If ROIC is What Matters, So Does Market Share
Market share plays a large role in financial results. Looking at market share and return on invested capital (ROIC) for the three largest players in Thailand, China, and Indonesia since 2015, you can see that financial return and market share tend to be directly related.
My rule of thumb is that the leader has twice the share of number two, which in turn has twice the share of provider number three. In Thailand, China and Indonesia, the general pattern holds, In Thailand the pattern holds well. The leader has 53 percent share, number two has 31 percent and number three has 17 percent share.
The theoretical model I use would call for shares of 50/25/13, or any other ratio that maintains the same sort of relationships between market share among the top-three providers.
The Chinese market diverges: the leader has 69 percent share; number two 17 percent and number three 14 percent.
In Indonesia, the market leader has 65 percent share; number two has 18 percent and number three has 17 percent.
My approach also suggests that any market not having the 50/25/13 structure is unstable, with the big changes to be expected in share shifts from the number-one provider to number two. The third provider in all three of these markets actually is doing as well as a stable structure would suggest.
Those relationships also include varying rates of return on deployed capital, with one possible and important exception. Where the leading provider generally earns the highest ROIC, and in some cases can wring extraordinary profits out of market leadership, the relationship between market share and ROIC is less predictable for providers two and three, in any of these markets.
Still, the general pattern is important. Market share matters because it is related, more or less in a linear fashion, with profit and return on invested capital, although perhaps in a less certain way than market share structures tend to take, in stable markets.
Source: Reperio Capital
Source: Reperio Capital
ROIC issues for access services are one reason why the strategy of “moving up the stack” or “up the value chain” continues to be relevant and necessary for at least the larger telcos, cable companies and similar access providers. Mergers to gain scale will help, in many cases, but the fundamental problem--lack of organic growth for network services--will be a key constraint.
Market consolidation, in many cases, also will help, as market share and financial return tend to be correlated. So increasing share will tend to boost financial performance. In all three countries studies by Reperio Capital, market share and ROIC were related. In the clearest example, the number three provider in all three countries had single digit ROIC. Provider number one had high or even extraordinarily high ROIC.