The Analyst's Corner: Take three steps

Service providers can apply segmentation techniques for improved market capitalization

Fluctuations in financial performance—coupled with the volatility of international markets—represent a modern plea for domestic service providers to contemplate segmentation principles when building their market models. Diversification of markets, product specialization and separation by economic behavior remain keys for winning—but so quickly find abandonment in the new economy. 

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“Preserving the best and removing the rest” seems peculiar to the unprecedented levels of markets that perpetuate the demise of many carriers—from failed satellite networks to the receding boundaries of traditional paging entities. So, why not take heed in what appears to be common sense? 

Protection from marketplace famine and the creation of improved market capitalization involves an understanding of three concepts: market velocity, finite demand conditions and long-run supply environments. 

Addressed in different ways, these components can fortify the telecom industry with knowledge for engineering and launching services to fertile markets. Difficult or immature climates will always exist; avoiding pitfalls requires a commitment to analyze the economic evidence. With the abundance of rational data sources, it should be possible to accurately to predict the climbs and turns of the market ahead. If at first you don’t succeed, try and try again doesn’t bode particularly well in an economy that demands instant results—and accountability.

But if market capitalization involves the speculation of current value based upon expectations of future payment streams, then how does an understanding of market velocity change the outlook? Simply stated, the assessment of market velocity accounts for density over a given period of time—while comparing the number of buyers and sellers with given supply and demand considerations. 

As the rate of absorption increases, saturation and price behavior changes, which helps anticipate the appropriate entry and exit intervals. Knowing when to leave a market can be just as important as recognizing an entrance opportunity. By probing variables such as price elasticity and technology lifecycles, visualizing the rate of change helps establish a guidance framework for avoiding poor investments—for both investors and service providers. 

Demand is a staple word in today’s business lexicon, but its implication is farther reaching when applied to the measurement of market conditions.  

Finite demand integrates specific levels of buyer behavior for a defined price schedule. This allows economists and financial planners to better project the performance of product and service offerings over time. By plotting these demand segments graphically, analysts see a heuristic picture of the financial future—and base assumptions of capitalization largely around normalized outcomes. While figures stand to be often billed as inflated, these speculations of economic worth account for undelivered benefits—taking into consideration the present value of such instruments as the money supply and discount rate.  

But beyond the equilibrium of financial instruments and monetary policy, finite demand assists the foreshadowing of market behavior yet unseen and lends a strategic tool to those organizations in search of managing their service strategy. Too frequently, exercises in poor demand planning give rise to market timing issues and the outset of worsened financial valuations. Jockeying for growth funds with a less than optimal position can pose negative trickle-down effects when service providers enter complementary market spaces.           

Yet as private equity investors become increasingly obsessed with near-term profitability, the real picture steadies itself in the long-run supply perspective. Wall Street analysts may lack a stable historical record to compare with some of the most popular nascent technologies, but focus on sustainable economic models remains. 

The virtue of a segmented product or service portfolio rests in the firm’s ability to diversify risk—and weather the ebbs and flows of customer demand. Although price strategy and supply-side economics are critical, the key area of interest is how the market responds over time—to both forces of competition and purchasing behavior.  

For many carriers in the broadband and wireless marketplace, competitive forces continue to pummel profits. Without the necessary capital reserves to expand the service infrastructure, consolidation appears inevitable and may remove the innovation behind new markets for these services.           

Life through the critical eyes of the investment community is a daily struggle. And the thought of any stability seems a misnomer to those carriers and competitive local exchange carriers (CLECs) attempting to bolster their market positions. Given the current state of capital imbalance, additional corrections and volatility remain certain. But for organizations that apply intelligent analysis before modifying their growth strategy, the consistent delivery upon marketplace expectations will help to ensure the long-term success and vision nestled within the present economy.
Frank J. Bernhard is a technology economist and partner with Omni Consulting Group Davis, Calif. He can be reached via e-mail at fbernhard@ocg-us.com or by telephone at (530) 750-5199.
This column originally appeared on the internetTelephony.com website.

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