A management professor once told us that when choosing to enter a line of business or career, one generally does better picking an industry or segment that is growing fast, compared to an industry or segment growing slowly.
The same general observation arguably also holds for lines of business a connectivity provider might consider when looking for revenue growth or repositioning into additional segments of the internet ecosystem.
As connectivity providers look for new ways to grow revenue, there are only a few basic strategies they can adopt. They can add scale. They can add new connectivity products. They can try to increase the value of their connectivity products. Or they can move into new areas of the internet value chain and add new roles within the ecosystem.
Adding scale is the simplest strategy: sell more of what you already do sell. Creating more “added value” arguably is the next step up in complexity, as it requires creation of new features, bundles, channels or support.
The strategy of selling new connectivity products is more complex, as the additional product lines might not have the market potential to be large revenue contributors. Those products might require new skills or be sold to different customers.
Most complicated of all is taking on new roles within the ecosystem. That carries both the most risk but sometimes also the most reward.
New products and greater scale generally add revenue bulk. That matters because valuation is higher for firms with higher growth rates and business moats. Growth prospects alone tend to move firms towards the upper range of EV/EBITDA rankings from perhaps 12 times (or lower ratios) towards the high end around 15 times.
The value of moving into additional parts of the ecosystem is that sometimes those other roles carry higher EV/EBITDA valuations. Telcos generally have EV/EBITDA rations in the 10 times to 12 times range.
Content or media firms, for example, also have ratios in the 10 to 15 times range. So taking on content ownership roles adds gross revenue and might provide additional profit margin advantages and diversification.
Likewise, consumer electronics firms often carry EV/EBITDA ratios in the 10 times to 15 times range.
Movement into internet content roles could provide a boost in EV/EBITDA ratios to a range from 15 to 20 times. Likewise, semiconductor firms often have rations in the 15 to 20 area.
Moving into other roles could carry EV/EBITDA valuations in a similar or higher range, in other words.
E-commerce apps and sites, for example, might carry ratios in the 20 times to 30 times range. Software firms might carry ratios in the 20 to 21 range.
Looking at EBITDA and net income margins, larger telcos and connectivity firms might have EBITDA margins in the 20 percent range, with net income margins lower than EBITDA margins. Smaller providers might have EBITDA in the 10 percent range, with net income margins lower than that.
EBITDA margins for linear video can range from 15 percent to 20 percent. Net margins (after taxes) might range from 10 percent to 15 percent.
EBITDA margins for content companies such as Disney, Warner Brothers Discovery or Paramount can range from 20 percent to 25 percent. Net margins (after taxes) might range from 10 percent to 15 percent.
EBITDA margins for internet content companies such as Google, Meta or Twitter can range from 30 percent to 40 percent. Net margins (after taxes) might range from 20 percent to 30 percent.
EBITDA margins for e-commerce apps and sites such as Amazon or eBay can vary based on translation volume. Smaller sites might have EBITDA in the 10 percent to 15 percent range, while Amazon has in the past had margins closer to 20 percent. Net income margins might range from five percent to 10 percent.
EBITDA margin for smaller software firms might range from 20 percent to 25 percent. Net income margin might range from 15 percent to 20 percent. Larger firms tend to have higher margins. Microsoft or Oracle could have EBITDA margins as high as 30 percent.
The bottom line is that a successful move by a telco or connectivity provider into almost any other part of the internet ecosystem can trigger a higher valuation of earned revenue.
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