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The W Report Media & Telco 2009
The W Report Media & Telco 2009
No part of this publication may be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of the wRatings
c Corporation. The research methods used in this report are protected by US patent 6,658,391 and certain patents pending that are under license to wRatings
Corporation from Gary A. Williams. “Moat Maker”, "Competitive X-Ray", and "The W Report" are trademarks of Gary A. Williams. All other trademarks used in this
report are property of their respective owners.
ABOUT THIS REPORT
FORWARD-LOOKING STATEMENTS
In addition to historical information, this report contains 26 Why Our Ratings Work
US 6,658,391 HBR Cover Warner Business
forward-looking statements that reflect projections, 27 Prioritize Spending to Build Advantage Dec 1999 May 2002 Apr 2004
objectives and expectations as of the date hereof. The
wRatings Corporation assumes no responsibility or liability 28 Our Industry Coverage
for any damages resulting from the use of the information
contained herein. 29 CONTACT US
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 2
PAST FINDINGS FROM wRATINGS STUDIES
This report covers the Media & Telecom DATE OUR PUBLISHED FINDINGS WHAT HAPPENED NEXT
Industries. We define the Media Industry as
those companies delivering content via
August 2002 The wireless industry has very low pricing power as consumers By Summer 2003, Cingular and other providers abandon any
books, newspapers, magazines, television
are unwilling to spend additional dollars on their technology thought of price hikes and the price wars begin. They change
and the web to consumers. In 2009, we've until their basis services work more reliably. New 3G mobile their advertising to focus on network coverage, reliability and
expanded our coverage to include companies phones will not be the instant hit wireless companies desire. customer service.
with business customers such as advertising
firms and data publishing firms.
January 2003 In order to monetize their content, media and telecom In 2004 alone, Comcast reports that video-on-demand
companies must work together to expand services such as viewership grew from 20 million shows in January to 75 million
We define the Telecom Industry as those
Video on Demand. These type of offerings promise to deliver shows by December. Yet, the Media & Telecom industry as a
companies providing services for wireline
advertising messages to a highly targeted audience, thereby whole continue to struggle on how to convert this demand
phones, wireless phones, internet and increasing ad revenues. into sustainable economic profit.
cable/satellite. In 2009, we've expanded
our coverage to include companies with
business customers such as telecom January 2005 Over 92% of consumers see the benefits of a single provider for Since 2005, the "triple play" (and now quad play) becomes a
equipment and telecom services. all of their telecom needs: wireless, wireline and standard bundling technique by telephone and cable providers
cable/television. Price remains the most critical buying driver, alike. The war for the consumer begins for which companies
thus perpetuating the difficulty in finding pricing power. can best meet expectations across all communication types.
May 2006 For Media Content providers to succeed in the future, The Apple iPod continues to integrate video into select
consumers want them to use technology to distribute their versions, yet content providers are slow to adapt. By the end of
content in more ways. What is critical though is to match the 2006 though, Media Content providers start offering TV shows
device with the content length, where consumers won't for download at their own website and/or third-party sites in a
typically watch video on mobile devices for more than 10 growing number.
minutes at a time and on PCs for more than 60 minutes.
June 2007 In 2007, the business models underneath media & telecom The writer's strike delays the introduction of new shows as the
providers are improving to show positive economic profit on industry struggles to split the oncoming profits of digitized
average but more work must be done. While media content content. Media providers use the delay to optimize their
drives demand, providers continue to struggle with monetizing content processes to lower costs and stagger their new show
their shows. introductions.
July 2008 Telecom players continue to struggle to build durable Struck by the economic downturn, advertising revenues in
NOTE: advantages that rivals find difficult to duplicate, and price wars both old and new media decline due to lack of consumer
Past findings are from Gary A. Williams and his research continue to be the norm. Consumers are still searching for demand. Broadcast networks remain at the top in advertising
team published for Miller-Williams, Adjoined Consulting and innovative ways from media companies to meet their revenue, but the web is increasingly important but still not
Kanbay. All data is owned by Gary A. Williams and licensed
expectations, and will pay for them. Old (print) and new (web) large enough to support traditional volume. Telecom
to wRatings Corporation.
media remain in transition to monetize their content. continues to struggle to make money consistently.
