ASSIGNMENT

Case Studies
for
Telecom Business Finance

Topic : Risk Management in Telecommunications

SYNDICATE 1

Arun Premarajan Chenandy 09020541059

Bhuvan Kapur 09020541063

Puneet Khanwani 09020541084

Rachna Singh 09020541085

Snehil Bhaladhare 09020541099

Manu Parvesh 09020541111

Risk Management in Telecommunications
Whilst operators will "risk manage" at an operational level by the design of telephone
networks in order to provide a reliable service to its customers and address commonly
identifiable threats such as fire, safety and security issues, it is seen that procedures or
standards are often applied on a blanket basis irrespective of the level of risk presented nor
do these reflect experience either nationally or internationally.   This means that scarce
resources are often diluted, leaving critical areas of the business unduly exposed whilst less
important facilities enjoy enviable levels of attention. The aim is to assist in targeting risk
management to produce the most effective control of risk within the company.

In order to commence the process of risk management, it is felt that a company needs to
assess the relative likelihood and impact of a series of threats to its business. This is
because it is the "services" that the company provides, that is the important issue rather
than acting as custodian of a considerable asset base.  As such, any evaluation of impact
must include an assessment of those effects which often cannot be measured in clear
financial terms.   Customer confidence, the opinions of legislators, the use made of incidents
by competitors are some of the range of social, commercial, political and occasionally
national security issues which must be considered.

The company should set its own judgement criteria rather than follow those imposed by an
external authority such as insurers, who will usually focus solely on the financial loss.    It is
important when balancing cost of risk with the cost of risk reduction measures, that the
true picture is used in any decision making process.   Where the company have self-insured
risks they will need to evaluate the total cost to ensure the risk control measures or
acceptance levels are both appropriate and effective.  

In accordance with the rapid growth that has been seen in the Indian Telecom Industry, the
key risk factors for the various players have also transformed significantly. It is believed
that the changes in the telecom industry's fundamentals have led to an improvement in the
credit risk profile of the industry as a whole. 

The Top 10 Business Risks in the Telecom Industry may be

divided into quadrants as:

a. Strategic threats — related to customers, competitors and investors

b. Compliance threats — originating in politics, law, regulation or corporate

governance

c. Operational threats — affecting the processes, systems, people and overall value
 d. Financial threats — stemming from volatility in markets and the real economy

Telecoms operators now share their customers with other players in both the consumer
and enterprise markets. The key to re-establishing ownership is changing the customer’s
mind-set about the value of the network through clear communication and rates.
(Unchanged at number 1)

Many enterprise customers now no longer care if they buy their telecoms services from a
traditional operator or someone else. And the brand value of the leading technology
players typically outstrips that of the leading telecoms companies.

Meanwhile, an intensifying cross-sector battle is underway for the loyalty and engagement
of operators' customers. Smartphone users, for example, identify strongly with device
manufacturer brands as a reason to switch operators. Elsewhere, cable players are strongly
positioned to win in the battle for the triple-play customer, while a new wave of web
applications continues to undermine legacy voice and data services.

to manage the risks around customer ownership effectively and sustainably, the key for
operators will be to engineer a change in customers’ mind-set to reflect the real and
substantial contribution made by telecoms companies to the overall service experience.
Getting this message across will require clear and consistent communication on the value
of the network, and on what it takes to provide high-quality services

Telcos have unique capabilities, such as their billing and payment engines, and their
customer information assets reveal a type of end-user ownership that hasyet to be fully
exploited, either by themselves or through third parties

Retention strategies have actually been destroying value, with bundled offers in fixed and
flat-rate offers in the mobile market having the effect of widening product scope at the
expense of product profitability. With consumers now making growing use of mobile
internet, new forms of revenue cannibalization are under way, such as substitution of all-
you-can-eat mobile data usage for usage-priced SMS.

In many cases, operators’ current strategies for retaining customers are actually destroying
value; for example, by widening product scope at the expense of revenue and profitability.
Operators need to realize the full value of customers by recognizing and leveraging their
own transformative power.

