Jos Gerrese , GANESHA consult

Jos Gerrese, GANESHA consult Pricing in the Newest Economy “rebuilding the industry” 41st FITCE European Telecommunications Congress Genova, 4 – 7 Sept. 2002 GANESHA consult

agenda • Analysis of the current troubled situation • Foreseen developments of the bandwidth market for fixed and mobile operations • The “Newest Economy” concept • Solutions • Conclusions GANESHA consult

GANESHA consult

Analysis of the Situation 1 • The Telecoms Industry is largely dead • Telecoms itself is very much alive GANESHA consult

Analysis of the Situation 2 • The result of the initial explosive growth of internet ( IP ) and the hype that followed • 400 % growth per year predictions (Worldcom) • New entrants who need a network before they can sell anything • Result: Extreme overprovision GANESHA consult

Installed Bandwidth versus Demand in Gbit/s, Intra-Europe Source: Probe research; Telecommunications International Dec 2001 GANESHA consult

Analysis of the Situation 3 • Price erosion caused by classic price-war • Prices started falling and are now at 10 – 20 % of prices some years ago • Sell at any cost to get a contribution to cover (some) costs • Only 10-20 % of capacity can be sold because of lacking demand • Revenues are 1-5 % of planned budget GANESHA consult

Investment vs. Income Market price level at investment Price/ unit Investment price Current market price Sales window 97 98 99 00 01 02 03 04 GANESHA consult

agenda • Analysis of the current troubled situation • Expected developments of the bandwidth market for fixed and mobile operations • The “Newest Economy” concept • Solutions • Conclusions GANESHA consult

Future Bandwidth Market Expectations ( fixed & mobile ) • Fixed • Nobody (private & business) is using less telecom. The market is growing following a rather normal pattern • Taking away the hype effects, IP shows a healthy growth as well • About 80% of installed capacity is idle and can still be upgraded by WDM technology GANESHA consult

Future Bandwidth Market Expectations ( fixed & mobile ) • Fixed 2 • Professional IP services will gradually reach a significant position • Mobile • The air segment in a mobile connection is only 2-5 kms. The terrestrial part can range from 5 -20000 kms GANESHA consult

Future Bandwidth Market Expectations ( fixed & mobile ) • Mobile 2 • When hopefully (??) GPRS and UMTS take of, using bandwidth per connection of at least ISDN level, a new layer of capacities will be needed, resulting in doubling the current used capacities • The future does not look bad at all GANESHA consult

The “ Newest Economy “ • The recent years went under the paradigm “The New Economy”.It can be characterised as: Doing without ThinkingCompanies embarked on business ventures without validating the consequences • I introduced some months ago • The “ Newest Economy ” Concept GANESHA consult

The “ Newest Economy “ • The Newest Economy concept is about PROFITS When Total Revenues > Total Costs, thanTotal Revenues -/- Total Costs = Profits GANESHA consult

The “ Newest Economy “ • Minimum conditions: • Each service or product in the portfolio is profitable on a NPV ( Nett Present Value ) basis within a relative short time window • Each customer is profitable for the total of services contracted • The customer is King only when he renders profitable revenues • The “Free Service” concept must disappear GANESHA consult

Solutions 1 • Over-extended or loss-making companies will be taken over by the few strong ones or they go broke • Some companies will pick-up the pieces at real cheap cost and will be able to re-create a new business with an acceptable costbase and profitable pricing • Prices must be raised in general GANESHA consult

Solutions 2 • Customers will have to pay the price • Mass market standard prices for standard services • Tailor made prices for dedicated services • Customers must decide if they can afford the service they want • The additional business value should compensate for the costs of service • “Nice to have” is not a valid decision criterium • Control the discounts GANESHA consult

Solutions 3 • Development strategy • Stop a project before it stops you • Evaluate progress and opportunities per stade and keep Geoffrey Moores’ law in mind • Climbing the value chain • Cash flows • Required skill sets GANESHA consult

Geoffrey Moores’ Chasm & Tornado application life cycle tornado rev decline innovate mass chasm acceptance early time Fig. 4 GANESHA consult

Revenues Margins % Revenue – Margin relation Nett cash margins Transaction services 2.5 k € Information services Communication services Network services 7.5 k € Transport services 12.5 k € Margins 2% ………………………………………25% Revenues 10 K€ ........................................................0.5 M€ GANESHA consult

Sales Channel Options/Skills Transaction services Direct+Indirect+VA-resellers+Integrators, Skills; prof. Services + application prov. Information services Direct+Indirect+VA-resellers+Integrators; Skills; prof. Services Communication services Direct+ Indirect+distributors; skills Network services • Direct + Indirect Sales, • Increased Headcount Transport services Direct Sales, limited headcount Fig. 6 GANESHA consult

Conclusions • The industry is in shambles but telecoms itself shows a healthy pattern. The industry needs a serious clean-up • Apply “Newest Economy” concept • Customers have to pay a profitable price so that all parties can live • Pricing and discounting is key • Be careful with development projects and climbing the Value Chain • Continuously ask: will it bring a profit • If not: don’t do it or stop it GANESHA consult

GANESHA consult Thanks for your attention j.gerrese@wxs.nl phone: +31 71 5416959 fax: +31 71 5894800 GANESHA consult

Jos Gerrese , GANESHA consult