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 3
KEY FINDINGS 2009
A few decades ago, being a media or ! Size and uniqueness drive much of the competitive strength for media companies in 2009. Ten of the top 20 spots are controlled by
telecom executive was relatively easy just three firms. Multiple media properties under one umbrella help control operational expenses, and can share inventory when
(although many probably didn't see it that advertising dollars decline. Four of the remaining top 20 spots are occupied by small firms with less than $650 million in revenue.
way at the time). Consumers had just a few These firms are carving out niches through their unique content and proprietary distribution channels.
choices of broadcast networks and a
smattering of cable channels to watch. Basic
! Historically, the Telecom industry remains one of the most challenging industries to build a consistent level of competitive strength.
and long-distance phone service were Much of this is due to the constant need to invest large amounts of capital to build infrastructure. Even so, the Top 20 in 2009 had a
oligopolies, and PCs only connected to 50% turnover since last year, with eight of the top 20 serving business (B2B) companies.
electrical outlets.
! Although revenues continue to rise for both Media and Telecom over the past decade, net income has been inconsistent and
Today, content choices are abundant, economic profit (i.e. return on capital minus cost of capital) has been even worse. The future will be dominated by those companies
delivery is complex and competition is willing to test the limits of their business models, and introduce new forms of revenue and profit generation.
everywhere. Hundreds of cable channels
and endless websites all compete for ! Since 2002, media and telecom competitive strength has been relatively stagnant. Overall, the media industry is more competitive
consumer engagement (i.e. how involved than telecom by almost 50%. But in stark contrast to the growth in strength for retail and consumer goods companies in Q1-2009,
people are with your content). Google and media and telecom show little or no growth in strength in Q1-2009.
Yahoo! get 20% more unique visitors per
month than the Super Bowl gets viewers. ! Business models are in flux as companies seek out predictable profit streams. Only four categories are generating negative economic
profit, and three of those four are re-building strength with their customers. A turnaround in Advertising, Entertainment and Telecom
Multi-tasking is the norm for viewers, and
Service firms show promise by end of 2009.
making money has become ever so elusive
as consumers expect everything for free.
! As the economy continues to struggle and unemployment rises, consumers seek out free or inexpensive content. This means the top
advertising firms are in higher demand, as the ad-supported model to making money remains a viable force in 2009.
New challenges mean change, and change
requires trial and error. No wonder media ! Given the high year-over-year volatility across most categories though, both media and telecom companies struggle with how to best
and telecom profits are difficult to keep serve customer needs. Virtually all of the telecom service providers (telecom, internet, cable/satellite, wireline and wireless) show a
consistent from year to year. decrease in customer expectations and pricing power from one year ago. Commoditization is rampant for these categories.
This report provides an update on the ! Profits are shifting to those categories with rising expectations and pricing power, such as firms in advertising, entertainment, web
competitive strength and opportunities in content and publishing. Consumers remain willing to spend money with traditional media such as broadcast, cable and news/tv
these two industries, and details what's in channels.
store for companies as we move towards
2010. ! Media and telecom companies gravitate to just a few competitive moats (e.g. scale, cost and network effect), which in turn causes
fleeting economic profit. Copycats arise quickly and few are building a barrier to entry to protect their profits. Future profits will not
come from consolidation, but from innovative business networks that connect supply and delivery chains, as well as non-Media and
non-Telecom companies to each other.
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 4
MOST COMPETITIVE 2009: Media
Rankings within industry only Trailing 12 Months as of Q1-2009 W Ratings and Scores at national level
A ! Rating represents a company’s ability to 5 23 Apple iTunes AAPL Apple Inc. $33,038 !!!! 77.1
earn a consistent profit above their cost of 6 12 VH1 Channel VIA/B Viacom Inc. $14,625 !!!! 76.6
capital, and their ability to protect that profit 7 20 USA Today GCI Gannett Company $6,768 !!!! 75.1
through multiple sources of competitive
advantage with customers.
8 7 Nickelodeon VIA/B Viacom Inc. $14,625 !!!! 75.0
9 40 DreamWorks DWA Dreamworks Animation Inc. $649 !!!! 74.4
In 2009, size is driving much of the 10 19 Google News GOOG Google Inc. $21,796 !!!! 74.4
competitive strength for media companies.
