Verizon
Our client Verizon Wireless wants to enter the telematics space. It is interested in providing telematics services to vehicles in the USA.
The client has hired us to advise him on whether they should enter the market. If yes, then how?
Suggested case structure
- Market analysis: The candidate should attempt to lay out a list of typical parameters that can be used to evaluate the attractiveness of the market– market size, growth, customer segments, trends etc. The key hurdle to cross is – Is the market attractive enough to enter?
- Competition: It is critical to check the competitive landscape - competitors, market concentration, barriers to entry. The key question is – Given the competitive landscape, does it still make sense to enter the market?
- Company: If the market is attractive and there are no significant barriers to entry, the candidate should look to answer the question – What is the probability of success in the new market? Does the company have any advantages over others?
- Recommendation: Based on the analysis, the candidate must succinctly lay down the next steps for the client in order to enter the market.
1. Market Analysis
The interviewee should at the outset try to understand the market – The technology, the services sold, profitability, product substitutes, customer segments etc.
If the candidate is not familiar with the technology, share the below information verbally with the candidate:
- Telematics is a technology which enables a car to be connected to the outside world. It is a two way communication platform, where information can be sent from the vehicle for e.g. emergency calls, or information can be retrieved from the outside world for e.g. internet connectivity etc.
Market information
- Two key segments in the market: Personal cars and commercial cars (Trucks, buses, company fleet cars)
- The Personal car segment is declining at 3% p.a. for the last three years and is expected to remain at the current level for the next year
- The commercial car segment has been growing at 4% p.a. for the last three years. However, the industry growth estimates for this segment are pegged at 8% growth p.a. for the next 2-3 years.
- The telematics market is profitable with an average EBIT of 18%
- There is no new technology envisaged at this point of time which can disrupt this market
The interviewee should at the outset try to ascertain market size.
Share the following assumptions with the candidate:
- No. of private cars: 3 m
- No of commercial cars: 6 m
- Revenue per private car is 200 $
To calculate the market size, the candidate would also require the revenue per vehicle for commercial cars.
Exhibit 1
The interviewee can now calculate the market share.
Personal car segment
𝑀𝑎𝑟𝑘𝑒𝑡=3 𝑚 ×200 $
=600 m$
- We don’t have information on revenue per car for this segment
- However, we know the overall revenue mix for personal vs. commercial car segment. The commercial car segment is 75% and personal car segment is 25% of the market.
- Therefore, the revenue from commercial car segment is 3 times that of personal car segment (75/25)
Hence,
𝑀𝑎𝑟𝑘𝑒𝑡=3 ×600 $
=1,800 m$
Total Market
𝑀𝑎𝑟𝑘𝑒𝑡=600 𝑚$+1800 𝑚$
=2.4 B$
- The size of the market is large at 2.4 B$.
- It is a profitable market with an EBIT of 18%
- The largest segment (commercial cars) is expected to accelerate with 8% growth p.a.
- So the market seems attractive
2. Competition
Now the interviewee should look to evaluate the competitive landscape – existing competitors, market share, market saturation, barriers to entry
Exhibit 2
Share the below information with the candidate if he enquires:
- There are no regulatory barriers to enter the industry. However, renting satellites to enable the telematics service are enormous and form the largest chunk of capital costs
- AT&T has a monopoly over the market with a 65% market share
- It is difficult to break into the AT&T market share as its an established player with a long history and brand in this segment
- The remaining market share of 35% is spread across 10 competitors. Unlike AT&T, these 10 competitors are not telecom service providers
- There is an ongoing law suit against AT&T over its monopoly
- Experts opine that AT&T is likely to lose the lawsuit and would need to sell 25% of its business, which would lead to it losing over 30% of its business. That would bring down the market share to about ~45%
The candidate must use the above information to make the following observations:
- Although there is quasi-monopoly of AT&T in the market, it is likely to break in the next 3 years
- This would be a great opportunity to enter and gain market share
- The high capital cost seem to be a deterrent and need to be evaluated
3. Company
The interviewee should look to evaluate the company’s capabilities of entering the market – Expertise in telematics, capital available, synergies if any
Share the below information with the candidate if (s)he enquires:
- Verizon is one the largest telecom providers in the country and has a vast network of digital cell phone antennas. These antennas can be easily adapted to provide the telematics services to cars
- The client’s product team has identified the modification possibility and is certain that with the existing network it would be able to provide 98% coverage over USA
- Given the capability to modify, Verizon would not need to invest in renting satellites
- Verizon also has over 30 million customers who subscribe to the telecom services. These customers could potentially be targeted to subscribe to the telematics service
The candidate must use the above information to make the following observations:
- There is a significant synergy with the existing business. The existing antennas can be modified to provide telematics service.
- This advantage is available to Verizon and AT&T who are telecom providers; but would not be available to the other 10 competitors
4. Final recommendation
The three key questions laid out at the beginning of the case were – Is the market attractive enough to enter? In the light of the competition, does it still make sense to enter the market? What capabilities does the company have and what is the probability of success?
The candidate should synthesize his recommendation as follows:
The client should consider entering the market given that:
- The market is large (2.4 B$), profitable (18% EBIT) and growing (8% growth of commercial cars).
- The largest competitor in the segment is likely to lose a lawsuit which would force it to sell a proportion of its business
- There are strong synergies with the existing Verizon network, that can be extended to provide telematics service
- The company has a large customer base which can be leveraged to acquire customers
- There are strong entry barriers for non-telecom operators (high satellite costs)
