Introduction

2Tel is one of the largest mobile network operators in the world. It has grown mainly through significant acquisitions and it has extensive experience in buying companies and integrating them into the group. 2Tel continually invests substantial funds in research into network technologies. Like all global mobile network operators, it is constantly looking for technical opportunities for making its networks quicker, more reliable and, if possible, cheaper to install and maintain.

A business opportunity has arisen in The Federated States (TFS) where network operator licenses are about to be renewed. 2Tel is currently evaluating this opportunity and is considering either bidding directly for a license (as 2Tel) or acquiring a current licensee and bidding through this company. 2Tel is interested in entering the highly regulated mobile network market in TFS, even though most of its acquisitions to date have been in countries where there is little or no government regulation of the mobile network operators.

The Federated States (TFS)

The Federated States is a densely populated country with a population of 70 million people. The country has experienced five years of economic decline, characterized by high unemployment, falling incomes, and rising personal and government debt. Crime rates are also increasing. A year ago, a new government was elected with a mandate to tackle the economic problems of the country. Its priority has been to reduce the national debt and to help achieve this aim, it has introduced higher taxes and cut welfare benefits. The removal of these welfare benefits provoked civil disturbance and rioting, where shops were looted and burnt and mass demonstrations, usually ending in violence, were held in the streets of major cities.

TFS is an increasingly socially fragmented country with vocal minority groups representing a wide range of pressure groups and communities. It has a comprehensive and complex legal system, presided over by senior judges who were largely appointed by the previous government. The current government has suggested that many recent judgements made by these judges are politically-motivated and are designed to hold back the governments reforms. The employment laws of TFS make it relatively expensive to employ people (there are minimum wages laws) and also difficult to dismiss them (employment protection laws). Legal proceedings are often time-consuming and expensive.

A report into the riots and demonstrations highlighted the role mobile phones and social networks played in coordinating attacks on shops and people. The report acknowledged that such communication devices had long been a widely used tool in organized crime in TFS, but that it had now also become a significant factor in organizing mass disobedience. In an effort to prosecute offenders, the government asked mobile phone network operators to give it information about text messages and the timing and duration of phone calls which possible offenders had sent and received during the period of the riots. The information provided was used as supporting evidence in court, and helped Convict a number of people.

The releasing of this information to the government has proved controversial. The network operators have been criticized by civil liberties organizations which believe that this is personal, confidential information and, under the terms of the Data Protection Act of TFS, should not have been released without the persons consent. On the other hand, the government has praised the network operators for their good citizenship and believes that the data provided is exempt from the Act as the Act allows data to be exempt if it is used for the detection and prevention of crime. An influential newspaper, whilst recognizing the contribution of the networks to the successful prosecution of offenders, felt that instead of helping catch offenders, the networks, by making their services unavailable might have prevented the offences in the first place. One of the current network licensees, Z-Tel, is being sued for damages by people who claim that their confidential information has been illegally released to the government. The case has yet to be presented to a court, but lawyers for both sides are confident of success.

Licensing arrangements in TFS

Communication network licenses are granted to mobile network operators for an eight-year period. Licenses are allocated to bidding companies on the basis that the companies meet a certain number of criteria. This includes financial criteria, such as liquidity and gearing, and environmental criteria. Successive governments of TFS have enacted environmental regulations and set environmental targets (such as carbon emissions and recycling rates) which all companies operating in TFS have to achieve.

Beyond these minimum criteria, the licenses are allocated to the highest bidders, the companies which offer the most money for a license. There are four current licensees and these were the four highest bidders in 2009, the last time that the licenses were granted. During the license period, no new network operators can enter the market.

