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Questions - Fixed Networks: Section
8 - Question 17
Question 17: How should the performance of telecoms
companies be measured and compared?
The first possibility is measurements based on earnings and
profitability. These measurements have the potential advantage of dealing
directly with the variables that ultimately determine shareholder value and the
market capitalisation of companies. In theory, the value of a company’s
shares is determined by the present discounted value of its future earnings.
There are, however, serious problems with these measures in the case of the new
telecoms operators. Problems arise, for example, because many of these
companies, including some of those whose shares and market capitalisations have
risen remarkably, are not yet making profits and have negative earnings (i.e.
losses) as a result of the substantial costs of constructing and operating
their networks. One possible way round this problem is to measure
changes in the company’s EBITDA (i.e. earnings before interest, taxes,
depreciation and amortisation). Improvements in a company’s EBITDA will
indicate improvements in performance.
A second set of possible measures is based on share price performance.
Examples are changes in market capitalisation or the current value of a fixed
amount of money invested at a fixed date in the shares of the company, both of
which are regularly used in the publicity material put out by new telecoms
operators whose shares have performed well. One problem with these measures is
that they are not direct measures of performance, but are essentially measures
of the expectations of investors, heavily influenced by the judgements of
financial analysts (embodied in the assumptions they make in the models they
use to calculate a company’s market worth).
These expectations may be influenced by factors other than the
performance of the company in question. For example, they may be influenced by
fashion; ‘herd expectations’ regarding the short term movement of
share prices generally or the specific share price of the company; or changes
in macroeconomic conditions in the country in which the shares are being sold,
for instance a change in the rate of interest that makes shares in general less
attractive relative to fixed interest assets.
Thirdly, there is a set of performance measures that attempt to capture
directly factors that will eventually influence earnings and profitability. The
first of these is changes in revenue. If the revenue of a telecoms company
increases, it may be argued, this is likely to impact positively on future
earnings and profitability assuming that costs do not rise proportionately. The
problem here, however, is that rising revenue could also be an indication of
the temporary absence of competition which, when it emerges later, could have a
negative influence on earnings and profitability. This is likely to be a
problem, for instance, with incumbents who still enjoy de facto monopoly
positions in particular market segments or with early new entrant operators who
have not yet been subjected to the full force of competition.
Another possible direct measure of performance attempts to measure the
network capacity of a telecoms operator. This measure may include variables
such as route miles of optical fibre, measures of network capacity, number of
buildings directly connected, etc. All of these measures have been used in the
annual reports of telecoms companies as indicators of performance. The problem
with these measures, however, is that they are supply-side biased and do not
take demand side factors such as customer demand and competitiveness into
account. That is, they measure the ability of a company to supply telecoms
services but fail to measure that company’s likely success in attracting
and keeping customers and earning profitable revenue from them.
Other attempts have been made to directly measure a company's
performance in a way that takes account of its ability to satisfy customer
needs. These measurements focus on the demand side but do not deal with the
supply side. Accordingly, they have to be used in conjunction with other
relevant measures in order to gauge a company’s overall performance. One
example is the audited data on company performance that is officially provided
by the UK regulator, Oftel (see Oftel's web
site or the Comparable Performance
Indicators web site for further information).
The following table comes from Oftel’s publication,
Telecommunications Companies: Comparable Performance Indicators, dealing
with business customers.
| INDICATOR |
WHAT IS MEASURED |
| Service Provision |
The ability of companies to keep to their promises to
provide services. |
| Customer-Reported Faults
|
The reliability of the company’s network. |
| Fault Repairs |
The ability to repair faults within target times. |
| Complaint Handling |
How promptly complaints are dealt with |
| Billing |
The customer’s perception of the accuracy of
billing information |
These performance measures are helpful for the purchasers of telecoms
services who might not otherwise have the information that enables them to
discriminate between providers on the basis of the quality of their services.
However, these measures obviously are not intended to provide overall
indications of company performance. For example, relatively good performance on
the basis of these indicators does not necessarily translate into good
competitiveness which is also influenced by other factors such as success in
marketing and sales, new product and service development, and degree of
competition in different market segments.
So how should we attempt to measure the performance of telecoms
companies?
What other measures might be used?
What combination of measures should be used?
Indeed, is it possible to produce a set of measures that will give an
accurate picture of company performance?
If you wish to express your views on questions such as these go to the
Workshop (Area 1). To
compare your visions with those of others go to Vision Check.
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