Case 1: Norwegian Telecom Company

1. About the case

This is a modified version of a classic case that was given to me by one of my case partner. I found it very interesting and added few twists to make it more complete and challenging. It is a balanced case in which interviewees will need to combine profitability analysis with broader business decisions.

2. Context

Your client is a large Norwegian telecom company, active in telephone and internet services. The year is 2002 and your client is aware that a new technology for internet, broadband, has appeared and is adopted by a growing number of competitors who offer the service to their customers.
How can your client decide whether they should also offer broadband to their clients?

3. Information gathering

The following data should be given when the candidate ask for it in a clear and deliberate way. There is a lot of information, in order to cover as much questions as the candidate would have. Depending on the candidate’s performance, the case can become longer.

i. The company

• The company actually operates in two lines of business: telephone and internet. Internet services offered by the company are all based on the dial-up technology.
• The client company is the largest telecom company in the country with market shares of 80% for the telephone market.
• The client is also the dominant player in the dial-up segment with a market share of 40%
• It used to be the national telecom company before it was privatized in 1996 (the Norwegian state still holds 20% of the capital). As a consequence, the client carries a public service mission.
• The company’s culture is to breakeven within one year following an investment

ii. The environment

• The Norwegian population is 4 million
• 70% of Norway population live in urban are while the rest live in rural areas
• The penetration rate for the internet in Norway is 50% overall and is the same among urban and rural areas
• The urban areas account for 20% of the country area
• The area of Norway is 360,000km²

iii. The internet market

• The market is broken down as the following:
• Internet users using cable: 20% with expected flat growth
• Internet users using broadband: 20% with expected growth
• Internet users using dial-up: 50% with 5% expected decrease
• People not using internet but wishing to use broadband soon: 10% with expected growth following the general market trend
• The market is expected to grow by 10% p.a. in the next five years Alternatively, the following charts can be handed to the candidate:

• The market breakdown is similar in urban and rural area
• The average price charged for broadband services is €20 per month
• Cable services are available only in urban areas and are coupled with TV subscription. When taken alone, the price of cable internet is €10 per month. Cable internet is as fast as broadband.

iv. The competition

• The competition is weak in the telephone market but intense in the internet market
• The broadband segment is equally divided among 4 competitors
• The competition used to be intense in the dial-up market with many medium and small competitors but they have started to withdraw from the market in recent years.
• The competitors in the broadband segments are all young companies which started doing business in broadband only
• Those competitors are perceived as being cheaper and having a better customer service than the client company
• Those competitors sell broadband services only

v. The product

• The two main advantage of broadband over dial-up are:
• Speed (50 times faster)
• Convenience (consumers can use the internet and make a phone call at the same time)
• A phone line is compulsory to use broadband, as the technology is based on existing phone infrastructure
• The average number of phone lines per customer is 1.2 throughout the country
• One piece of broadband equipment is enough to cover 3,600km²
• The broadband equipment is depreciated over 5 years

vi. Entering the broadband market

• The costs associated with entering the broadband market are:
• Equipment costs: €890,000 per location
• Linkage costs: €5 per internet line per month
• Service costs: €10 per customer per month
• Overheads: €1.4 million

4. Elements to crack the case

A strong candidate should uncover the following points:

The decision to enter the internet market is determined by the capacity of the client to breakeven in the first year – in line with the company’s culture. It is therefore a good idea to use a profitability analysis to start with.

Once the candidate is given the information about revenues and costs, he should quickly realize that he needs to calculate the number of customers to break-even in one year.

For exceptional candidates, the interviewer can add a twist by hinting that the client may adopt different strategy based on the urban/rural presence:

• Strategy 1: coverage of urban areas only
• Strategy 2: coverage of rural areas only
• Strategy 3: coverage of the whole country

For regular candidates, just assume the client wants to cover the whole country.

The different strategies modify the number of equipment the client needs to invest in, therefore modifying the cost structure and the number of customers.

The typical equation to find the number of customers is given by:

N.B.: The equipment cost is depreciated linearly over 5 years

For the three strategies, the results are:

	Strategy 1: Urban only	Strategy 2: Rural only	Strategy 3: countrywide
Number of equipment	20	80	100
Approximate Number of customers to breakeven	105,000	325,000	400,000

Following these results, the candidate should think about the feasibility of each strategy, considering the client’s objective: breakeven in 2003. Few key points the candidate should think:

• The objective is determined by the number of expected customers in the dial-up, broadband and interested segments in 2003
• There are three ways the client can gain its customers:
• Upgrade customers from dial-up to broadband (whether its own customers or the competition’s)
• Steal broadband customers from competition
• Convert interested prospects into broadband customers
• The candidate should quickly realize that there is no point in targeting cable customers as the price is very competitive for the same quality of service.
• It can help to structure the analysis using a advantage/inconvenient matrix:

	Strategy 1: Urban only	Strategy 2: Rural only	Strategy 3: countrywide
Advantages	Fewer number of customers to gain due to lower costs Larger broadband segments	Weak competition Large interested customer segment Large dial-up segment	Larger pool of customers Comply with the public service mission
Disadvantages	Strong competition Small interested customer segments (the most interesting)	Larger equipment cost per customer Big market share to gain (need to be very aggressive)	Greater number of customers to reach

• No matter which strategy the candidate go after, he should then think of the possible approach the client could develop in order to gain the number of customers needed. Here are some possibilities:
• Stealing broadband customers from competitors through price discount (discuss the implications), aggressive promotion or innovative distribution channels
• Bundling internet and telephone subscriptions to attract new customers(using client’s strength in the telephone market)
• Converting existing dial-up clients to broadband client (discuss the financial and non-financial implications)