SuperMovil - Telco startup market expansion

Problem Definition

Your client is the CEO of a Europe-based mobile Telco operator, SuperMovil.

Their business model is very unique: they are a “virtual Telco”. They differ from traditional mobile operators (e.g. Vodafone, T-Mobile, Telefónica/O2, etc.) in that they do not own optic fiber, antennas and satellites, but instead partner with the cited traditional Telcos and rent capacity in order to offer their services. Hence, they differ from the classical Telco, since they don't make big CAPEX investments.

Your client has expressed interest in expanding her company’s operations to a new country.

Which are all the factors you would take into consideration to orchestrate this geographical expansion?

*Note: The M&A department has shortlisted 10 countries as top candidates, but this info will be provided and worked on later on in the case.

Comments

This is a typical McKinsey case – perfectly extrapolable to other MBBs, particularly 1st round – consisting on:

1. Structuring part – Where the candidate will draft an issue tree / hypothesis tree to structure his/her toughts.
   • How to conduct it? >
     1. Encourage the candidate to make clarifying questions about the client and its business model and share the data in the orange box.
     2. Allow 2-3 minutes for the candidte to draft the issue tree.
2. Exhibit ­ part – Where the candidate will be given a table of contents and will need to draw conclusions.
   1. How to conduct it? > Share Table 1 with the candidate
3. Math calculations part – Where the candidate will perform ad-hoc calculations and draw conclusions.
   1. How to conduct it? > Share Table 2 with the candidate

Short Solution

Solution

Example of an excellent structure (presented as an issue tree):

ECONOMIC FACTORS

• Overall market analysis: conduction of deep analysis on:
  • Market size
  • Market fragmentation:
    • Are there any other Telco start-ups with similar business model to ours? – Given that the key to our success is the ability to move and escalate fast, we need to keep in the radar other players operating the same way.
    • Who are the main "traditional" Telcos? (CAPEX owners) per market? – Key for this particular case, since they are needed business partners for our expansion
  • ​Estimated market trends: both short and medium term

• Analysis of potential new markets: conduction of deep analysis on the shortlisted countries around key KPIs in order to identify the ideal target:
  • Potential number of users
    • Population
    • Penetration rate
  • Industry & segment growth rate
  • Stability of the market

• Operational approach: SuperMovil rents capacity from traditional Telcos, which grants them operational speed. In order to penetrate a new market, options are:
  • M&A (Merger & Acquisition): buying a Telco in the new market that operates with the same business model (i.e., renting capacity)
  • JV (Join Venture): partnering with a traditional telco:
    • Local Telco in the targeted country, targeting the most insteresting one in terms of:
      • Market penetration
      • CAPEX (antennas, fiber optic, etc.) availability
      • Company's health and stability
    • Local Telco in the targeted country that is a branch from one of their current European partners, in order to leverage the established business relationship

SOCIAL FACTORS

• Brand perception risk when moving to a new location (particularly outside Europe, their current market)
• Operational risks in a new and unknown market (particularly if outside Europe), highly influenced by:
  • Culture
  • Population density
• Post-merger integration risks (after M&A):
  • Integration of vision, mission and values
  • Different working cultures
  • Different compensations

POLITICAL FACTORS

• Anti-trust regulation compliance, when expanding inorganically
• Need to adapt to new regulations in the new markets - Telco is a highly regulated industry

IMPORTANT NOTE: Social & political factors, that encompass the risks of the operation, are key in the case. Structures without them lack a key part of the analysis

Example of an excellent exhibit analysis:

There are 2 countries in the list that stand out, since they are "best-in-class" in 2 out of 3 KPIs tested:

• Spain: Although having low industry growth rate, it is a stable market with >50% of data-bundle users.
• India: Although being an uncertain market from an the stability perspective, it combines a high growth rate with >50% of data-bundle users.

To arrive to this conclusion, the candidate should compare in each column and flag the best-in-class (e.g., in the Industry growth rate column, High is the best-in-class). Both Spain and India are best-in-class in 2 out of 3 KPIs tested.

Additionally, the candidate can suggest two different approaches:

1. Deep-diving into each of the two countries with real data to calculate the real entitlement and then choosing one
2. Diversifying the risk and expanding into the two countries: given the nature of Spain and India, they complement each other very well and would result in a very balanced strategy:
   • Spain is a "secure" option given its market stability, with little risk but also less opportunities for big revenues.
   • India is a "risky" option given its market uncertainty, but higher revenue opportunities – given its high industry growth rate and % of data bundle users.

Example of an excellent calculation and conclusion:

• Spain:
  • 50,000,000 inhabitants * 95% penetration rate * 50% of data-budle users * $30 monthly = 712,500,500 total market value (can be rounded up to 700 million)
  • 700 million total users * 1% that can be adquired = ~$7 million
• India:
  • 1,100,000,000 inhabitants * 70% penetration rate * 60% of data-budle users * $10 monthly = 4,620,000,000 total market value (can be rounded up to 4.5 billion)
  • 4.5 billion total users * 1% that can be adquired = ~$40 million

Hence, as a conclusion:

• If we can only expand to one country, India would bring higher revenues, ~$40 million vs. ~$7 million.
• However, the candidate can also suggest to diversify the risk and expand into the two countries: given the nature of Spain and India, they complement each other and would result in a very balanced strategy.

• Spain and India are the best countries to expand to, with estimated revenues of ~$40 million and ~$7 million monthly.
• In order to do so, SuperMovil should consider (1) buying a local player with the same operating model or (2) partnering with a local traditional Telco who owns the infrastructure (e.g., fiber optic).
• As next steps, we will focus on deep-diving on the risks cited in the structure & an analysis of the Spanish and Indian market to shortlist potential partners.

Difficult Questions

• How liberalized are both markets, and how easy it is for foreign companies to penetrate?
• How fragmented are both markets in terms of players? Which is the market share of the top 3 & top 5 players?
• Are there any players in any of the two countries who are partners of our current European partners?