> Detecon Executive Briefing Dr. Markus Steingrver Markus.Steingroever@detecon.

com

Wholesalers and retailers are in the business of re-selling goods that have been purchased from suppliers. They bring goods produced in the province, or imported from other regions and countries, to the marketplace where they can be purchased by consumers.

Wholesalers can be thought of as middle men who supply goods to industrial or business customers, such as retailers, restaurants, manufacturers, or construction companies. They sell single units of big ticket items like farm machinery, heavy equipment and vehicles. They also sell bulk quantities of building supplies, food & beverages, seed, fertilizer, and many other types of products. Wholesalers typically operate from a warehouse or office space that is not necessarily designed to attract walk-in customers. These outlets are often located in industrial areas of cities, where it is convenient for their customers to pick up and load supplies, or from which goods can be distributed and delivered directly to their clients.

The main characteristic of retailers is that they sell goods primarily to consumers or households. Supermarkets, gas bars, drug stores, furniture outlets, mom and pop shops, hardware stores, car lots, mobile home dealers, and garden centres are only some of the many types of retail businesses. This industry also includes big box retailers such as office supply and computer stores, and retailers of building materials, plumbing, and electrical supplies. Retail outlets are usually designed to have display areas where customers can see merchandise available for sale. They cater to walk-in traffic, so theyre often located in city centres or suburban areas.

Retail versus Wholesale Effectively soIving the conflict between retail and wholesale The fear that wholesale offerings will cannibalize retail revenues is often unsubstantiated. If systematically analyzed, it turns out that there are only a few areas in which wholesale offerings will result in dangerously empowered competitors in the medium term. On the contrary, the strategic shaping of retail markets can often be done more effectively using partnering with strong brand owners, who bring in their own core competences. Separating the wholesale from the retail activities can be a

profit maximizing strategy. Independent wholesale units are more likely to follow a proactive and innovative approach. Conflicts between retail and wholesale have to be solved at the group level by following a wholesale joins retail strategy. www.detecon.com

> Detecon Executive Briefing Retail versus Wholesale The question as to whether wholesale business should actively be pushed is one of the most disputed issues for fixed or mobile incumbents. Most incumbents traditionally view themselves as being retail companies and are sceptical with regard to providing wholesale offers to other operators. This has historical reasons: in newly liberalized fixed network monopolies, wholesale was a niche segment that became crucial for market development. The new entrants business models were based to a large extent on these preproducts. Incumbents tended to use wholesale products to influence market development, as the retail market share needed to be protected. Wholesale products like bitstream access were generally not offered with great enthusiasm, but mandated by the NRAs, often after hard litigations with new entrants. Operators normally change their attitude towards wholesale, when an increasing number of their wholesale services begin to face competition from new fixed or mobile entrants who have rolled-out their own infrastructure. Moreover, innovative wholesale products have emerged from the IP revolution including Ethernet, IP transport, Enabling Services, VoIP, IPTV and VoD. It is a strategic question whether these services are to be provided on a wholesale basis. The retail perspective is to protect a USP by not selling these services to competitors. But is this strategy optimizing the profitability of the whole company or does it need a joint retail-wholesale approach? To understand the nature of the retail-wholesale conflict, it is useful to distinguish between services that have to be provided to fulfil regulatory obligations and those which are offered because of competitive pressure on the wholesale market itself. Example: fixed wholesale products categories Rationales Network Infrastructure & Facilities Site Land Tower Antenna Rooftop Collocation Power supply Duct Access road Grounding Facilities Leased Capacity Network Access Data Services Voice Services Multimedia Internet and IT Services Business Operation Support E1 STM-1 Low capacity High capacity Satellite link Transponder Wavelength IP Bitstream ATM Bitstream xDSL resale LLU Ethernet NGA Network roaming WiFi roaming BWA IP VPN IP Peering IP Transit Satellite transport ATM Frame Relay SMS transport MMS transport GPRS transport VoIP Domestic IC International IC IC transit IP interconnect VAS voice

Billing IPTV Collection VoD Enabling service Planning Network design Web Hosting Optimization eBusiness Maintenance Consulting VNO 1 Regulated Products 2 Potentially Regulated Products 3 Commercial Products Detecon International GmbH 12/2008 2 www.detecon.com Retail versus Wholesale

