A brief illustrated discourse on the concept of "large" in the context of mobile telephony

Citation

Curwen, P. (2005), "A brief illustrated discourse on the concept of "large" in the context of mobile telephony", info, Vol. 7 No. 1. https://doi.org/10.1108/info.2005.27207aab.001

A brief illustrated discourse on the concept of "large" in the context of mobile telephony

A regular column on the information industries

A brief illustrated discourse on the concept of "large" in the context of mobile telephony

Introduction

As most readers will be only too well aware, being “large” is generally considered to be a virtue in an industrial context, as indeed is being “larger” than some other body corporate and especially being the “largest” of all. The problem is that there is no single definition of “largeness” that suits everyone at the same time, so the terms “larger” and “largest” can be happily bandied about in the reasonably secure knowledge that, if challenged, the originator of the term can find some indicator, however trivial, to support its use. It is worthy of note that in the vast majority of cases when any of these terms are used in the media or reported on the internet, they are used in a non-specific context: Whatever indicator is in the mind of the author is omitted, possibly deliberately but often because no real thought has been given to the matter. However, this tends to have the unfortunate side-effect that, once printed, the assertion is treated as “gospel” and hence repeated verbatim by all those who see no further need to check the facts for themselves.

Some readers may feel that this is just semantics, and that it really does not matter how the terms are used; Wal-Mart is large, the corner shop is not. However, those who are interested in the concept of competition would doubtless disagree since it a fundamental issue in anti-trust that one needs to define the term the term “market” very carefully indeed, and measure the market shares of the companies within it even more carefully, if one is to arrive at meaningful decisions about the existence of market power and its (potential) abuse.

Largeness in a generalised context

If one approaches the issue of largeness in a generalised context, it seems to be sensible to measure it from a financial perspective. After all, that is anyway the common perspective from which all companies must be viewed for a whole variety of bureaucratic purposes. Thus it is, for example, that most financial magazines that wish to make cross-sectoral comparisons home in on revenue as the most appropriate indicator. This is understandable since a company that has annual revenues of $100 million is surely larger in any meaningful sense than one with annual revenues of $1 million. Unhappily, however, this straightforward and intuitively appealing approach falls down on a number of counts. In the first place, there is absolutely no direct connection between revenue and profit. It is no accident that some of the companies with the largest revenues are also some of the least profitable, yet it is difficult to understand who – apart from a company’s board when it best suits their purposes – would choose to measure its success in terms of its revenue in preference to its profit.

Naturally, it may be argued that profit is a very slippery term and that it anyway varies according to the accounting conventions being adopted. Quite so, but that does not mean that revenue is by definition a more straightforward term. One of the obvious objections to the use of both profit and revenue is that they can only be counted on an intermittent basis – the minimum realistic period is quarterly and quarterly data are invariably subject to retrospective adjustment, sometimes on a heroic scale. Hence, it is fairly easy to move revenue from one quarter to the next, forwards or backwards, to “clean up” the accounts. After all, for example, once a contract is signed it seems reasonable, does it not, to register its value as revenue in the accounts even though the money has yet to flow in; or possibly not. Naturally, the accounting conventions can deal with the rightness or otherwise of such practices, and naturally auditing is an exact science so there can be no slippage – but did someone mention WorldCom and Global Crossing[1]?

Anyone who, like this author, simply cannot go along with measuring largeness using either revenue or profit as the indicator, yet who wishes to keep the faith with financial measures of largeness, is left with a limited choice, especially given the need for data availability. The most sensible solution seems to be to concentrate upon the market value, or capitalisation, of a company, since that can at least be measured on a daily basis according to fluctuations in the share price. There are still difficulties, not least because company shares only have a monetary value when they are actually sold, otherwise there is simply a ledger entry, and it goes without saying that if all shareholders chose to sell simultaneously the ledger value of a company would not even begin to be realised in terms of actual money. In effect, one is left making the best of a bad job.

The issue in the context of mobile telephony

This issue of defining largeness is particularly interesting in the context of the mobile telephony sector because here we have an alternative, and evidently superior, way to proceed, namely counting the customers. Of course, one can count the customers of any business, but there are problems of interpretation in many other industries which render the method unhelpful. For example, the number of customers may be very small, and hence fairly insignificant variations in the absolute number over time can appear to be excessively significant when expressed in proportionate terms. Equally, a supermarket customer may simply want to buy one item for under $1 while another is intent upon a monthly shop worth $200. Mobile telephony tends not to show such variability because, for example, a contract customer is paying a fixed minimum sum monthly and will tend to keep close to the number and type of free minutes available in the chosen package precisely because it was chosen to reflect the customer’s known usage pattern. Equally, most pre–paid customers are unlikely to run up huge bills otherwise they would be better off on a contract.

