the w report media & telco 2009
TRANSCRIPT
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T H E W R E P O R T s p o n s o r e d b y C A P G E M I N I
c
MOST COMPETITIVE COMPANIES in AMERICA
Copyright 1999-2009 wRatings Corporation. All rights reserved.
No part of this publication may be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of the wRatings
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.
Media & Telecom 2009
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Rankings within industry only Trailing 12 Months as of Q1-2009 W Ratings and Scores at national level
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
Margin of Error 0.27 for all ratings
FINANCIAL SOURCE: Company Reports, Standard & Poor Compustat Database
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.
T H E W R E P O R T
2008-
Q1
Rank
Embarq Phone
4
Ticker
Harris
2 1 Hughes Network
3 33
1 22
Business Segment
Embarq Corporation $6,124
10 Qualcomm
Parent CompanyTTM Rev
in $M
Hughes Communications Inc.
EQ
Harris Corporation
Historically, the Telecom industry remains
one of the most challenging industries to
build a consistent level of competitive
strength.
Much of this is due to the constant need to
invest capital for building out infrastructure.
The Top 20 in 2009 had a 50% turnover
since last year, although our coverage thisyear was expanded to include business-to-
business companies as well. Eight of the top
20 are B2B companies.
This year's list does include a 5W company
in telecom, Embarq Phone. We spotlight
Embarq later in this report.
HRS
MOST COMPETITIVE 2009: Telecom
2009-
Q1
Rank
!!!!
Fairpoint Communications Inc. $1,275
CommScope Inc. $4,017
6 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009
7 7
5 12 Windstream Phone WIN
HUGH
$5,654
$1,060
Windstream Corporation $3,172
Qualcomm Inc.QCOM $11,210
W Rating W Score
!!!!!
!!!!
!!!!
!!!!6 5 Juno/Netzero UNTD United Online Inc. $670 !!!!
FairPoint FRP !!!!8 9 DISH Network DISH Dish Network Corporation $11,617 !!!9 48 CommScope CTV !!!
10 47 Earthlink ELNK Earthlink Inc. $956 !!!11 4 Cincinnati Bell CBB Cincinnati Bell Inc. $1,403 !!!12 25 ADC Telecom ADCT ADC Telecommunications Inc. $1,382 !!!13 2 Frontier Phone FTR Frontier Communications Corporation $2,237
!!!14 23 Brightpoint CELL Brightpoint Inc. $4,646 !!!15 40 Brocade BRCD Brocade Communications Systems $1,551 !!!16 27 EchoStar SATS EchoStar Corporation $2,151 !!!17 18 Cricket LEAP Leap Wireless International Inc. $1,959 !!!18 13 Time Warner Cable TWC Time Warner Cable Inc. $17,200 !!!19 52 Cablevision CVC Cablevision Systems Corporation $7,230 !!!
EBAY !!!Ebay Inc. $8,541Skype20 45
82.3
76.2
73.5
72.3
70.2
61.7
61.2
58.1
57.9
57.4
56.1
55.6
54.9
51.2
51.1
48.8
48.7
48.7
47.2
46.4
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Approximate % Distribution of Companies in 2008
THE! RATINGS SYSTEM
T H E W R E P O R T
The !Ratings are similar to a five-star
rating system used for hotels. We rate
companies 1 through 5 !s, where the !"
represents Winners, with 5 the most and 1
the least competitive.
The Competitive Outlook quadrant shows
how our ratings are based on historical
results and future ability to perform. Thehistorical is a 5-yr weighted average of
economic profits. The future is the total
moats (i.e. barriers to entry) of how well a
company is beating its rivals by meeting
consumer expectations in the current year.
Changes in a companys !Ratings can be
caused by:
1) Increased Economic Profits (EP)
2) Increased performance with consumers,
resulting in higher Total Moats (TM)
3) Rivals that increase their EP or TM faster
than the company
Because the !Ratings are relative,
companies can shift up or down without
changing their performance.
We continually backtest our algorithms, and
a companys Total Moats are a leading
indicator to their ability to generate EP. In
our backtests, companies able to sustain a
high TM score (in the top quintile) have
generated the highest EP every year.
Vulnerable
Most Competitive
!!!!!
30%
PREDICTABLE RESULTSDelivering higher economic profits (EP) on a consistent basis requires companies
to meet consumer expectations better than rivals and build moats to protect their profits.
