01 Telecoms Distribution

Telecoms Distribution 2.0:

Adapting to a Brave New World
By Duarte Braga, Nimal Manuel, and Steve Rudolph
Mobile market saturation is leading many
operators to question the modern relevance
of distribution. While it doesnt play the role
it once did, there is good reason to put distribution back in the spotlight.
Distribution was for a long time during the
wireline incumbency days a natural extension of the telecoms service operations. The
intent of the industry was that it would be a means to
reach the customer, but in practice it was not always in line
with customer needs. During the 80s and 90s, however,
this paradigm started changing around the world, primarily
because of the gradual increase in competition in wireline
and the need to treat customers accordingly but also because of the advent of mobile. The introduction of the mobile phone to the telecoms industry revolutionized the way
operators approached their channel strategies. Suddenly,
telecom operators started acquiring high street fronts all
over the world and competing to offer the most fashionable
handsets. During the 90s and early 2000s, distribution
became a key component for the mobile world, where customer acquisition was the name of the game. Customers
were joining the fray by the millions and, with customer
lifetime values typically overestimated, distribution costs
and commissions logically seemed a small price to pay.
Quickly most mobile operators, whatever their size or profitability, developed national footprints using multiple types
of distributors, from flagship stores down to small village
electrical appliance stores. At the same time, the wireline
world started to shift gears again, amassing Internet-based
products and working to bring the old fixed subscription

service to life. They began pushing their traditional direct sales channels even further,
opened their own wireline stores, and leveraged shelf space in wireless stores and
other high-traffic distributors in the wake of
mobile phones.
In the past few years, however, as pene
tration of mobile reached impressively high
levels in the West (see Exhibit 1) and as broadband penetration begins showing early signs of saturation, operators
are re-examining the role of distribution. As the number of
new clients entering the market subsides again, as in the
old days of wireline, and with no new revolutionary service in sight resembling the invention of mobile, more and
more operators are asking key questions: Do we need to
maintain the high cost levels of a full-blown retail distribution? Are there ways to optimize this presence?
Today this issue is at the forefront of the minds of many
CEOs, especially in the US and Europe, where penetration
has reached exceptionally high levels. But the matter is
of growing importance in most emerging markets as well,
where historical growth is expected to start slowing down.
Our experience in supporting operators as they adapt their
distribution systems to this brave new world reveals a
number of major tendencies: (1) a shift of priorities away
from pure acquisition in a context where new adds into the
market subside and distributors have to focus increasingly on up- and cross-selling and retention/churn management; (2) the growing importance of channel productivity
and retail excellence as a means to ensure cost adequacy

Telecoms Distribution I 9

influence over consumer decisions regarding operator selection. As such, distributors are reinventing themselves
to improve their ability to track customer behaviors and
maintain a stronger lifetime link that enables them to identify and capture these opportunities.

in tighter markets; (3) the push for channel innovation in

emerging markets with lower income customer bases; and
(4) the increasing relevance of distribution as a lever for
strategic differentiation, as some operators promote the
exclusive concept while others push for optimal footprint
efficiency with multiple formats.

At the same time, operators understand this

opportunity and are emphasizing cross-/upselling and retention in their commissioning
schemes at the expense of fixed remuneration and acquisition commission. This is a
tricky business, however, as we see that, despite the reduction of new adds, gross adds
in the market are actually still on the high
side due to the effect of inter-carrier churn.
As such, distribution is now becoming more than merely a
cost directly related to growth, where each dollar invested
would guarantee 4 or 5 in growth.

Shifting priorities for distributors

As the wave of new clients to the market
subsides, distributions focus is moving
from acquisition to management. Up-selling
and retention/churn management are levers
that can also be influenced by distribution.
Operators today have in their distributors,
more than a simple push channel. Distributors are counterparts who want to play a greater role in the long-term
client interface and who, to some extent, have increasing

01

Telecoms markets are showing traces of saturation, both in mobile

and broadband
Net adds Percentage of total
subscriber base in WE*

Percent

Mobile

Broadband

160

151

140
Penetration

120

92

100
80
60
40
20

67

57

Penetration

49
19
7

10

02

03

04

05

21
8

15

0
1999 2000 01

06 2007

2001 02

03

04

05

06 2007

* Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, UK
Source: ECTA, Merril Lynch Global Wireless Matrix, McKinsey analysis

10 I RECALL No5: Channel Management

Increasing importance of channel

productivity

becoming more important. At the same time that the

complexity of the sale is increasing, post-paid customers
are becoming less patient with long waits and extended
transaction times. Carriers, therefore, must reduce transaction time through process and systems simplification,
increase the use of online activation (even in
post-paid), and use the time that they buy
back to strengthen their efforts in activities
that drive channel productivity: cross-sell,
up-sell, and customer education (Exhibit 2).