Another obvious virtue of counting mobile customers is that in many countries this is a growth sector and the increase in the customer base gives a good guide to the health of the operator. Allowance needs to be made for the fact that as the penetration ratio grows there is a tendency for poorer customers to be signed up, and the average revenue per user (ARPU) tends to fall, but if ARPU is watched alongside the number of customers this can be much more illuminating than any financial indicator such as profit. This is not to imply that all measurement problems suddenly disappear; they do not. For example, there is the thorny issue of how to define an “active” customer. Some operators choose to count anyone who has bought a pre-paid card even if no calls are either made or received. Others restrict the time period such that if no call is made and/or received within so many months the customer is deemed not to exist. As of the time of writing, there is no uniformity concerning this matter which is largely left to the discretion of individual operators.

Nevertheless, measurement is necessarily an imperfect science, and the goal is to choose the best indicator that is available, so in the case of largeness the number of customers has obvious virtues both in an absolute and a relative context. Unfortunately, a very awkward issue now intrudes, namely the tendency for almost all reports to cite the number of gross subscribers involved in any network with which a mobile operator has a connection[2,3]. In other words, if operator X has a one per cent stake in operator Y it credits itself (or is credited) with the whole of Y’s customer base. Only a handful of operators are scrupulous about this matter[4], taking care only to cite proportionate customers – that is, multiplying the gross number of subscribers by the proportion of the shares held. Vodafone is a particularly good example since it not merely makes the correction but makes the numbers easily accessible on its web site.

Another awkward issue arises where certain overseas mobile subsidiaries are for various reasons “owned” by a fixed-wire operator rather than its mobile subsidiary. Here again, if the parent wholly owns its domestic subsidiary it makes no real difference if they are treated as one, but this is not always the case – cf. Telefónica and Telefónica Móviles.

Does this distinction between gross and proportionate matter? Yes, it does. Consider, for example, the recent debate about the consequences of Telefónica’s offer to acquire the Latin American networks of BellSouth. Not one single public domain report managed to get the figures right on this, either because all of the data were quoted gross or because the proportionate figures were incorrect. This was invariably the case for Vivo where, given that Vivo is a 50/50 joint venture between Telefónica and Portugal Telecom, each was credited with half of the gross figure. The possibility that everything contributed to a joint venture is not necessarily wholly owned by the contributors appears to be beyond the imagination of most commentators. As a result, almost all of the commentary drew incorrect conclusions about how the takeover would affect the competitive landscape for mobile telephony in Latin America.

So which mobile operators are, in fact large, and, importantly, is there any tendency for them to hold a dominant position in specific regions of the world? Table I attempts to address this latter question, with supporting evidence from a selection – limited for reasons of space – of the databases for individual operators (Tables II-VII). Whether Table I contains surprises rather depends upon the pre-conceptions of the reader, but a few brief comments are in order. First, although there are a “big four” among the European operators, one, Telefónica, has no European GSM networks other than in Spain. Nor is it as large in Latin America as is commonly supposed, although the acquisition of the BellSouth assets will make a difference. Secondly, the African market is becoming extremely competitive, with a number of as yet fairly small-scale operators rapidly building up a presence there. Thirdly, the vast majority of customers in Asia and Australasia belong to domestic operators. So far, operators have been very wary of muscling in on each others’ territories.

Table I Top operators¹ by area, 31 December 2003

Table II Gross/proportionate subscribers: T-Mobile & Orange, 31 December 2003

Table III Gross/proportionate subscribers: Vodafone & mmO₂, 31 December 2003

Table IV Gross/proportionate subscribers: TeliaSonera and Telenor, 31 December 2003

Table V Gross/proportionate subscribers: Telefónica & BellSouth, 31 December 2003

Table VI Gross/Proportionate Subscribers: América Móvil & Telecom Italia Mobile, 31 December 2003

Table VII Gross/Proportionate Subscribers: Vodacom and MTN, 31 December 2003

Notes1. There is also the awkward issue of Internet start-ups that earn no revenues of any consequence yet are deemed to be highly valuable because of their potential many years down the line. It was to accommodate these that the concept of ebitda – earnings before interest, tax, depreciation and amortisation – was invented since it made everything appear to be so much better at a stroke. However, now that so many ebitda-valued companies have gone bankrupt, there are increasing numbers of analysts who prefer to keep their eyes on something more tangible such as cash flow.2. Which is nothing compared to the problem of dealing with reports that throw in the fixed-wire and possibly other customers as well without pointing out – assuming they know – that this is the case. For example, this invariably happens with Tele2 and is a major source of confusion.3. Another source of confusion arises when certain networks mysteriously fail to get a mention. This is surprisingly common even in official company accounts.4. Which is clearly not relevant if an operator has no overseas subsidiaries.

Peter CurwenVisiting Professor of Telecommunications, Strathclyde Business School, Glasgow, UK. E-mail pjcurwen@hotmail.com