> Detecon Executive Briefing Wholesale products can be grouped into three categories that reflect different levels of regulatory intervention: 1. Regulated products: Wholesale offerings in this category are mandatory for mobile or fixed incumbents. Hence, no real retail-wholesale conflict applies as incumbents do not have the choice of refusing to offer or even fine-tuning product features. 2. Potentially regulated products: In this category there is a threat of regulatory intervention. The strategic recommendation here is to proactively design wholesale products that do not cannibalize the retail business. Examples include bitstream access and naked DSL as well as sharing facilities such as ducts, sites or towers. 3. Commercial products: Includes all products which could be offered by alternative carriers on a wholesale basis. In emerging markets these operators are often larger mobile carriers. Incumbents do not face a retail cannibalization problem but should follow a me-too or even better a me-first strategy. It becomes obvious that what seemed at first glance to be a huge threat actually only applies to the second product category. As a result the retail cannibalization problem can be reduced to the question of how to deal with potentially regulated products. At a general level wholesale business opportunities in this category should be actively promoted if the following formula holds true: Additional wholesale revenues Retail loss > 0 A detailed business case is needed to calculate the revenue delta. In addition, the following issues have to be systematically addressed: 1. Regulatory threats: Potentially regulated services can be designed in a way which prevents the regulator stepping in. These offerings minimize retail cannibalization using creative design and pricing schemes. At the same time they provide protection against much more painful regulatory intervention. For example, many incumbents come up with some form of resale-based bitstream access offerings before the regulator mandates a broadband access product. 2. Competitors reactions: Competitors align their strategies to the wholesale market environment created by the incumbent. BT for example is currently facing the problem that competitors are migrating from bitstream to local loop unbundling a medium term reaction to the relatively high retail-minus-based bitstream access price. This example shows that what might be beneficial in the short run may have quite painful consequences in the medium run. By opening up their infrastructure, incumbents can accelerate and support service-based competition rather than infrastructure-based competition. This sustainable competition is also to the benefit of incumbents as they can still sell large parts of their traditional value chain. Detecon International GmbH 12/2008 3 www.detecon.com Retail versus Wholesale

> Detecon Executive Briefing 3. Market structure & market dynamics: An isolated view of retail and wholesale revenues is hardly possible as there is no pre-defined way of designing the wholesale business. In order to take the full advantages of the wholesale business option for incumbents into consideration, an advanced strategic approach is necessary. Such an approach takes the medium and long term effects of wholesale offerings on market dynamics into account. For example, by actively promoting wholesale transport services or FTTH wholesale products market consolidation would be given a hefty push, which in turn could be used to gain retail market shares. A strategic approach can also be applied in marketing new retail services. The wholesale service portfolio can be designed to support, sustain and develop existing, and future retail business. Many incumbents are developing new multi-play products to try to establish services like IPTV in an already saturated market. The argument that these services are a retail USP and should not be offered to competitors neglects the opportunities provided by wholesale offerings based on a partnering approach. This approach chooses wholesale partners because of their core competences, i.e. strong and credible brands. These are used to push the offering in the retail market. For example, a telco-marketed IPTV might not take off, but strong promotion with a major Pay TV provider as partner might change this picture. Organizing for success? The retail and wholesale conflict can only be resolved at top-management level and may involve changes in the organizational structure. The systematic exploitation of valuable wholesale business opportunities is in many instances hampered by inadequate decision processes or inefficient committee structures. Related issues are often subject to informal meetings/committees with no official decisionmaking power and with unclear responsibilities leading to insufficient solutions. Often this is combined with frictions in delivery channels and a poorly defined allocation of customers to the enterprise or wholesale segment. An example of a well-designed organizational model is the separation of the retail and the wholesale business. Independent wholesale units are more likely to follow a proactive and innovative go-to-market strategy. A specific management approach to the retail vs. wholesale dilemma includes the establishment of a superior committee within the organization focused on the strategic goals of the whole company. This committee then institutionalizes the joint enabling of the wholesale and retail business. Detecon International GmbH 12/2008 4 www.detecon.com Retail versus Wholesale

> Detecon Executive Briefing Conclusion & Recommendations A careful and systematic analysis of the retail versus wholesale conflict will in most cases show that wholesale can add a positive net effect and improve the overall performance of the company. The wholesale products and the commercial conditions under which these are provided should be carefully designed to support a wholesale joins retail strategy. This strategy anticipates market dynamics by taking competitors reactions into account. Incumbents should change their mindset with regard to wholesale by following a proactive approach, and also start integrating complementary market players into their retail strategies. An appropriate organizational structure can support a constructive approach and decisionmaking. If the retail-wholesale conflict is addressed at the CEO level, it ensures a fair balancing of arguments and a profit optimizing strategy for the whole company. Detecon International GmbH 12/2008 5 www.detecon.com Recommendation