The!Ratings System blends ranks of EP and Total Moats into a single rating.
COMPETITIVE
OUTLOOK
Total Moats (Barriers to Entry)
Competitive
!!!
Emerging5-YREconomicProfit
NarrowingDURABLE
!!!!!
7Media & Telecom 2009 2009 wRatings Corporation. All rights reserved.
25%
10%
25% High Competitive!!!!
10%Least Competitive
!
LEADING INDICATOR TO FINANCIAL RESULTS
Low Competitive
!!
-25%
-20%
-15%
-10%
-5%0%
5%
10%
15%
2002 2003 2004 2005 2006 2007
EconomicPr
ofit
(ROIC-WAC
C)
B ot to m Q ui nt il e 2 0t h Q ui nt il e 4 0t h Q ui nt il e 6 0t h Q ui nti le T OP Qu in ti le To ta l M oa ts
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Stages of Competitive Life Cycle
INVESTMENT PERIOD
Emerging ROIC with High Investment
COMPETITIVE ADVANTAGE PERIOD (CAP)
High Economic Profit with continual Fade Rate
PRICE-EFFIENCY PERIOD
Low or Negative Economic Profits
T H E W R E P O R T
DELIVERY
CHAIN
Channel Lock-Out
We measure competitive advantage in a
highly unique, but completely logical way.
Our turn-key, patented system combines
financials, behavioral psychology and
statistics to measure the durability of a
company's advantages with consumers. The
ratings serve as a leading indicator to the
sustainability of company's economic profit.The three steps are:
1. Calculate a company's Economic Profit
(EP), ROIC (return-on-invested-capital)
minus WACC (weighted average cost of
capital). Companies with 5+years of superior
EP have built some form of protection
what famous investor Warren Buffett calls a
"moat."
2. Moats are barriers to entry a company
builds to protect their economic advantage.
The precursor to every economic advantage
is a consumer advantage, and we've
statistically determined that nine moats
exist.
3. By blending the percentile ranks of a
company's ability to sustain EP and protect it
with consumers via Total Moats, we score
the competitive strength of every company
in the wRatings coverage.
For more information on the wRatings
approach, see the Appendix.Network Effect
Economies of Scale
8
Switching Lock-In
MEASURING COMPETITIVE ADVANTAGE
Economies of Skill
Cost Containment
Brand Perception
SUPPLY
CHAIN
Competitive Strength
1
3
PRODUCTS
Barriers to Entry: MOATS
Routine Reliance
Competitive Life Cycle
Design Dominance
The Moat Maker database
utilizes multiple patents
Media & Telecom 2009 2009 wRatings Corporation. All rights reserved.
2
INVESTMENT CAP PRICE-EFFICIENCY
ROIC
WACC
C a i ta lDurable
Advantage
Narrowing
Emerging
Vulnerable
0
20
40
60
80
100
02 03 04 05 06 07 08 09e 10e 11e
WScores
Current W Scores Projected W Scores Projections with Mgmt Impact
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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) Moodys Credit Ratings (MCO) Speedway Motorsports (TRK) YouTube (GOOG)
Forbes Magazine (Private) Morningstar.com (MORN) The CW Network (CBS)
Fortune Magazine (TWX) MSN Search (MSFT)
FOX Business Network (NWS) MSN.com Content (MSFT)
FOX Network (NWS) MS-NBC Channel (GE)
FOX News (NWS)
T H E W R E P O R T 2009 wRatings Corporation. All rights reserved.
Check our website for the most up-to-date coverage.
MEDIA COVERAGE
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The wRatings company coverage is determined by company size (market cap), brand awareness and subscriber requests. Some companies listed here for historical purposes.