Ten of the top 20 spots are controlled by
11 9 Ticketmaster TKTM Ticketmaster Entertainment Inc $1,455 !!!! 74.0
just three firms: GE, Google and Viacom. 12 22 YouTube GOOG Google Inc. $21,796 !!!! 72.9
Multiple media properties under one 13 3 Google Search GOOG Google Inc. $21,796 !!!! 72.4
umbrella helps control operational expenses, 14 32 MTV Channel VIA/B Viacom Inc. $14,625 !!!! 71.9
and share sales and marketing impact when
advertising dollars are down.
15 11 Paramount Pictures VIA/B Viacom Inc. $14,625 !!!! 70.8
16 33 BusinessWeek MHP McGraw-Hill Companies $6,355 !!!! 69.1
Four of the remaining Top 20 spots are 17 25 Moody’s Credit Ratings MCO Moody’s Corporation $1,755 !!!! 68.8
occupied by small firms with less than $650
million in revenue: Arbitron, DreamWorks,
18 35 MS-NBC Channel GE General Electric Company $182,581 !!!! 68.1
Morningstar and TheStreet.com. These 19 6 Food Network Channel SNI Scripps Networks Interactive Inc. $1,591 !!!! 66.4
firms are carving out niches through their 20 39 Universal Theme Park GE General Electric Company $182,581 !!!! 65.4
unique data and distribution channels. 100 = Best Possible W Score
W Scores are blended percentile ranks of the company's 5-Year Weighted Average Economic Profit and the ability of the Business Segment to meet consumer expectations
NOTE: For comparison with our 2008 report, this year's report ranks a larger number of companies due to expanded wRatings coverage so ranks may not align.
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 5
MOST COMPETITIVE 2009: Telecom
Rankings within industry only Trailing 12 Months as of Q1-2009 W Ratings and Scores at national level
since last year, although our coverage this 5 12 Windstream Phone WIN Windstream Corporation $3,172 !!!! 70.2
year was expanded to include business-to- 6 5 Juno/Netzero UNTD United Online Inc. $670 !!!! 61.7
business companies as well. Eight of the top 7 7 FairPoint FRP Fairpoint Communications Inc. $1,275 !!!! 61.2
20 are B2B companies.
8 9 DISH Network DISH Dish Network Corporation $11,617 !!! 58.1
This year's list does include a 5W company 9 48 CommScope CTV CommScope Inc. $4,017 !!! 57.9
in telecom, Embarq Phone. We spotlight 10 47 Earthlink ELNK Earthlink Inc. $956 !!! 57.4
Embarq later in this report.
11 4 Cincinnati Bell CBB Cincinnati Bell Inc. $1,403 !!! 56.1
12 25 ADC Telecom ADCT ADC Telecommunications Inc. $1,382 !!! 55.6
13 2 Frontier Phone FTR Frontier Communications Corporation $2,237 !!! 54.9
14 23 Brightpoint CELL Brightpoint Inc. $4,646 !!! 51.2
15 40 Brocade BRCD Brocade Communications Systems $1,551 !!! 51.1
16 27 EchoStar SATS EchoStar Corporation $2,151 !!! 48.8
17 18 Cricket LEAP Leap Wireless International Inc. $1,959 !!! 48.7
18 13 Time Warner Cable TWC Time Warner Cable Inc. $17,200 !!! 48.7
19 52 Cablevision CVC Cablevision Systems Corporation $7,230 !!! 47.2
20 45 Skype EBAY Ebay Inc. $8,541 !!! 46.4
100 = Best Possible W Score
W Scores are blended percentile ranks of the company's 5-Year Weighted Average Economic Profit and the ability of the Business Segment to meet consumer expectations
NOTE: For comparison with our 2008 report, this year's report ranks a larger number of companies due to expanded wRatings coverage so ranks may not align.
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 6
THE ! RATINGS SYSTEM
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 7
MEASURING COMPETITIVE ADVANTAGE
Our turn-key, patented system combines Emerging ROIC with High Investment
INVESTMENT CAP PRICE-EFFICIENCY
financials, behavioral psychology and COMPETITIVE ADVANTAGE PERIOD (CAP)
statistics to measure the durability of a ROIC High Economic Profit with continual Fade Rate
company's advantages with consumers. The
WACC PRICE-EFFIENCY PERIOD
ratings serve as a leading indicator to the Durable
sustainability of company's economic profit. Advantage Capital Low or Negative Economic Profits
The three steps are:
W Scores
60
builds to protect their economic advantage. 2 Barriers to Entry: MOATS
The precursor to every economic advantage
40
is a consumer advantage, and we've
statistically determined that nine moats Economies of Scale
exist. SUPPLY 20
Economies of Skill
CHAIN
3. By blending the percentile ranks of a Cost Containment
0
company's ability to sustain EP and protect it Design Dominance 02 03 04 05 06 07 08 09e 10e 11e
with consumers via Total Moats, we score PRODUCTS Brand Perception
the competitive strength of every company
Routine Reliance
in the wRatings coverage.
