by HSBC
Technology, media, and telecom companies are amongst the industries in which we see the greatest innovation and potential to overturn established ways of communicating, learning and working, and create new lifestyle and enterprise models. Inevitably, however, with periods of rapid industry transformation and increasing competition, there is enormous pressure to invest in innovation and customer relationships to avoid commoditisation and create and maintain competitive advantage.
In this article, and the series that will follow over subsequent editions of TMI, we provide a snapshot of some of the key issues facing treasurers and finance managers of technology, media and telecom (TMT) companies. Inevitably, it is impossible to cover every challenge, and indeed opportunity. Like treasurers in every other sector, treasurers of TMT companies face the difficulties of changing regulations, increasing cost of compliance, macro-economic challenges, and a prolonged period of low or negative interest rates. As we outline in this series, however, there are some issues that are of particular, and in some cases more specific concern to TMT treasurers, particularly around working capital, cash investment and rapid international expansion.
In this first feature, we look at the technology, media and telecom segments in turn and explore some of the challenges and opportunities that these industries are experiencing, and the implications for treasurers. At the same time, there are both collaborative and competitive lines being drawn between these three segments, which also means that treasury strategies are becoming more closely aligned.
Technology: Priorities for treasurers
- Reliable access to financing, whether through traditional or alternative routes;
- Working capital optimisation;
- Centralisation of treasury and finance operations and technology to enable rapid integration or spin-off of new entities, process, cash, transaction and data efficiency, and economies of scale;
- Access to solutions and expertise in expansion markets to facilitate international growth;
- Supporting the business using tools such as distributor financing to increase the resilience of the supply chain;
- Supporting emerging collection methods to facilitate sales;
- Improved cash flow forecasting.
A second industrial revolution?
Every generation claims that it is living through a more exciting era of technological innovation than the last, but the current period is characterised not simply by the speed of innovation, but the way that technology is disrupting and reshaping the way we live and work to an extent we have not seen since the industrial revolution.
While technology innovation has largely been driven by consumer demand in recent years, we are now seeing a strengthening appetite at an enterprise level to build efficiency and competitive advantage. The Internet of Things (IoT) has become a reality, from large scale manufacturing through to retail, with an impact across the supply chain. As a result, demand for technologies to support IoT will continue to grow, from network infrastructure to data analytics. Other new technologies that appeared to be part of a sci-fi imagination until relatively recently, such as Artificial Intelligence (AI), are also playing a growing role in many industries to predict behaviours and convert high volumes of data into more digestible and actionable content.
Some emerging enterprise technologies are an extension of those already prevalent amongst consumers, such as cloud computing. The use of cloud computing at an enterprise level is set to soar from $50bn to more than $250bn between 2014 – 2017[1] which has major implications for the way that companies adopt, manage and integrate applications and data. Building on cloud computing, everything-as-a-service (Xaas) is one of the most rapidly growing areas, including remote delivery of platforms and infrastructure as well as software, a model that has been successfully embraced by companies such as Amazon, Google, Salesforce.com and Workday.
The changing role, delivery and expectations of technology in both the consumer and enterprise space has important implications for strategists, shareholders and indeed treasurers:
Notes
[1] Jagdish Rebelo, Enterprise Cloud Computing: Future Market Size, Growth and Competitive Landscape, IHS Quarterly, Q2, 2014 as quoted in 2015 Technology Industry Review, Paul Sallomi, Vice Chairman and US Technology Leader, Deloitte Tax LLP
[[[PAGE]]]
Competitive landscape
While large and established hardware and software providers continue to offer innovative technology, the low cost of entry is resulting in the emergence of a large number of new competitors from both developed and emerging markets that are increasingly driving the innovation debate. The speed of innovation is growing as a result, and as the development lifecycle shortens and accelerates, established players need to protect margins and boost investment spend to compete successfully against more nimble players with a lower cost base. Operational, financial and supply chain efficiency are therefore vitally important, all of which are areas in which treasury, supported by a trusted partner bank, has a major role to play.