TELECOM CATEGORIES 3Com (COMS) DirecTV (DTV) Rogers Communications (RCI)
ADC Telecom. (ADCT) DISH Network (DISH) SBA Communications (SBAC)
Cable/Satellite Provider Adelphia (Bankrupt) Earthlink (ELNK) Shaw Communications (SJRB.TO)
Internet Service Provider Alcatel-Lucent (ALU) EchoStar (SATS) Skype (EBAY)
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)
AT&T Wireless (T) Global Crossing (GLBC) Tellabs (TLAB)
BCE (BCE) Harris (HRS) Telus (TU)
BellSouth (Bought) Hughes Communications (HUGH) Time Warner Cable (TWC)
Black Box (BBOX) iBasis (IBAS) TiVo (TIVO)
Brightpoint (CELL) IDT (IDT) T-Mobile (DT)
Brocade Communic. (BRCD) JDS Uniphase (JDSU) U.S. Cellular (USM)
Cablevision (CVC) Juniper Networks (JNPR) Verizon FiOS (VZ)
CenturyTel (CTL) Juno/Netzero (UNTD) Verizon Phone (VZ)
Charter Cable (CHTR) Level 3 Communic. (LVLT) Verizon Wireless (VZ)
Ciena (CIEN) Loral Space & Comm (LORL) Vodafone Group (VOD)
Cincinnati Bell (CBB) Mediacom Communications (MCCC) Vonage (VG)
Comcast Cable (CMCSA) Metro PCS Communic. (PCS) Windstream Phone (WIN)
CommScope (CTV) Nextel (S) XO Communications (XOHO)
Corning (GLW) Nortel Networks (NRTLQ)
Cox Cable (Private) Qualcomm (QCOM)
Cricket (LEAP) Qwest Telephone (Q)
Crown Castle Int'l (CCI) Road Runner (TWX)
T H E W R E P O R T 2009 wRatings Corporation. All rights reserved.
Check our website for the most up-to-date coverage.
TELECOM COVERAGE
10
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Customer Expectations & Pricing Power
T H E W R E P O R T Media & Telecom 2009 2009 wRatings Corporation. All rights reserved.
INDUSTRY COMPETITIVENESS
Revenue & Profit 10-Year Trends
Competitive Strength & Projections
Customer vs. Financial Performance
11
Unfair Share of Economic Profits
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MEDIA INDUSTRY
TELECOM INDUSTRY
NOTE: Data as of 20-Feb-2009
Media & Telecom 2009 2009 wRatings Corporation. All rights reserved.
-------------------------
More
Competitive
A W Score measures a company's ability to
earn a consistent return above their cost of
capital AND protect that profit through
competitive advantages with consumers.
Higher scores mean greater predictability
and financial durability over their rivals.
By trending W Scores forward, we can
project two different views of their future: 1)
A baseline view (tan striped bar) of how well
the company is likely to do based on its last
5 years of results, and 2) A projected view
(green striped bar) that includes
management's impact over the past 2 years.
The 2010e projections (generated at end of
Q1-2009) indicate a decrease in media
competitive strength, and increase in
telecom strength by 2010.
Since 2002, media and telecom competitive
strength has been relatively stagnant. The
need for new, innovative business
frameworks is critical to increasing
strength. The media industry is more
competitive than Telecom by almost 50%,
although Q1-2009 shows some stress to the
media environment.
T H E W R E P O R T
COMPETITIVE STRENGTH & PROJECTIONS
Less
Competitive
More
Competitive
----------
---------------
Less
Competitive
13
0
20
40
60
80
100
2002 2003 2004 2005 2006 2007 2008 Q1-
2009
2010e
WScores
W Scores Projections (Baseline) Projections (Management Impact)
0
20
40
60
80
100
2002 2003 2004 2005 2006 2007 2008 Q1-
2009
2010e
WScores
W Scores Projections (Baseline) Projections (Management Impact)
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Most Competitive Least Competitive
with Customers with Customers
(Highest Total Moats) (Lowest Total Moats)
FINANCIAL SOURCE: Company Reports, Standard & Poor Compustat Database
------------------------------------------------------->
2009 wRatings Corporation. All rights reserved. 14
By ranking each category by their Total
Moats (TM) and Economic Profit (EP), we can
better evaluate the overall competitiveness
of a category.
The current quarter shows considerable EP
improvement for media and telecom
companies when compared to the past 10-
years. Business models are in flux as
companies seek out predictable profit
streams. Only four categories are
generating a negative return on their capital,
and three of those are building strength with
their customers. A turnaround in
Advertising, Entertainment and Telecom
Service firms show promise for 2009.
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 viable through 2009.
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.
With customer & financial strength aligned,
predictability is best found in web
content, publishing, web search, news
companies and cable channels.