Channel Lock-Out
For more information on the wRatings DELIVERY The Moat Maker™ database
Switching Lock-In
approach, see the Appendix. CHAIN utilizes multiple patents
Network Effect
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 8
MEDIA COVERAGE
The wRatings company coverage is determined by company size (market cap), brand awareness and subscriber requests. Some companies listed here for historical purposes.
MEDIA CATEGORIES A&E Channel (Private) Google News (GOOG) MTV Channel (VIA/B) Thomson (TOC.TO)
ABC Network (DIS) Google Search (GOOG) MySpace (NWS) Thomson Reuters (TRI.TO)
Advertising Firm Animal Planet (DISCA) Google Tools (GOOG) NBC Network (GE) Ticketmaster Entertainment (TKTM)
Broadcast Network AOL Search (TWX) Harris Polls (HPOL) NetRatings (Private) TLC Channel (DISCA)
Cable Channel AOL.com Content (TWX) Harte-Hanks (HHS) New York Times (NYT) TNT Channel (TWX)
Entertainment Firm Apple iTunes (AAPL) HBO Channel (TWX) Nickelodeon (VIA/B) Travel Channel (DISCA)
News Company Arbitron (ARB) Headline News (TWX) Omnicom (OMC) Twitter (Private)
News TV Channel Ask.com (IACI) HGTV Channel (SNI) Paramount Studio (VIA/B) Universal Music Group (VIV)
Publishing Firm BusinessWeek (MHP) Home Shopping Network (IACI) Playboy (PLA) Universal Theme Park (GE)
Web Content Firm Carmike Cinemas (CKEC) Hoovers (DNB) QVC Channel (LBTYA) USA Today (GCI)
Web Search Firm CBS Network (CBS) Houghton-Mifflin Harcourt Books (Private) R H Donnelley (RHDC) ValueClick (VCLK)
Cinemark Hldgs. (CNK) IBD Newspaper (Private) Rackspace Hosting (RAX) VH1 Channel (VIA/B)
CKX (CKXE) IDC (IDC) Regal Entertainment Group (RGC) Vocus (VOCS)
Clear Channel (CCO) Interpublic Group (IPG) Reuters (RTRSY) Vogue & Glamour (Private)
CNBC News (GE) John Wiley & Sons (JW/A) Rhino Records (WMG) Wall Street Journal (NWS)
CNN News (TWX) Lamar (LAMR) Scholastic (SCHL) Warner Music (WMG)
Discovery Channel (DISCA) Lexis Nexis (ENL) Showtime (CBS) Washington Post (WPO)
Disney Channel (DIS) Lions Gate Entertainment (LGF) Shutterfly (SFLY) World Wrestling Ent. (WWE)
Disneyland & Disneyworld (DIS) Live Nation (LYV) Simon & Schuster Books (CBS) WPP (WPPGY)
DreamWorks Animation (DWA) Martha Stewart (MSO) Sirius XM Radio (SIRI) Yahoo! Content (YHOO)
ESPN Channels (DIS) Meredith (MDP) Six Flags (SIX) Yahoo! News (YHOO)
Facebook (Private) MLB (Private) Sony Pictures (SNE) Yahoo! Search (YHOO)
Food Network Channel (SNI) Moody’s Credit Ratings (MCO) Speedway Motorsports (TRK) YouTube (GOOG)
The wRatings company coverage is determined by company size (market cap), brand awareness and subscriber requests. Some companies listed here for historical purposes.