Many telcos have already strengthened their focus on customer value by reorganizing
themselves along customer lines (such as consumer and enterprise divisions) rather than
technology lines (such as fixed and mobile). They are also identifying and trying out new
models, such as selling smartphone applications in return for a proportion of the revenues,
and innovating in partnership with device and application developers to create
differentiated experiences

“Network neutrality” is dominating the global regulatory agenda and is widening in the US
to include mobile services. In parallel, diverse regulations are evolving across different
segments, and governments are looking to boost tax revenues. The overall need is for
greater regulatory certainty.

This change of focus reflects the rise of “network neutrality” as the dominant global
regulatory issue. Under this concept, operators must try to provide network bandwidth on
an equal basis to all applications, irrespective of how much bandwidth each application
consumes. With data traffic rising inexorably and unpredictably, network neutrality
threatens to undermine the certainty of financial return that operators need in order to
allocate the next wave of network capex

Mobile operators are seeing roaming and termination rate reductions as well as the
prospect of network neutrality; fixed operators are facing fiber regulation such as network
unbundling and duct access; and TV services are facing challenges around content
exclusivity. Higher levels of state support can create new problems for governments, such
as dilemmas over whether to focus on closing the digital divide or boosting the fastest
speeds in the market

Advancing technology and uncertain returns mean operators face new choices and
considerations in their network capex strategies against a background of evolving national
policies. The timing of investment is also crucial, with decisions to “leapfrog” technology
platforms raising both risks and opportunities.

But the dramatic shortening of the technology evolution cycle means it is getting harder to
identify which technology to implement at which point in time.

The intensity of capital expenditure remains high — for example, in NGA and long term
evolution (LTE). But varying demand- and supply-side factors make it hard to target this
investment, with national infrastructure policies still at the work-in-progress stage, and
evolved high-speed packet access (HSPA+), regarded by many as superior to LTE from a
cost-benefit point of view, at least in the near term.

The timing of technology decisions is also challenging, and “leapfrogging” technology

platforms brings both risks and opportunities.

With operators having already capitalized on their “low-hanging” cost-cutting

opportunities, the next wave of reductions will be harder to achieve. Companies need to
balance innovation and rationalization to control costs while supporting rising traffic
volumes.

With revenues from legacy services such as voice remaining static or even falling, and the
revenue-generating potential of new services still uncertain, operators have no alternative
but to cut costs if they are to generate the returns that shareholders demand. For example,
in emerging markets such as India, other Asian markets and Central and Eastern Europe,
the cost challenges are exacerbated by consumers lacking the disposable income needed to
support higher-value, higher-priced services.

Technology and handset developers have seized the initiative in industry innovation, with
telecoms operators currently relegated to a secondary role. To regain the lead, operators
need to make the most of external talent and internal assets, including real-time, location-
sensitive customer data. Device manufacturers and online application developers — have
seized the initiative in the innovation arena, leaving telcos resembling spectators as new
technological innovations emerge. Unlike operators, technology leaders such as Apple and
Google do not face revenue cannibalization risks from innovation. To close this innovation
gap, operators need to energize their workforce. This will include prioritizing R&D and
reasserting their ability to innovate for consumers

Operators have survived and emerged from the crisis as a “safe haven” for investors — but
this status is not enough to sustain investors’ confidence. Telcos can no longer rely on the
sector’s defensive nature, and now need to change their story from short-term cash
generation to longer-term growth and innovation. (New this year).A further negative factor
is that “capex creep” is viewed as inevitable by investors, given the need for the industry to
invest in capital-intensive projects such as NGA, spectrum acquisition and 3.5G
implementations.
Different parts of the business have different needs in terms of systems and processes, and
effective management of the legacy business has become even more important in the wake
of the crisis. New platforms and policies to support both legacy services and new offerings
or models are key and that managing the legacy areas of the business more effectively has
become even more important in the wake of the crisis

Current industry dynamics are favoring various forms of inorganic expansion, ranging from
revenue-sharing partnerships to full in-country consolidation. Operators need to develop
new competencies and discriminate clearly between situations requiring partnership or
M&A. Many of the characteristics of today’s telecoms industry —including intensifying in-
market competition and cost pressures, and the need for major investment in new
infrastructure — are drivers of inorganic growth, either by undertaking full-blown M&A or
forming strategic partnerships.