CUSTOMER vs. FINANCIAL PERFORMANCE
T H E W R E P O R T
-7.0%
-9.2%
-3.3%
8.6%
0.4%
8.1%
3.7%
7.6%
5.2%
0.3%
5.3%
3.9%
-0.6%
6.0%
8.6%
-15
-12
-9
-6
-3
0
3
6
9
12
15
A
dvertisingFirm
TelecomS
erviceProvider
Ente
rtainmentFirm
WebContentFirm
TelecomE
quipmentProvider
PublishingFirm
W
ebSearchFirm
InternetS
erviceProvider
NewsCompany
Cable/Sa
telliteProvider
N
ewsTVChannel
CableChannel
Wireless
PhoneProvider
Bro
adcastNetwork
Wireline
PhoneProvider
TOTALMOATS
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
E
CONOMICPROFIT
Economic Profit as % of Revenue, TTM Q1-2009 Customer Performance (Avg Total Moats 2009-Q1)
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Average Company Delivery 2008-Q1 x Customer Expectations
Average Company Delivery 2009-Q1 -- Pricing Power (Willingness to Pay X% More if Expectations Met)
Highest Lowest
Pricing Power Pricing Power
with Customers in 2009 with Customers in 2009
------------------------------------------------------->
T H E W R E P O R T 2009 wRatings Corporation. All rights reserved.
CUSTOMER EXPECTATIONS & PRICING POWER
15
By looking at the year-to-year changes in
how companies deliver on consumer
expectations as well as their pricing power,
we can better understand how the
competitive landscape is changing.
The average pricing power increase across
all 15 categories is 0.5%, indicating that
customers are willing to pay more if
companies can better meet their
expectations. This is good news, especially
considering that customer expectation levels
have gone down by (21%) and company
delivery is up by 45% since 2008.
Given the high year-over-year volatility
across most categories though, the media
and telecom industries are struggling with
how to best serve customer needs. Virtually
all of telecom (except telecom service
providers) show a decrease in customer
expectations and pricing power from one
year ago. Commoditization and lack of
pricing power overall remains the norm.
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 traditionalmedia such as broadcast, cable and
news/tv channels.
Media & Telecom 2009
80
85
90
95
100
105
110
AdvertisingFirm
Entert
ainmentFirm
TelecomSe
rviceProvider
Web
ContentFirm
TelecomE
quipm
entProvider
Pu
blishingFirm
InternetServiceProvider
N
ewsCompany
We
bSearchFirm
NewsTVChannel
Cable/Sate
lliteProvider
Broad
castNetwork
WirelinePhoneProvider
CableChannel
WirelessPhoneProvider
Expectations
(100=Median in 2004)
0%
1%
2%
3%
4%
5%
6%
Pricing Power
(Willing to Pay % More)
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20th Percentile Median 80th Percentile
* Top Moat Performers determined by those companies with a 4M or higher rating for each moat.
13.9%
5.1%
10.4%
National
2009 wRatings Corporation. All rights reserved. 16
0.0% 0.0%
2.8%
10.6%
DELIVERYCHAIN
##### Most Competitive
Total Business Segments
Weak Advantage
26.2%
0.0%
72
0.0%
Switching Lock-In
Network Effect
Fear Loss of Time/Money/Status7.8% 2.8%
0.8%
103
25.2%
Media Telecom
SUPPLY
CHAIN 8.3%
19.4% 1.4%Cost Containment
Economies of Scale
5.8%
Real Functional Distinctiveness
Comparative Quality at Fair Price
17.0%
7.2%
10.2%
Economies of Skill
16.7%
Design Dominance
Time-based Core Competencies
High Volume in Focused Area
UNFAIR SHARE OF ECONOMIC PROFITS
PERCENT OF COMPANIES IN
TOP MOAT PERFORMERS*
Regular Usage Built into Schedule
Which actions, programs and other initiatives
generate an unfair share of economic
profits? Certain aspects of a company's
business model generate far superior returns
on capital than others.
In this chart, we segmented the top
performing companies (> 3Ms) for each
moat last year. We then percentile rank
economic profits (EP). When the 80th
percentile is high AND the gap with the 50th
percentile is also high, an unfair share of the
EP is going to those advantages. The % of
companies in each moat are the # of
4Ms/5Ms divided by total companies
examined.
Media and Telecom companies gravitate
to a common set of competitive moats
(e.g. scale, cost and network effect), whichin 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.