Telecom Equipment Provider Alltel (VZ) Embarq Phone (EQ) Southwestern Bell (Bought)
Telecom Service Provider Amer. Tower (AMT) Ericsson (ERIC) Sprint Nextel (S)
Wireless Phone Provider AOL Broadband (TWX) FairPoint Communic. (FRP) Symmetricom (SYMM)
Wireline Phone Provider AT&T Telephone (T) Frontier Phone (FTR) Telephone & Data (TDS)
Ciena (CIEN) Loral Space & Comm (LORL) Vodafone Group (VOD)
Comcast Cable (CMCSA) Metro PCS Communic. (PCS) Windstream Phone (WIN)
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 11
REVENUE & PROFIT 10-YEAR TRENDS
$0 -50%
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009-Q1
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009-Q1
FINANCIAL SOURCE: Company Reports, Standard & Poor Compustat Database
MEDIA INDUSTRY
A W Score measures a company's ability to W Scores Projections (Baseline) Projections (Management Impact)
More
earn a consistent return above their cost of 100 Competitive
capital AND protect that profit through
------------------------->
competitive advantages with consumers.
80
Higher scores mean greater predictability
and financial durability over their rivals.
W Scores
60
By trending W Scores forward, we can
project two different views of their future: 1)
A baseline view (tan striped bar) of how well 40
the company is likely to do based on its last
5 years of results, and 2) A projected view
(green striped bar) that includes 20
management's impact over the past 2 years. Less
Competitive
0
The 2010e projections (generated at end of
2002 2003 2004 2005 2006 2007 2008 Q1- 2010e
Q1-2009) indicate a decrease in media
2009
competitive strength, and increase in
telecom strength by 2010. TELECOM INDUSTRY
Since 2002, media and telecom competitive W Scores Projections (Baseline) Projections (Management Impact)
strength has been relatively stagnant. The 100
More
Competitive
need for new, innovative business
------------------------->
frameworks is critical to increasing
strength. The media industry is more 80
competitive than Telecom by almost 50%,
although Q1-2009 shows some stress to the
W Scores
media environment. 60
40
20
Less
Competitive
0
2002 2003 2004 2005 2006 2007 2008 Q1- 2010e
2009
NOTE: Data as of 20-Feb-2009
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 13
CUSTOMER vs. FINANCIAL PERFORMANCE
Economic Profit as % of Revenue, TTM Q1-2009 Customer Performance (Avg Total Moats 2009-Q1)
By ranking each category by their Total
Moats (TM) and Economic Profit (EP), we can 15 10%
better evaluate the overall competitiveness
of a category. 12 8.6% 8.6% 8%
8.1%
7.6%
The current quarter shows considerable EP 9 6%
improvement for media and telecom 6.0%
companies when compared to the past 10- 5.2% 5.3%
6 4%
years. Business models are in flux as
ECONOMIC PROFIT
3.7% 3.9%
companies seek out predictable profit
3 2%
TOTAL MOATS
streams. Only four categories are
generating a negative return on their capital, 0.4% 0.3%
and three of those are building strength with 0 0%
-0.6%
their customers. A turnaround in
Advertising, Entertainment and Telecom -3 -2%
-3.3%
Service firms show promise for 2009.
-6 -4%
As the economy continues to struggle and
unemployment rises, consumers seek out -9 -6%
-7.0%
free or inexpensive content. This means the
top advertising firms are in higher demand,
-12 -8%
as the ad-supported model to making money -9.2%
remains viable through 2009.
-15 -10%
Broadcast Network
Telecom Equipment Provider
Telecom Service Provider
Cable/Satellite Provider
News TV Channel
The shift in competitive strength to the web
for both ads and content is well underway.
Traditional media such as broadcast
networks and even cable channels are
becoming less competitive. Wireless and
wireline providers have been commoditized.
By looking at the year-to-year changes in Average Company Delivery 2008-Q1 x Customer Expectations
how companies deliver on consumer Average Company Delivery 2009-Q1 -- Pricing Power (Willingness to Pay X% More if Expectations Met)
expectations as well as their pricing power,
we can better understand how the
competitive landscape is changing. Expectations Pricing Power
(100=Median in 2004) (Willing to Pay % More)
The average pricing power increase across 110 6%
all 15 categories is 0.5%, indicating that
customers are willing to pay more if
companies can better meet their 105 5%
expectations. This is good news, especially
considering that customer expectation levels
have gone down by (21%) and company 100 4%
delivery is up by 45% since 2008.
