TMNG Global Develops DSL Profitability Roadmap for a Leading Broadband Provider

Challenge

A leading broadband provider had been rolling out DSL on both the wholesale and retail level. Separate organizations were responsible for wholesale and for retail, with the retail group buying services from the wholesale group, which also provided DSL to other ISPs. Both groups, however, were currently unprofitable, and the long-term economics of the business were not well understood by senior management.

Since DSL was a critical component of the client’s strategy for growth, a rapid and reliable course of action was needed to achieve profitability using this key technology. The client requested that TMNG Global clarify the current and proposed economics, develop tactical and strategic options that would improve projected results, analyze their specific financial impacts, and make a recommendation about what courses to pursue.

TMNG Global Solution

We began the engagement by preparing an independent financial assessment of the client’s wholesale and retail DSL units. This base case analysis agreed with the client’s conclusion—that a continuation along the current trajectory would not yield a profitable business.

The client’s business plan called for a gradual shift in channels, starting from the present, when 80% of the client’s lines were sold by its retail unit, to a point five years in the future, when other retail channel partners were expected to sell 60% of the lines. The client’s strategy thus already downplayed its retail unit, and under its proposed plan, the wholesale unit would be modestly profitable, but the retail unit would be unprofitable. That is, the major strategic issue centered on the retail unit and a plan for its future.

Broadly speaking, there were two strategic options: retaining the retail unit and selling it. Within the first option, we considered various partnership possibilities with major consumer ISPs. For each broad option, there were three strategic orientations: managing for revenues, managing for costs, or a combined approach that focused on revenues and costs, achieving roughly half of the best-efforts goals for each.

Analysis of the “Keep Retail” option showed that attaining profitability would require creating as many as 12 value-added services that would generate new revenues—while raising basic DSL prices and/or significantly reducing operating costs. Clearly this strategy exposed the client to immense execution risks and was not likely to be successful. Selling the retail unit, in contrast, required increasing wholesale revenues through wholesale value-added services and/or cutting costs. The loss of the retail channel would depress revenues, place responsibility for revenue growth in a partner’s hands, and, perhaps more critically, would accelerate the loss of the parent company’s highest-value voice customers.

Our analysis showed the greatest EBITDA improvements if the retail channel was retained, but this choice also carried the greatest risks. Abandoning or selling the retail unit did not improve the financial picture greatly, and it did mean giving up a critical channel linking the telco to the evolving broadband home. The recommendation balanced the financial impact and the strategic impact of the several choices, and favored retaining the retail channel. Within this option, seeking higher revenues and also reducing costs appeared to carry lower risk and yield acceptable financial results.

TMNG Global suggested ISP partnerships to mitigate the risks and assist in cost-reduction. A high-level economic analysis of the client’s DSL operations with each of these combined entities was developed to show how they might support the client’s service and financial goals.

Benefits to the Client

This engagement allowed the client to clearly understand the detailed financial issues of its DSL business. For the first time, the client was able to identify the key cost drivers, accounting for intra-company transfers and other complicating factors. A realistic assessment of the strategic options showed that there was no easy route to overall profitability, but that moving forward on several fronts (new services, cost-cutting, alliances) offered the optimal approach and would achieve the client’s goals.