For smaller, emerging technology companies, facilitating growth is the major challenge. No longer can these companies limit their activities to a local market: indeed, the concept of a ‘local’ market has all but vanished in this sector, so optimising working capital, accessing financing (whether internally or externally) and managing international expansion are typically the priorities.
Organisational change
One of the ways in which technology companies are repositioning their businesses in response to rapid industry change is through mergers and acquisitions, but also divestments. On the acquisition side, some are snapping up small companies to tap into innovation quickly; for example, companies such as IBM are investing in cloud computing and big data, while other acquisitions are bringing together larger companies with complementary capabilities. For example, FIS, a leader in banking and payments technology, recently completed the acquisition of financial software and technology services company SunGard, to broaden its enterprise banking and capital markets capabilities. High profile divestments have included HP’s split of its hardware and software divisions to allow both segments greater flexibility, while Symantec has also divided its business into information management and cybersecurity companies to invest in both segments in a more targeted way.
Facilitating growth
Whether a business is acquiring, divesting or pursuing an organic strategy, the focus remains the same: to expand revenue streams in order to enhance shareholder value. According to a recent PwC study of technology companies [2], the potential increase in shareholder value derived from revenue growth rather than margin improvement is substantial, with 80% of technology companies demonstrating greater potential for shareholder value through growth rather than increasing profit margin. Facebook, for example, has a relative value of growth (RVG) of 100 (i.e., a ratio that demonstrates that the company could derive a hundred times times more shareholder value through growth than profit margin). More established companies have similar characteristics, such as Adobe (16.5), Yahoo (22.5) and Microsoft (5).
Paradoxically, many major technology companies have focused on earnings rather than revenue growth, relying on cost cutting rather than new income streams to deliver on earnings expectations. While this strategy has been relatively successful for large hardware providers, the market for legacy products is shrinking, so these companies too will need to invest in top line growth, whether through home-grown innovation or acquisition. For most companies, therefore, future success will depend more on creating competitive advantage than cutting costs, leveraging high-growth technology innovations, such as cybersecurity, digital content, XaaS amongst others to drive revenues.
Treasury has a vital role in facilitating growth, both by securing access to financing and managing working capital effectively. Furthermore, as technology businesses expand internationally, and adopt new business and commercial models, treasury can facilitate sales in innovative ways, such as distributor financing, and put in place the mechanisms to adopt new collection methods through mCommerce or eCommerce.
Media: Priorities for treasurers
- Reliable access to financing, whether through traditional or alternative routes;
- Working capital optimisation;
- Support for innovative payment and collection methods and customer subscription models;
- Centralisation of treasury and finance operations and technology to enable rapid integration of new entities, process, transaction, cash and data efficiency, and economies of scale;
- Access to solutions and expertise in expansion markets to facilitate international growth;
- More timely, accurate cash flow forecasting.
Reading between the lines
The growth of digital content is an important area of overlap between technology and media companies, and the distinction between the two is becoming more blurred. As consumer and enterprise appetite and demand for new technologies has grown, so too have expectations about content, and indeed advertising, and how it is consumed. While pay TV subscription and advertising models and bundled packages helped to increase viewing choices in the past, these are now being superseded by the online reality of younger generations in particular. Traditional models such as scheduled programming and newspapers (although increasingly in digital rather than hard copy format) still make a crucial revenue contribution, but no company in this sector can ignore the major growth in online, on-demand, device-independent content, particularly video. The changing influence and spending power of the millennial generation is also apparent in the rapid growth of newer media, such as video games, the fastest-growing consumer category in 2014[HB1], with a 14.3% increase. Online and mobile games now account for the majority of consumer spending on video games with strong growth over the past five years.
Technology is not only driving new content, and mechanisms for creating this content, but there are rapid changes taking place in the way that people consume this content. As the number and type of devices proliferate, potentially fragmenting media consumption, consumers are looking for a more cohesive experience across devices. These demands are further exacerbated, but the opportunities also enhanced, through cloud technologies that provide scalability in managing media content demands and addressing storage issues.