MOAT KEY
MOAT
Routine Reliance
$" No Advantage
##
PRODUCTS
Perceived Trusted Leader
Competitive % Disadvantage
T H E W R E P O R T
###
Community Growth with Each Node
" Non-Competitive#### Strong Advantage
3.9% 5.6%
0.0% 1.4%
Media & Telecom 2009
1,436
7.0%
Channel Lock-Out
Brand Perception
ECONOMIC PROFIT OF
TOP MOAT PERFORMERS* IN 2008
Control Distribution for Choice
6.2%
23.9%
9.9%
10.5%
15.8%
8.8%
21.9%
20.0%
10.2%
-13.2%
-18.1%
-10.2%
6.8%
-5.1%
-4.3%
-14.4%
-6.6%
5.3%
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17 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009
Paramount Pictures
COMPETITIVE SPOTLIGHTS
AT&T Wireless
Apple iTunes
T H E W R E P O R T
Embarq Phone
FairPoint
USA Today
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By Week
Percentile ranks within wRatings national coverage
By Week
INVESTMENT OPPORTUNITY COMPETITIVE STRENGTH
#####
### Competitive % Disadvantage
#### Strong Advantage
T H E W R E P O R T
MOAT KEY ##
The recent economic downturn has tested
the power of Apple's competitive edge, and
the company has weathered the storm to
become a leading indicator of the broader
technology industry.
Yet, most interestingly, two of the key
sources for their success comes from beyond
their technology products: Apple retail stores
and Apple iTunes. The integration of
electronics, retail and media content with its
software development platform provides
Apple with a unique business framework,
what some call an ecosystem.
In past reports, we've detailed how iTunes
has helped build moats in Switching Lock-In
and Network Effect to keep customers
captive. Never willing to rest on past
success, Apple is now churning out profitsthrough its supply chain. With surgical level
control over pricing and costs, the company
can generate exponential volume growth
with only incremental costs.
Consumers still love the products and
experience, but iTunes taps into non-
traditional moats to keep and grow their
edge.
Most Competitive $" No Advantage
Non-Competitive
17.2%
%
"
###
#
Business
Segment Apple iTunesApple Inc. (AAPL)
83.2%
Weak Advantage
Stock
Channel Lock-Out
Economies of Skill
COMPETITIVE LIFE CYCLE BARRIERS TO ENTRY
Cost Containment
62.8%
Brand Perception
##
2009 Rating
####Economies of Scale
Moat
45.1%
0.0%
Switching Lock-In
2009 wRatings Corporation. All rights reserved.
62.4%##
Media & Telecom 2009
TOTAL MOATS = 16
18
Network Effect ##
Routine Reliance
Nat'l Rank
77.3%
Design Dominance
70.6%
###
61.4%
FINANCIAL SOURCE: Company Reports, Standard & Poor Compustat Database
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
06-
Q3
2007
2008
2009
ROIC WACC Reinvest Rate
0
20
40
60
80
100
2004 2005 2006 2007 2008 Q1-2009 2010e
WScore
s
W Scores Projections (Baseline) Projections (Management Impact)
0
50
100
150
200
250
06-
Q3
2007
2008
2009
0%
5%
10%
15%
20%
25%
30%
Stock Price Economic Profit
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By Week
Percentile ranks within wRatings national coverage
By Week
INVESTMENT OPPORTUNITY COMPETITIVE STRENGTH
COMPETITIVE LIFE CYCLE BARRIERS TO ENTRY
Moat 2009 Rating Nat'l Rank
Economies of Scale % 0.0%
## 59.5%
Economies of Skill # 40.5%
Cost Containment % 0.0%
Brand Perception
Routine Reliance " 11.4%
Channel Lock-Out % 0.0%
# 39.3%
Network Effect " 28.2%
TOTAL MOATS = 1
Switching Lock-In
FINANCIAL SOURCE: Company Reports, Standard & Poor Compustat Database
T H E W R E P O R T 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 19
#### Strong Advantage Non-Competitive
### Competitive % Disadvantage
"
##### Most Competitive $" No Advantage
MOAT KEY ## Weak Advantage
Stuck in one of the most commoditized
industries, what can a wireless service
provider do to build competitive advantage?
Why not partner with one of the coolest
brands on a new product outside of the
media and telecom industries?
AT&T Wireless (the old Cingular Wireless)
did just that when they signed on to be the
exclusive provider for Apple's iPhone. The
costs to subsidize the product have been
high, but the rewards are starting to pay off.
Consumers rank the AT&T Wireless brand at
about 60%, essentially transferring some of
the Apple brand coolness to AT&T.