95 3%
Given the high year-over-year volatility
across most categories though, the media
and telecom industries are struggling with
90 2%
how to best serve customer needs. Virtually
all of telecom (except telecom service
providers) show a decrease in customer
85 1%
expectations and pricing power from one
year ago. Commoditization and lack of
pricing power overall remains the norm. 80 0%
Broadcast Network
Telecom Equipment Provider
Telecom Service Provider
Cable/Satellite Provider
Cable Channel
News TV Channel
Profits are shifting to those categories with
rising expectations and pricing power, such
as advertising, entertainment, web content
and publishing firms. Consumers remain
willing to spend money with traditional
media such as broadcast, cable and
news/tv channels.
Highest Lowest
Pricing Power -------------------------------------------------------> Pricing Power
with Customers in 2009 with Customers in 2009
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 15
UNFAIR SHARE OF ECONOMIC PROFITS
Which actions, programs and other initiatives PERCENT OF COMPANIES IN ECONOMIC PROFIT OF
generate an unfair share of economic TOP MOAT PERFORMERS* TOP MOAT PERFORMERS* IN 2008
profits? Certain aspects of a company's MOAT 20th Percentile Median 80th Percentile
business model generate far superior returns Media Telecom National
on capital than others.
Economies of Scale
SUPPLY CHAIN
In this chart, we segmented the top
High Volume in Focused Area
25.2% 8.3% 17.0% -13.2% 6.2%
performing companies (> 3Ms) for each
moat last year. We then percentile rank Economies of Skill
economic profits (EP). When the 80th Time-based Core Competencies
0.0% 1.4% 7.2% 5.3% 23.9%
percentile is high AND the gap with the 50th Cost Containment
percentile is also high, an unfair share of the 19.4% 1.4% 10.2% -14.4% 9.9%
Comparative Quality at Fair Price
EP is going to those advantages. The % of
companies in each moat are the # of Design Dominance
4Ms/5Ms divided by total companies PRODUCTS Real Functional Distinctiveness
3.9% 5.6% 10.4% -18.1% 10.5%
examined.
Brand Perception
Perceived Trusted Leader
5.8% 16.7% 10.6% -10.2% 15.8%
Media and Telecom companies gravitate
to a common set of competitive moats Routine Reliance
(e.g. scale, cost and network effect), which Regular Usage Built into Schedule
0.0% 0.0% 0.8% 6.8% 8.8%
in turn causes fleeting economic profit.
DELIVERY CHAIN
Switching Lock-In
Future profits will not come from 7.8% 2.8% 7.0% -4.3% 20.0%
Fear Loss of Time/Money/Status
consolidation, but from innovative business
networks that connect supply and delivery Network Effect
26.2% 2.8% 13.9% -6.6% 10.2%
chains, as well as non-Media and non- Community Growth with Each Node
Telecom companies to each other.
Total Business Segments 103 72 1,436
* Top Moat Performers determined by those companies with a 4M or higher rating for each moat.
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 16
COMPETITIVE SPOTLIGHTS
Apple iTunes
AT&T Wireless
Embarq Phone
FairPoint
Paramount Pictures
USA Today
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 17
Business
Segment Apple iTunes
Stock Apple Inc. (AAPL)
The recent economic downturn has tested INVESTMENT OPPORTUNITY COMPETITIVE STRENGTH
the power of Apple's competitive edge, and
the company has weathered the storm to Stock Price Economic Profit W Scores Projections (Baseline) Projections (Management Impact)
become a leading indicator of the broader 250 30% 100
technology industry.
25%
200
Yet, most interestingly, two of the key 80
sources for their success comes from beyond 20%
their technology products: Apple retail stores 150
W Scores
60
and Apple iTunes®. The integration of 15%
electronics, retail and media content with its
100
software development platform provides 10%
40
Apple with a unique business framework,
what some call an ecosystem. 50
5% 20
2007
2008
2009
2004 2005 2006 2007 2008 Q1-2009 2010e
and Network Effect to keep customers By Week
captive. Never willing to rest on past
success, Apple is now churning out profits
through its supply chain. With surgical level
control over pricing and costs, the company COMPETITIVE LIFE CYCLE BARRIERS TO ENTRY
can generate exponential volume growth
ROIC WACC Reinvest Rate
with only incremental costs. Percentile ranks within wRatings national coverage
50%
Moat 2009 Rating Nat'l Rank
Consumers still love the products and 45%
experience, but iTunes taps into non- 40% Economies of Scale #### 83.2%
traditional moats to keep and grow their 35% Economies of Skill ### 77.3%
edge.