All four licensees are of a similar size, although their profitability varies (see Table one). The government is keen to ensure that no one network provider dominates the market. Table one: Comparative data (2014) for the four licensees All figures in $m Z-Tel T-Me Tello Co-nekt Revenue 750 700 725 740 Gross profit 350 300 325 325 Net profit 125 80 100 125 The licenses are due for renewal in three years time. At present, the rules for license granting are exactly the same as for the previous license allocation four licenses given to the four applicants who fulfil the minimum criteria and make the four highest bids. However, some government ministers are unhappy about this and are lobbying for a change which favours bids from current licensees. The government has already stated that any of the current licensees which fail to be reallocated a license will be paid a $100m exit fee to help the losing company adjust to the loss of its license. This will be paid for by the company which is replacing them, and is in addition to the contract fee paid by the successful bidder to the government. Some government ministers feel this bias towards current licensees should go further. One government minister recently suggested that the help provided to us during the recent riots should be acknowledged in some way. There has also been a suggestion that there should be more than four licensees. This would increase competition and would also raise more money for national debt repayments. However, except for introducing an exit fee, the government has not yet officially stated any changes to the rules on license allocation. The network operators are monitored by a regulator, Ofnet, appointed by the government. In general, Ofnet has been supportive of the four current mobile network operators and it has openly praised their attitude and service on a number of occasions. Ofnets primary focus is on pricing, service availability and service transfer. All prices are agreed in a series of meetings between the regulator and the licensees. As a result, the prices set by the four operators are very similar and are slightly less than the operators would like them to be. The companies, therefore, have to compete on branding, service support and network quality. In many geographical locations, one of the networks often provides a better signal quality and network speed, and indeed poor signal coverage is the most often cited reason for customers changing service operators. It is already possible for subscribers to move to a different service provider, but Ofnet believes, that this should be made even easier, and so is bringing in regulations to enable this. Licensees who do not comply with these regulations will be fined. The licensees are unconvinced of the demand for moving provider. One commented most subscribers move due to poor network service, and they can already do this! Mobile devices in TFS Despite the economic decline of the last five years, mobile devices are seen as essential to most people within TFS. The demand for mobile devices and the networks which support them has increased dramatically in the last five years. Furthermore, mobile devices are particularly prized by the young, who see having the latest up-to-date technology as an important status symbol. Consequently, the manufacturers of mobile devices continually update the features and functionality of their devices. This has had an important effect on the mobile networks. Demand for services has increased not only due to an increase in calls, messages and web browsing but also due to the increasing demand which improved services place on network availability, bandwidth and speed. Thus the network operators have to continually upgrade the technologies and configurations which support their service networks. Most people in TFS rent their phones as part of a contract with the network provider. The minimum contract period is for one year, although many people tie themselves in for longer periods to take advantage of lower prices. Most people upgrade their phones when they renew their contract, to ensure that they have the device with the latest features. Old phones are returned by customers to their network provider, who, in turn, sends them back to the original manufacturer. The environmentally-friendly disposal of these mobile phones is a continual problem for the mobile phone manufacturers. 3 Research into the tendering process 2Tel has commissioned research from Professor Tan of Midshire University, an acknowledged expert in probabilistic decision making, into the TFS bidding process. Here are some of his conclusions. He has determined probabilities using a bid price of $550m and the probabilities are based on four licenses being available. If the bidding rules are not changed before the next license allocation, then every bidder has a 04 probability of being granted a license if their bid is for $550m. If the bidding rules are changed before the next license allocation to favour current license holders, then a current license holder has a 06 probability of being granted a license if they bid $550m for the license. A new bidder has only a 02 chance of being allocated a license if they bid $550m for the license. These probabilities are based on research in other countries where bidding is biased towards the current license holders. It will cost current license holders $10m to prepare a bid for a license. New bidders, because of their unfamiliarity with the bid process, will incur a cost of $20m to prepare their bid. 2Tel is particularly interested in acquiring T-Me, the smallest of the current licensees. Their research suggests that they can implement efficiency gains which will generate $100m net profit per annum for the final two years of the current contract. This compares with T-MEs current net profit levels of $80m per year. Further efficiency gains and increased usage will lead to $120m net profit per year for the eight years of the contract, should the offer for T-Me be successful. An initial approach to T-Me has suggested that an offer of $400m for T-Me would be accepted. The same net profitability for the contract (eight years at $120m per annum) is also expected if 2Tel decides not to acquire T-Me and is successful in a direct bid for a license. Before entering any market (or industry), 2Tel commissions an independent briefing paper from a business analyst which considers both the external environment of that market or industry (the wider macro-environment which the market or industry works within) and the competitive environment of the market or industry itself (the market or industry the proposed company will work within). These briefing papers conclude with a brief summary of the opportunities and threats posed by the environment. These briefing papers are used by the board of 2Tel as part of its evaluation of whether a market is attractive to enter. In this case, whether it should attempt to enter the TFS mobile operator industry, and if it does attempt to enter, whether it should enter directly or through acquiring a current operator. Required: (a) Write the briefing paper required by 2Tel. The briefing paper should: (I) Analyze the macro-environmental factors affecting the TFS mobile operator industry; (50 marks) (ii) Analyze competition within the TFS mobile operator industry; (25 marks) (iii) Conclude with a summary of the opportunities and threats identified in the analysis. (20 marks) Marks are available in part (a) for the structure, coherence, style and clarity of the briefing paper. (5marks)