Notes
[2] 2015 Technology Industry Trends. PWC strategy & series
[[[PAGE]]]
Crossing the boundaries
Both new and existing players have a major role in, and opportunity to drive, the media transformation. There is also increasing crossover between media companies and those that have typically operated in the technology and telecoms space, with companies such as Amazon moving into online programming, creating new competition for consumers but critically also for advertisers. While print media has been in operation for over half a millennium, emerging business models today have a lifespan of five or perhaps ten years. For example, despite the meteoric growth of music downloads that took place in the five years until 2012, download volumes are now falling in favour of music on demand.
Faster broadband growth will further drive the growth of internet-based media, as will the growing number of connected consumers, particularly those who are mobile-enabled. This growth will further expand the digital spend compared with traditional alternatives, but will also continue to drive new business and consumption models. One such example is digital publishing. At present, sales of print books and eBooks continue to operate in tandem, and the digital experience of consumers essentially replicates that of the hard copy. Growth in eBooks will therefore be generated by creating a more interactive experience across devices to facilitate new forms of eLearning, consumer engagement and commercialisation of content.
As consumer trends change on one hand, and the availability of high quality data to monitor these trends increases on the other, advertisers are becoming more adept at devising advertising strategies, selecting distribution channels and monitoring outcomes more specifically. Some companies, notably those in traditional print media where advertisers cannot derive the same level of consumer intelligence, have seen advertising revenues have fallen by 50% in a decade [3]. This is likely to fall further as newspaper circulation continues to dwindle in developed markets (although not so in emerging markets). In contrast, according to McKinsey, digital advertising (consisting of both internet and mobile advertising) will become the biggest advertising category by 2017, and mobile will more than double its share of this market. [4]
Setting the pace of innovation
Media companies, particularly those that have existing revenue streams to protect, are challenged to move at a rate that recognises changing (or new) consumer behaviour and takes advantage of distribution, content and advertising innovation without interrupting existing revenue streams. One of the problems of these new distribution models is that the revenues are typically lower than the models they replace, creating new pressures on those tasked to deliver stable earnings to find new revenue sources to compensate, and to reduce costs.
With traditional and nascent distribution and consumption models co-existing and in many cases blending, the business models of the future are currently unclear. What is apparent, however, is that media, social media, telecoms and technology are becoming increasingly indistinguishable from a consumer perspective in the fast-growing IoT. This impacts on integration and connectivity requirements, but also on who will own and control customer relationships. The ability to analyse a wide variety of data, not least advertising metrics and consumer behaviour, is essential to creating and maintaining competitive advantage, but increasingly it will become more difficult to determine who should collect, own and therefore benefit from this data.
Key to success will be to be able to respond quickly to changing demands, whether through organic development or M&A. Treasury has an important role to play by facilitating international growth, financing M&A and integrating new business entities, and maximising investment opportunities. In addition, treasurers are able to assess the impact of changing revenue models, and both anticipate and respond to the need to support, integrate and optimise new payment and collection methods.
Telecom: Priorities for treasurers
- Reliable access to financing, whether through traditional or alternative routes;
- Working capital optimisation;
- Centralisation and automation of treasury and finance operations and processes to allow new entities to be integrated quickly, create economies of scale, increase cash and process efficiency and reduce costs;
- Sophisticated analytics to drive cash flow forecasting and devise competitive commercial models;
- Support for innovative payment and collection methods and customer subscription models;
- More timely, accurate cash flow forecasting.
- Access to solutions and expertise in expansion markets to facilitate
Collision or collaboration
With well over two billion smartphones now in circulation globally [5], offering everything from music and video streaming to contactless payment, the boundaries between the telecom industry and all manner of industries across retail, utilities, media and financial services have been shattered. The faster the increase in broadband speeds, the greater the opportunity to add and enhance services delivered through mobile channels. What is so distinctive about today’s mobile opportunity, however, is its diversity: specifically, the value of mobile is not restricted to developed markets, nor to owners of sophisticated phones. With mobile money solutions now expanding across Africa and parts of Asia, for example, using simple, cost-effective devices, consumers are able to make electronic payments and transfers, withdraw cash and pay bills, all without a bank account.
