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BCG Medium Profitability Bidding Strategy

German Telecom

#Telecommunications
ProHub Comment

This is a strong profitability case that combines financial analysis with strategic bidding considerations. The case requires candidates to build a comprehensive business model incorporating revenue assumptions (price, volume) and cost structure (fixed and variable), then use break-even analysis to determine maximum bid price. A key insight is recognizing that despite a profitable venture on paper, the client's actual competitive position versus established UK operators makes the real competition from other new entrants for the reserved license.

Estimated Time 15 minutes
Difficulty Medium
Source Chicago Booth
50 / 100
Our client is a large German telecom company. It is considering making a bid in an auction for one of 5 licenses to operate a new generation of mobile phone networks (4G) in the United Kingdom. It has engaged BCG to help with the issue and determine the appropriate strategy for the auction.

Clarifying Information

AUCTION:

  1. The auction will be a sealed bid auction with all bids received simultaneously. Since it is a sealed bid auction, our client will not know the true bidding strategies of its competitors with any certainty.
  2. The licenses will go to the highest 5 bidders. Each bidder can attain only one license. The licenses will be valid for 5 years.
  3. The British government intends for the auction to open the mobile phone market to competition to help control consumer prices. As a result, one license has been reserved for a new entrant, but the other four are open to both new entrants as well as established competitors.
  4. The auction is the first of its kind for 4G networks in Europe.

TECHNOLOGY:

  1. The most important characteristics are the high data speeds and increased capacity for service that it offers.
  2. It will enable data speeds of up to 5x greater than the most advanced 3G networks available today.
  3. Additional 4G spectrum enables incumbent wireless companies to build out their capacity in order to support more customers and to enable high-bandwidth services in an environment that is increasingly capacity-constrained.
  4. Following the introduction of 4G technology, old technology networks will be phased out by the government over the span of 3 years.

CLIENT:

  1. It is a market leader in Germany.
  2. It has a large presence in the rest of Europe, but no presence in the United Kingdom currently.
  3. It has been experiencing stagnating growth and is looking for opportunities to expand.
  4. It has the financial capability to bid what is needed, but does not want to overpay for the license.
  5. It has the financial capability to build the network that will be needed to operate in the UK.

COMPETITION:

  1. It is unclear how many competitive bids will be received or who will bid.
  2. Four major operators exist in the current UK market, and they roughly split the market equally.
  3. They already have established networks as well as retail outlets that can be leveraged for the introduction of 4G technology.

THE MARKET:

  1. Approximately 30 million people have a mobile phone in the UK.
  2. Converting to the new network will require the purchase of a 4G network-enabled device.

VOLUME:

  1. Some potential for growth beyond current market due to new services.
  2. Must consider that conversion of customers will be critical and that client is at a disadvantage compared to established competitors.
  3. A likely outcome is that our client will receive less than 1/5 of the total customers due to new entrant status.

PRICE:

  1. Customers pay £30 per month for their current mobile phone plans, cost is expected to be higher for 4G.
  2. Could charge additional fees for additional services and allow customer to pick and choose what they want.
  3. Could charge more for a fixed plan with all services included; however, there will also be increased competition in the market.
  4. Candidate should consider both the factors that will increase the price (new services) and decrease the price (increased competition).

FIXED COST:

  1. Significant upfront cost for our client as they must set up the network and retail chains.
  2. Upfront costs not as significant for established competitors (a key disadvantage for our client).
  3. Once network is established, fixed costs consist of: Network operation, Maintenance, Retail operations, etc.

VARIABLE COST:

  1. Minor once network is established (i.e. one extra customer costs little).