30% Cost Containment ### 70.6%
25% Design Dominance ## 62.8%
20% Brand Perception # 45.1%
15% Routine Reliance % 0.0%
MOAT KEY ## Weak Advantage 10% Channel Lock-Out " 17.2%
5%
##### Most Competitive $" No Advantage Switching Lock-In ## 62.4%
0%
#### Strong Advantage " Non-Competitive Network Effect ## 61.4%
06-Q3
2007
2008
2009
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 18
Business
Segment AT&T Wireless
Stock AT&T Inc. (T)
W Scores
25 60
exclusive provider for Apple's iPhone. The 6%
costs to subsidize the product have been 20
high, but the rewards are starting to pay off. 15 4%
40
Consumers rank the AT&T Wireless brand at
about 60%, essentially transferring some of 10
2% 20
the Apple brand coolness to AT&T. 5
0 0%
So what could AT&T/Cingular offer Apple, 0
06-Q3
2007
2008
2009
2004 2005 2006 2007 2008 Q1-2009 2010e
besides money? In 2006, Cingular had built By Week
an advantage in the much coveted Routine
Reliance moat where consistent profits are
virtually guaranteed. Their impact on this
moat has diminished over time, but was COMPETITIVE LIFE CYCLE BARRIERS TO ENTRY
strong enough and unique enough to capture
ROIC WACC Reinvest Rate
the Apple iPhone partnership. Percentile ranks within wRatings national coverage
30%
Moat 2009 Rating Nat'l Rank
25% Economies of Scale % 0.0%
20%
Economies of Skill # 40.5%
Cost Containment % 0.0%
15% Design Dominance " 23.7%
Brand Perception ## 59.5%
10%
Routine Reliance " 11.4%
MOAT KEY ## Weak Advantage
5% Channel Lock-Out % 0.0%
##### Most Competitive $" No Advantage Switching Lock-In # 39.3%
0%
#### Strong Advantage " Non-Competitive Network Effect " 28.2%
06-Q3
2007
2008
2009
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 19
Business
Segment Embarq Phone
Stock Embarq Corporation (EQ)
As the fifth largest wireline company in the INVESTMENT OPPORTUNITY COMPETITIVE STRENGTH
US, Embarq is on track to combine its
operations with CenturyTel this quarter. The Stock Price Economic Profit W Scores Projections (Baseline) Projections (Management Impact)
combined firms will operate in 33 states. 70 16% 100
W Scores
60
competitive advantage than each alone. 8%
30
Embarq is a strong operator and has been 6% 40
able to generate consistent economic profit 20
4%
over the past 10 quarters. Having been 20
10
spun off from Sprint, the firm knows how to 2%
execute in two main sources of competitive 0 0%
advantage: economies of scale and network 0
06-Q3
2007
2008
2009
2004 2005 2006 2007 2008 Q1-2009 2010e
effect. By Week
2007
2008
2009
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 20
Business
Segment FairPoint
Stock Fairpoint Communications Inc. (FRP)
W Scores
60
Customers see the benefits of the FairPoint
approach already. Local, highly focused 2%
10
phone companies typically provide superior 40
customer service. By pressing forward and 1%
offering customers service bundles (phone, 5
20
0%
internet and television), FairPoint will extend
its economies of scale advantage with 0 -1%
consumers. Bundles are critical to the future 0
06-Q3
2007
2008
2009
2004 2005 2006 2007 2008 Q1-2009 2010e
of wireline providers as many consumers are By Week
forgoing their land lines altogether.
12%
Economies of Skill # 40.5%
Cost Containment ### 70.6%
10%
Design Dominance ### 76.9%
8%
Brand Perception ## 59.5%
6%
Routine Reliance " 11.4%
4%
MOAT KEY ## Weak Advantage Channel Lock-Out ## 63.4%
2%
##### Most Competitive $" No Advantage Switching Lock-In ### 78.8%
0%
#### Strong Advantage " Non-Competitive Network Effect ### 75.2%
06-Q3
2007
2008
2009
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 21
Business
Segment Paramount Pictures
Stock Viacom Inc. (VIA/B)
W Scores
60
such as Titanic and The Godfather series, 25 6%
Paramount is now transforming its business
20
to rebuild its economic strengths. 4%
40
Paramount has a 62.8% ranking in a Design 15
Dominance moat, showing how strong their 10
2% 20
movies are with consumers. Teaming up 5
with Dreamworks Animation, they recently 0 0%
made Monsters vs. Aliens and will release 0
06-Q3
2007
2008
2009
2004 2005 2006 2007 2008 Q1-2009 2010e
new movies to the Star Trek and By Week
Transformers series this summer.