In a competitive environment in which fewer customers are new to the category,

fewer are switching operators, and servicerelated traffic is increasing, channel productivity is more important than ever. The need to increase channel productivity comes, however, at a time
when product complexity and the assisted sale is also

How important are up-sell and customer

education to increasing channel productivity? McKinseys Customer Lifecycle Management survey reveals that in-store education
increases the likelihood of data product usage in the future by 2 to 3 times. Customer education combined with
strong up-sell is absolutely critical in a world in which 40%

These effects are compounded further by industry consolidation (in many countries) and the continuous effort from
operators to improve their loyalty programs for high-value
clients. Evidence shows that in the recent past the churner
profile has become progressively less attractive than the
average customer, putting further pressure
on the acquisition business for distributors.

As churn becomes mostly rotational, a premium goes to channels

retaining/up-selling high-value customers

02

GROSS ADDS
Percentage over total wireless subscribers
Mobile penetration
Percent
UK

New adds
Rotation

Italy

New adds
Rotation

85

New adds
Rotation

103

112

117
4

12

25

27

28

31

31

92

98

108

123

138

6
14

10

12

11

14

14

16

93

97

107

117

4
22
84

Spain

91

12
11

11
14

4
19

21

22

2002

03

04

05

2006

Source: McKinsey

Telecoms Distribution I 11

of customers believe their phone doesnt have Internet capability when in reality 90% of the phones owned by these
customers are Web-enabled.
Executing in this increasingly complex world, however,
requires excellence in every aspect of retail and achieving retail excellence is not
easy. If as the old saying goes retail
is detail, then telecoms retail is double detail. Many small, fast-moving parts (staffing,
scheduling, recruiting, reporting, merchandising, inventory, etc.) make diagnosing the
problem easy. Optimizing, on the other hand,
is a bigger challenge. Telecoms retail is a
small-box environment (typically 5 to 15
employees) that requires a skilled labor force to execute
a high-touch sale that can last up to 60 minutes for new
activations.

03

Many operators are now applying lean manufacturing

principles to front-line operations in telecoms retail in order to improve productivity by reducing variability, eliminating waste, and reducing inflexibility in the system, while at
the same time delivering a better and more profitable
customer experience. The winners in the
competitive world of wireless retail will be
leaner, more efficient, and more productive
than their competitors.

Channel innovation in lower income

markets
Emerging markets have very different characteristics for telecoms operators as compared to mature markets, with important implications
for distribution (Exhibit 3). The typical subscriber in most
emerging markets represents a lower ARPU (average reve-

Emerging markets have very distinct distribution realities vs. more

developed markets
Distribution implications for
emerging markets

Mature market

Emerging market

Consumers

Primarily postpaid with higher

ARPU (> USD 20 typically)

Primarily prepaid with lower

ARPU (< USD 15 typically)

Retail capillarity critical to

ensure availability of recharge
and SIM purchase

Retailers

Typically dominated by retail

chains

Typically dominated by mom

and pop stores

Working capital availability a

key constraint short-term
capital is major impediment to
growth

Payment
methods

Largely postpaid billing through

the mail or Internet
Payments made monthly by the
consumer

Largely prepaid recharge

through scratch cards or
electronic recharges
Consumers typically recharge
multiple times a week

Potentially greater scope to

reduce distribution costs in
emerging markets by increasing
shift to electronic recharge
mechanisms

Source: McKinsey

12 I RECALL No5: Channel Management

nue per user), has significantly lower disposable income,

and is a prepaid service customer. As a consequence,
new customer acquisition is affected by the resulting economics (e.g., 1- to 3-minute FMCG-like sales transactions
with little to no explanation vs. post-paids 15- to 30-minute
high-touch aided sale) as well as billing rela
tionships (e.g., purchase of recharge scratchcards or over-the-air electronic recharge vs. a
monthly bill). As such, success in distribution
has been strongly dependent on the ability to
deploy SIM cards (more than phones) as well
as the existence of recharge or reload facilities capillarity of distribution is even more
critical than in developed markets.
Most emerging market operators are either still engaged
in the land grab for subscribers or just emerging from
this phase. This has meant that most operators focus on

extending distribution by the fastest means possible, resulting in classic multi-tiered distribution structures, with
multiple types of retail stores in a context where management control is significantly more difficult than in developed markets. More sophisticated operators are implementing tools and processes to enhance
performance-based management of the distribution system, including increasing transparency into the different distribution layers
and designing targeted incentives.
Given the need for capillarity and economic
restrictions, distribution is typically represented by cash-constrained mom-and-pop
stores. The needs of these small retailers
are different from those of cash-rich telecoms chains in
more mature markets. With this in mind, the best oper
ators actively manage the frequency at which stock is

