The Mexican telecoms and broadcasting magnate Carlos Slim — the wealthiest man in the world and owner of the business conglomerate Grupo Carso — has put a 28% bid for the Netherlands' incumbent telco KPN on the table. This is a very interesting and significant move. As is often the case, new winners tend to arrive when previous winners become losers, especially when they are becoming weaker and thus easier to attack. The new winners in the 21st century will come from what in the 20th century were called developing countries. In the communications sector in particular we have seen that these countries — be they in Africa, Asia or South America — have seen the most spectacular growth. Because of their very large populations, growth in these markets adds up to very big numbers.
For several years now I've argued that it is only a matter of time before these new telco giants will enter the so-called developed economies. Now is a good time: developed economies are under pressure, there is lots of hardship and a desperate need to save money. Yet at the same time people do not want to give up their gains in lifestyle. Mobile phones are a case in point — survey after survey show that consumers would cut back on meals out and other entertainment rather than reduce expenditure on mobile comms.
One of the reasons for confidence in predictions on 'foreign invasions' is that mobile operators in developing economies are amongst the most profitable in the world, with among the lowest costs to consumers. This is certainly an attractive position from which to start your competition, especially in depressed economies. One of the key reasons why these companies are in such a good position is because of their scale. With mobile rapidly becoming a commodity, and little possibility for mobile operators to increase ARPU, these players have to become far more cost effective, and they will have to grow their subscriber base to 50 million or more.
We believe that, rather than looking at the weakest markets in Europe, Mr Slim is clearly looking at the stronger markets — which nevertheless are also economically depressed — since from such a stronger position he can further extend his business throughout Europe. We believe that he will be aiming at 50 million subscribers in the region, and for that matter, why not 200 million or more? A key asset of Grupo Carso is América Móvil, which now has some 246 million mobile customers across South and Central America, including 67 million in Mexico and almost 62 million in Brazil.
Carlos Slim is also the co-chair of the ITU/UNESCO Broadband Commission for Digital Development which I helped set up and of which he is the special advisor. Mr Slim is a leading force in this Commission and has a very clear and very realistic view on the future of the telecoms industry. He also sees enormous commercial potential in telecoms and is more than happy to 'help out' in markets where players are struggling for growth.
As mentioned before (2008/2009) KPN, like most other telcos, has been struggling with finding its right strategy for the future. The company is missing out on new higher value digital media services and at the same time it needs to continue investing in infrastructure. While looking for those high ROI services it always ends up on the commodity side of the business. As this has now been going on for more than a decade, with falling income from their traditional cash-cows (telephony and basic access) the company is increasingly in need of new cash-flows. Projecting these developments further into the future than has been mentioned above, the only solution in a commodity market is to cut costs and built scale. Our analysis of Mr Slim's move is that this is exactly what is he is setting out to do. The highly fragmented European market has plenty of suffering — or soon to be suffering — telcos, so the time is ripe for massive consolidation.
According to Hendrik Rood from Stratix, by becoming involved in KPN Mr Slim is also laying the foundation for building credibility in this market. Through his involvement in this company he can build the groundwork to move further into Europe. He is well aware of the importance of telcos to the EU and to national governments, and to be seen as a responsible player in the market will help him grow further into it. And — which is also not to be snubbed — KPN still has an admirable ROI.
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