McKnightAssociate Professor ofInternational Communications
Paul M. VaalerAssistant Professor ofInternational Business
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
What Is Creative Destruction? 2.2
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.
What Is Creative Destruction? 2.3
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.
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
Market and Industry Measures2.6
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
Market and Industry Measures2.7
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
Market and Industry Analytics2.9
Intra-Industry Strategic Groups in RevolutionaryEurope
Market and Industry Analytics2.10
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
The Importance of Unstable TurbulentFactors for Business Unit Performance
Verizon Wireless Communications
Telecoms
Wireless
BA-GTE--Verizon
Stable: ME1.___C2. ____ I3. _____ SG4. _____ BU5. ____Turbulent: I6.___ SG7. ____ BU8. _____
2.19
The Importance of Unstable TurbulentFactors for Business Unit Performance
Stable: ME1. 1% C2. ____ I3. _____ SG4. _____ BU5. ____Turbulent: I6.___ SG7. ____ BU8. _____
Verizon Wireless Communications
Telecoms
Wireless
BA-GTE--Verizon
2.19
The Importance of Unstable TurbulentFactors for Business Unit Performance
Stable: ME1. 1% C2. 8% I3. _____ SG4. _____ BU5. ____Turbulent: I6.___ SG7. ____ BU8. _____
Verizon Wireless Communications
Telecoms
Wireless
BA-GTE--Verizon
2.19
The Importance of Unstable TurbulentFactors for Business Unit Performance
Stable: ME1. 1% C2. 8% I3. 2% SG4. _____ BU5. ____Turbulent: I6.___ SG7. ____ BU8. _____
Verizon Wireless Communications
Telecoms
Wireless
BA-GTE--Verizon
2.19
The Importance of Unstable TurbulentFactors for Business Unit Performance
Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. ____Turbulent: I6.___ SG7. ____ BU8. _____
Verizon Wireless Communications
Telecoms
Wireless
BA-GTE--Verizon
2.19
The Importance of Unstable TurbulentFactors for Business Unit Performance
Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. 4%Turbulent: I6.___ SG7. ____ BU8. _____
Verizon Wireless Communications
Telecoms
Wireless
BA-GTE--Verizon
2.19
The Importance of Unstable TurbulentFactors for Business Unit Performance
Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. 4% Turbulent: I6. 17% SG7. ____ BU8. _____
Verizon Wireless Communications
Telecoms
Wireless
BA-GTE--Verizon
2.19
The Importance of Unstable TurbulentFactors for Business Unit Performance
Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. 4%Turbulent: I6. 17% SG7. 35% BU8. _____
Verizon Wireless Communications
Telecoms
Wireless
BA-GTE--Verizon
2.19
The Importance of Unstable TurbulentFactors for Business Unit Performance
Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. 4%Turbulent: I6. 17% SG7. 35% BU8. 29% = 100%
Verizon Wireless Communications
Telecoms
Wireless
BA-GTE--Verizon
2.19
The Importance of Unstable TurbulentFactors for Business Unit Performance
Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. 4%Turbulent: I6. 17% SG7. 35% BU8. 29% = 100%
Verizon Wireless Communications
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.
The Importance of Unstable TurbulentFactors for Business Unit Performance
Stable: ME1. 1% C2. 8% I3. 2% SG4. 4% BU5. 4%Turbulent: I6. 17% SG7. 35% BU8. 29% = 100%
Verizon Wireless Communications
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.
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 DestructionLee W. McKnightAssociate Professor ofInternational Communications
Paul M. VaalerAssistant Professor ofInternational Business
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
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)
Overall Revenue for State-Owned Monopolist
3.3
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)
Overall Costs for State-Owned Monopolist
3.4
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)
Overall Revenues forPrivate Monopolist
3.5
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)
Overall Costs for Private Monopolist
Overall Profits forPrivate Monopolist
3.6
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)
3.7
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
Welfare Gain From ProductiveEfficiency Increase Due To:1) Simplified and Alligned Incentives.2) Market for Managerial Talent3) Highest Use (for Shareholders) of Assets
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)
3.8
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
Welfare Gain From ProductiveEfficiency Increase Due To:1) Simplified and Alligned Incentives.2) Market for Managerial Talent3) Highest Use (for Shareholders) of Assets
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)
3.9
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
Welfare Gain From ProductiveEfficiency Increase Due To:1) Simplified and Alligned Incentives.2) Market for Managerial Talent3) Highest Use (for Shareholders) of Assets
Welfare Loss From Allocative Efficiency Decrease Due To:1) Diminution of Non-Shareholder Interests2) Drop Less Profitable Routes
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)
3.9
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)
3.10
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
Environmental Opportunity
First Mover•Resources•Capabilities
CompetitiveStrategy
Late Entrant•Resources•Capabilites
CompetitiveStrategy
3.14
Environmental Opportunity
First Mover•Resources•Capabilities
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
Environmental Opportunity
First Mover•Resources•Capabilities
CompetitiveStrategy
Late Entrant•Resources•Capabilites
CompetitiveStrategy
First Mover Positional AdvantagesCost Differentiation
LearningCurve
Behavioral•Reputation•Switching Cost
ScaleEconomies
Pre-emption•Legal•Non-Legal
Late Entrant Advantages•imitation costs•free-rider effects•shifting industrial and techno-•logical factors•learning from first mover
Understanding First Mover AdvantagesConceptual Framework3.14
Environmental Opportunity
First Mover•Resources•Capabilities
CompetitiveStrategy
Late Entrant•Resources•Capabilites
CompetitiveStrategy
First Mover Positional AdvantagesCost Differentiation
LearningCurve
Behavioral•Reputation•Switching Cost
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
+ + + + -
+ -
Understanding First Mover AdvantagesConceptual Framework3.14
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