Distribution markets in Europe have evolved in different directions,

raising different priorities for each

04

Percent

Retail-driven markets, where non-exclusive

retail has achieved a strong position and
has significant power over remuneration
and customer management

Operator-driven markets, where

exclusive channels control the
landscape and distributors have
limited power vis--vis operators

Other
Non-Exclusive
retail

7
19

8
24

Exclusive
retail

74

Spain
How to control
channel costs?

10

14

10

36

38

48

68

54

48

42

France

Italy

Germany

UK
How to control
retail power?

Source: Yankee survey 2007

Telecoms Distribution I 13

These differences have brought to the forefront the discussions on channel control and channel efficiency (Exhibit 5).
We observe that, in countries such as the UK, independent
distributors tend to have significantly more power over the customer and, subsequently, over the operators. As a result, we
see more aggressiveness in price discounts,
campaigns, and promotions from independent
players as well as more pressure for these to
mediate the relationship with the customer,
an internalizing of CRM, and retention and
up-selling responsibilities. At the same time,
operators that manage exclusive chains with
a national footprint are increasingly questioning the viability of lower productivity exclusive
store models in areas with insufficient volumes. Smaller operators, increasingly under pressure to
cut distribution costs in a context of progressively lower
volumes, are considering the re-focus on non-exclusive dis-

replenished and develop smart options to extend credit to

these small retailers and, at the same time, mitigating the
credit risk they face.

Distribution as a strategic lever

During the early days of the race for shelf
space, operators typically used a push all
channels approach, where all players would
incentivize both exclusive and non-exclusive
retailers to reach potential clients more
quickly and let the most effective format win.
As we now see in many mature markets, the
success of the format is dependent on the
market. Exclusive stores seem to find success in operator-driven markets, such as Spain, while nonexclusive stores have achieved channel preeminence in
retail-driven markets, such as the UK (Exhibit 4).

05

Distribution is emerging as a lever for strategic differentiation

How to best control distribution productivity
and costs in networks with national footprint
with decreasing sales levels

Critical channel strategy

issues for operators

How to control non-exclusive distributors

to ensure continued ownership of customers
relationships and balanced remunerations
across channels

Implications for different channels

Exclusive physical retail
Reduce exclusive network where fixed
costs are not sustainable

vs.

Increase control over network through larger

operator footprint with privileged client access

Non-exclusive physical retail

Push more efficient distribution platforms
while controlling commission levels

vs.

Limit share of adds and access to client

information by non-exclusive stores

Remote (call center, online)

Increase weight of more efficient channels

Source: McKinsey

14 I RECALL No5: Channel Management

Increase weight of operator controlled channel

tributors as a way of maintaining a national footprint while

reducing fixed costs.
In the US, in particular, retail channels are being used as
a lever to drive growth in different market segments. While
the exclusive store remains the main channel for higher value post-paid customers,
more than 50% of prepaid acquisitions today come through non-exclusive mass retail.
This channel is increasingly being used by
operators as well as a multitude of independent prepaid brands, carrier flanker brands,
and mobile virtual network operators (MVNOs) to penetrate the low-end part of the
market spectrum.

As a consequence of these trends, we see many operators

facing a dilemma on how to best weight their strategy
exclusive vs. non-exclusive retail. The answer depends on
the type of market structure and the type of operator. Regardless of the market or operator type, there is value in
pushing to the extent possible the performance of remote channels that benefit both
from operator control and lower costs.
***
This edition of Recall offers a comprehensive view on the multiple dimensions of
distribution for telecoms operators, from
understanding consumer preferences to optimizing the various components of the channel mix. We
believe that distribution strategy will be one of the critical
components for the industry to further push its privileged
relationship with customers and will be an indispensible
tool for operators to battle their way through greater competitive challenges.

Duarte Braga
is a Principal in McKinseys Lisbon office.
duarte_braga@mckinsey.com

Nimal Manuel
is an Associate Principal in McKinseys Kuala Lumpur
office.
nimal_manuel@mckinsey.com

Steve Rudolph
is a Principal in McKinseys Boston office.
steve_rudolph@mckinsey.com

Telecoms Distribution I 15