The risks around partnerships are being compounded by the widening array of structures
and objectives involved, including network-sharing deals with other operators, revenue
sharing with content and application owners, insourcing of capabilities as “industry
utilities” and outsourcing to specialist third parties.

The development of the digital society has outpaced the ability to supervise it, and new
business models are bringing new threats to the telecoms industry. Security concerns vary
by customer, and operators are under pressure from government agendas. They need to
revisit the classification and sensitivity of customer data. Although the nature of the
industry means privacy and security threats are endemic, service innovation and changing
business models such as Web 2.0 and virtualization are bringing new types of threats.
Location-sensitive data supports ad-based revenue models, but can affect customer privacy

On the piracy front, digital rights are an emotive issue due to their socio-economic
implications, and managing risks around commercial content is complicated by the
involvement of multiple stakeholders
Types of risks
1) Commercial Risk
- Revenue generation model
- Cannibalisation of existing 2G applications
- Low penetration levels
- Exorbitant roaming charges

 Benefits - CDMA operators have an edge for 3G deployment

 Killer applications
i) Video telephony and music download
ii) High quality creating lock in

 Regulatory Requirements
i) Licensing
 TRAI approving MVNO’s
 Service level agreements
 Content IPR, regulation of content
ii) Security
 M-commerce
 Session hijacking
 Spam, virus and worm attacks

 Users not keen to upgrade to high end applications

 Collaborative Arrangements : Indus towers, window into the internal workings

 Preferred Government Players :MTNL and BSNL

 Foreign Entrants: China Mobile, Qualcomm

 Excessive Pricing : Prices need to be set after carefully studying competition

 Incomplete Utilisation of 3G Features : Key drivers for high ARPU not utilized

 Availability of Complementary Assets

i) 3G/dual band enabled handsets
 ii) Appropriate network and software infrastructure

2) Technology Risk
- Underlying 3G technology W-CDMA and Cdma 2000
- Next generation networks

a) Wimax
 Cheaper spectrum
 Efficiencies and benefits
 Low price entry
 Government favour
 BSNL gearing up
b) Infrastructure : Base stations and transmission networks
c) Shared R & D Efforts
d) Network Management complexity
a. Applications
b. Control
c. Access

3) Financial Risk
a) Spectrum allocation: High licensing fee, No resell allowed, Cheaper rate for CDMA
b) Stringent regulatory requirement
c) Financing M & A
d) Timing of ROI constraints

How to perform Risk Management????

 The formation of a Risk Management Committee or Council with authority drawn
from the Director General.   Representatives from all areas of the business;
networks, sales/marketing, information systems, real estate as well as those
normally associated with "risk management", finance, legal and  personnel and
organisation.   The in-house fire, safety and security functions would also be
involved as well as the risk management and insurance department.   The primary
role is that of risk identification and evaluation based on a total cost of risk
concept.  
 The risk management committee would be responsible for the preparation of
relevant company standards, practices and procedures.   These should reflect a risk
 ranking or grading methodology particularly where asset protection is involved.  
This will combine severity, frequency and also the business impact referred to
above in order that the controls put in place are relevant and appropriate.
 Training and instruction of staff will be essential at local level in order to reduce not
only the high frequency/low severity incident which can be identified by an analysis
of the company's own experience and incorporating national or international
experience but also to ensure that measures put in place to control potential
catastrophe risks are not negated by poor local practices or communications.  
Systems should reflect the management of the risk as well purely physical aspects
which may be beyond local control.
 Undertaking regional/national audits to ensure that practices and procedures are
being implemented, remain valid and also continue to reflect the true risk grading
of the facility.   Training and instruction for the staff to undertake these audit
procedures is also a pre-requisite.   At a corporate level Marsh's international
experience would assist in establishing benchmarks  to ensure  company standards
reflect the industry.
 Utilising a risk grading approach and this audit of risk management on a regional or
a functional department level can be incorporated into a premium apportionment
model in order that those who effectively manage risk can be recognised.