The trouble with this ‘blurring’ between different services is that telecom operators themselves are not necessarily the beneficiaries: while operating and capital expenditure is increasing, revenues are stagnating, while many media companies in the video and audio space are ‘piggybacking’ on the back of their services, and increasingly owning the greater value of customer relationships. Telecom companies are therefore tasked to build customer loyalty and satisfaction on one hand to reduce ‘churn’ (i.e., customers switching to alternative providers) whilst also reducing costs. Investment requirements are also high, to replace legacy technologies and increase capacity to provide an optimum digital experience, and to provide high levels of user security. On the other hand, there are growing opportunities to monetise the enormous amounts of data that telecoms companies process, and growing customer demand for data-heavy services.
Notes
[3] “Creative destruction: Newspaper ad revenue continued its precipitous free fall in 2014, and it’s likely to continue’. Mark J Perry, American Enterprise Institute, April 2015
[4] Global Media Report 2015, McKinsey & Co
[5] http://www.smsglobal.com/thehub/smartphone-ownership-usage-and-penetration/
[[[PAGE]]]
Resisting commoditisation
These challenges are exacerbated by a more stringent regulatory environment, such as the net neutrality issue (i.e., the principle that internet service providers and governments should treat all online data equally rather than discriminating or charging differential pricing by user, content, site, application, device or communication method). Laws already introduced in countries such as Chile, the Netherlands, Slovenia and the United States, with potentially other countries to follow, restrict how telecom providers and ISPs can price their services and therefore, potentially limit revenue, add cost and reduce differentiation, a challenge for both fixed and mobile operators. According to PwC’s recent Strategy & research paper [6], over half of mobile markets globally are already commoditised or in imminent danger of becoming so.
The authors of the PwC report identify three potential avenues to create differentiation in a commoditised and crowded market:
- investing in a high-performance operating model as a means to increase revenue;
- creating the lowest possible cost operating model through outsourcing and cost reduction, or thirdly,
- pursuing scale-driven benefits through consolidation and growth.
Each of these strategies, or a combination in some cases, has very different capital, revenue and growth implications, and therefore impact significantly on treasurers’ strategy. For the first group, for example, investment, cash flow modelling to assess the impact of emerging revenue models, and support for newly emerging collection methods will be amongst the priorities for treasurers. For those for whom cost reduction is most important, themes such as centralisation, efficiency and automation will predominate. For the third group, all of these issues will be significant. In addition, M&A and the ability to expand the company’s international footprint will also be important.
In reality, competitive pressures and fast-changing technology will force telecom companies to continue to invest to maintain their market position. Looking at 5G technology, for example, although still three or four years away, larger companies are investing now to be in a position to leverage faster speeds, lower latency, better coverage and opportunities in simultaneous connection to develop devices and services to create a high quality user experience and create market share.
Creating value from disruption
One of the common characteristics of the innovations that we are seeing across the technology, media and telecoms industries is the potential to embrace, or indeed drive entirely new business models. Indeed, it is the inter-relationship across all three segments that is often the catalyst of disruptive consumer and enterprise models. Five years ago, for example, downloading music onto mobile devices was a significant innovation, whereas today, web-enabled smartphones, more cost-effective mobile broadband packages and faster internet speeds are resulting in on-demand music becoming more prevalent. Uber is also a commonly cited example of industry disruption, overturning the concept of a minicab booking service and replacing it with a mobile service to connect, and provide the settlement engine between travellers (buyers of miles) and drivers (sellers of miles).
These services rely on innovation and interoperability across all three industry segments, and increasingly, the three are becoming more aligned. The difficulty will be how each contributor to a consumer or enterprise service derives value, owns crucially important customer relationships and monetises valuable data.