40%
Economies of Skill % 0.0%
Cost Containment ## 55.5%
30% Design Dominance ## 62.8%
Brand Perception " 28.7%
20%
Routine Reliance " 11.4%
MOAT KEY ## Weak Advantage 10% Channel Lock-Out # 34.7%
##### Most Competitive $" No Advantage Switching Lock-In # 39.3%
0%
#### Strong Advantage " Non-Competitive Network Effect # 43.1%
06-Q3
2007
2008
2009
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 22
Business
Segment USA Today
Stock Gannett Company (GCI)
W Scores
60
USA Today, with its innovative multi-color 4%
format and unique writing style, represents 30
one of the most competitive news properties 3% 40
today. Thinking of themselves as a clearing 20
2%
house of media content available around the 20
10
clock, the "paper" is building a formula to 1%
replace its traditional ad-supported revenue 0 0%
model. For example, they recently struck a 0
06-Q3
2007
2008
2009
2004 2005 2006 2007 2008 Q1-2009 2010e
deal to feed USA Today news articles directly By Week
into the Apple iPhone.
27
53
79
105
131
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 23
APPENDIX
Terminology
Our Coverage
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 24
TERMINOLOGY
Pricing Power
The percentage more consumers are willing to pay if
companies met their expectations. A small gap between
Desires and Delivery scores with a high Pricing Power indicates
an increasing demand for innovative approaches.
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 25
WHY OUR RATINGS WORK
SUPPLY CHAIN
what truly drives a company’s competitive DELL TJX COMPANIES
advantage. GLAXOSMITHKLINE UNITED PARCEL SERVICE
HOME DEPOT WALGREENS* Economies of Skill
The Benchmarks. To see if a company built LOREAL YUM BRANDS Time-Based Core Competencies
PRODUCTS
The Moat Makers™. We then wanted to
see HOW those top companies built barriers 2 ROIC Brand Perception
to entry, or moats, to protect their Perceived Trusted Leader
advantages. Using the top 15 companies as
a starter set, we analyzed data from
135,000+ consumer interviews to Deliver on Routine Reliance
empirically find the nine sources of 3 Consumer Frequent Usage Based on Habit
competitive advantage. We call these
Desires
companies Moat Makers™.
Channel Lock-Out
The Results. Our ratings work because they
2001
2002
2003
2004
2005
Out-Perform
DELIVERY CHAIN
Control Distribution for Choice
use a core set of Moat Maker™ algorithms to 4 Competitors
determine the strength of a company’s moat
in comparison to Switching Lock-In
industry peers. Rolling 5-year analysis
starting in 1999 Fear Loss of Time/Money/Status
Network Effect
Exponential Growth with Each Node
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 26
PRIORITIZE SPENDING TO BUILD ADVANTAGES
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 27
OUR INDUSTRY COVERAGE
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 28
FOR MORE INFORMATION
ABOUT CAPGEMINI
CONTACT wRATINGS CONTACT CAPGEMINI
Capgemini, one of the world's foremost providers of consulting,
technology and outsourcing services, enables its clients to
transform and perform through technologies. Capgemini provides
Gary A. Williams Greg Jacobsen
its clients with insights and capabilities that boost their freedom to gawilliams@wratings.com greg.jacobsen@capgemini.com
achieve superior results through a unique way of working, the
Collaborative Business Experience. The Group relies on its global
delivery model called Rightshore®, which aims to get the right wratings.com capgemini.com
balance of the best talent from multiple locations, working as one
team to create and deliver the optimum solution for clients. Present
wRATINGS CORPORATION CAPGEMINI U.S.
in more than 30 countries, Capgemini reported 2008 global 2325 Dulles Corner Blvd. 623 Fifth Avenue
revenues of EUR 8.7 billion (approximately USD $12.74 billion) and
employs over 90,000 people worldwide.
Suite 500 33rd Floor
Herndon, VA 20171 New York, NY 10022
More information is available at www.us.capgemini.com.
703.788.6532 212.314.8000
THE W REPORT™ © 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 29