Treasury is not an observer of the business strategies that have the potential to be transformational, but a key facilitator, whether the focus is on growth (both in-country and internationally), investment or cost efficiency. From financing through to facilitating new customer collection and supplier payment models, increasing cost efficiency, optimising liquidity/investment management and enabling international growth, treasury functions across technology, media and telecoms globally are enhancing competitiveness and setting the foundations for future success.
Notes
[6] “Against the tide: How mobile operators can resist the pull of commoditization”, David Tusa, Milind Singh, and Ming-Chyuan Chan, PwC, September 2014
[[[PAGE]]]
The wider treasury perspective
While treasurers in the TMT sectors need to anticipate and respond to the specific demands of their respective industries, there are also a variety of wider trends and challenges arising to which all treasurers need to dedicate attention and resources. These are not always considered to be ‘front of mind’ at a corporate strategy level, but they may have major implications for the business, both financially and reputationally. One is the volatility in world markets, including both FX and commodity prices. Treasurers play a pivotal role in measuring, monitoring and managing these risks, and educating the wider organisation. While the ‘headline’ commodities, such as energy and agricultural products are less relevant to companies in the TMT sectors, the cost of both precious and base metals such as cobalt, palladium, platinum and copper can be significant.
Another key example is the impact of banking regulation such as Basel III. With banks being forced to be more selective in both their lending decisions, and their appetite for corporate cash investment changing, there are considerable implications for treasurers across all industries, including TMT. These issues present challenge, but arguably also opportunities. For example, while banks may discourage on-balance sheet lending for some borrowers, there are growing opportunities in alternative financing, such as supplier financing and receivables financing, which will often meet companies’ working capital needs more specifically and potentially cost-effectively. Similarly, while depositing short-term cash with banks is becoming less feasible, cash investment opportunities for corporate investors are expanding, including new forms of money market fund (MMF) and other types of cash investment instruments.
The value of treasury transformation
Treasurers’ ability to meet the changing needs of the business, whether the result of specific industry trends or wider market and regulatory developments, is significantly impacted by the efficiency, transparency of the treasury function, a core element of which is centralisation. Centralised visibility and control of cash makes it far easier for senior executives to measure cash resources and optimise their use to deliver the greatest value to the business. Some companies are already very well-advanced in centralising and optimising their treasury operations and decision-making, but it has typically been more difficult to create a business case for a centralised treasury function in organisations with a culture of autonomous business units, such as global media corporations, where distinct financial functions typically exist. In these situations, treasury often has either limited or delayed knowledge of local cash surpluses (that are often earning little or no return, and may result in counterparty or FX risks) which may be better utilised to avoid costly borrowing in other parts of the group.
An effective way of addressing this situation is the use of integrated infrastructure, such as interconnected regional/global shared service centres and/or payment/receivable factories. These structures can reduce costs but also improve central visibility and control of group cash. Further efficiencies arise if in-house banking is implemented to manage intercompany funding and investment, particularly in conjunction with payments-on-behalf-of (POBO) and/ or receivables-on-behalf-of (ROBO) techniques to streamline processing and rationalise bank account structures. As discussed above, centralisation is also key to efficient M&A and dispersals, which has particular implications in the TMT sectors. For example, M&A in the media sector 2014 increased by more than 90% by value compared with 2013, and the first quarter of 2015 saw six large scale deals totalling more than USD34.4bn.
As 2016 progresses, treasurers of technology, media and telecom companies are mapping their priorities and opportunities to deliver value to the enterprise for this year, and starting to cast their eye to the year ahead. Some of these will be driven by the specific needs of their company and industry, while others will be the result of changing financial market and regulatory conditions. A key factor in anticipating and responding appropriately to these trends is the advice and support of an expert banking partner that operates across the same markets, has a deep understanding of the emerging trends and challenges in the TMT sectors, and has the commitment to invest in the solutions that will allow treasurers to add value to the business.