So what could AT&T/Cingular offer Apple,
besides money? In 2006, Cingular had built
an advantage in the much coveted Routine
Reliance moat where consistent profits arevirtually guaranteed. Their impact on this
moat has diminished over time, but was
strong enough and unique enough to capture
the Apple iPhone partnership.
Design Dominance " 23.7%
Stock
Business
Segment AT&T WirelessAT&T Inc. (T)
0%
5%
10%
15%
20%
25%
30%
06-
Q3
2007
2008
2009
ROIC WACC Reinvest Rate
0
20
40
60
80
100
2004 2005 2006 2007 2008 Q1-2009 2010e
WScore
s
W Scores Projections (Baseline) Projections (Management Impact)
0
5
10
15
20
25
30
35
40
45
06-
Q3
2007
2008
2009
0%
2%
4%
6%
8%
10%
12%
Stock Price Economic Profit
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By Week
Percentile ranks within wRatings national coverage
By Week
INVESTMENT OPPORTUNITY
T H E W R E P O R T 2009 wRatings Corporation. All rights reserved.
#### Strong Advantage "
COMPETITIVE STRENGTH
COMPETITIVE LIFE CYCLE BARRIERS TO ENTRY
Moat 2009 Rating Nat'l Rank
Economies of Scale ### 73.9%
Economies of Skill # 40.5%
Cost Containment # 30.4%
Design Dominance ## 62.8%
Brand Perception " 28.7%
Routine Reliance # 35.5%
# 34.7%
FINANCIAL SOURCE: Company Reports, Standard & Poor Compustat Database
Network Effect ### 75.2%
Switching Lock-In # 39.3%
Media & Telecom 2009 20
### Competitive % Disadvantage 13
MOAT KEY ## Weak Advantage
TOTAL MOATS =
Non-Competitive
##### Most Competitive $" No Advantage
Channel Lock-Out
As the fifth largest wireline company in the
US, Embarq is on track to combine its
operations with CenturyTel this quarter. The
combined firms will operate in 33 states.
As the rate of local access line losses
continue to accelerate, cost cutting is key to
survival. Yet, consolidation of the two
companies will help to build an even greater
competitive advantage than each alone.
Embarq is a strong operator and has been
able to generate consistent economic profit
over the past 10 quarters. Having been
spun off from Sprint, the firm knows how to
execute in two main sources of competitive
advantage: economies of scale and network
effect.
Scale comes from their ability to controlcosts while keeping service availability high.
Embarq also uses new technology behind the
scenes to their advantage, allowing them to
offer a better and more unique experience to
their customer community.
Stock Embarq Corporation (EQ)
Embarq PhoneBusiness
Segment
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
06-
Q3
2007
2008
2009
ROIC WACC Reinvest Rate
0
20
40
60
80
100
2004 2005 2006 2007 2008 Q1-2009 2010e
WScore
s
W Scores Projections (Baseline) Projections (Management Impact)
0
10
20
30
40
50
60
70
06-
Q3
2007
2008
2009
0%
2%
4%
6%
8%
10%
12%
14%
16%
Stock Price Economic Profit
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By Week
FINANCIAL SOURCE: Company Reports, Standard & Poor Compustat Database
21T H E W R E P O R T 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009
Network Effect
### Competitive % Disadvantage TOTAL MOATS =
### 75.2%Non-Competitive
##### Most Competitive $" No Advantage
#### Strong Advantage "
Channel Lock-Out ## 63.4%
Switching Lock-In ### 78.8%
MOAT KEY ## Weak Advantage
FairPoint is the eighth largest telecom
company, operating in 18 states and 32 local
exchanges. Recently, FairPoint took full
control over the Verizon wireline business in
the New England local exchange. With this
change over finally implemented, customers
are welcoming a fresh view and perspective
from the new kid on the block.
Customers see the benefits of the FairPoint
approach already. Local, highly focused
phone companies typically provide superior
customer service. By pressing forward and
offering customers service bundles (phone,
internet and television), FairPoint will extend
its economies of scale advantage with
consumers. Bundles are critical to the future
of wireline providers as many consumers are
forgoing their land lines altogether.
FairPoint is also stepping up efforts to attract
business customers as well. In rural areas,
this approach can generate significantly
higher returns on the same capital deployed
already.
#### 83.2%
INVESTMENT OPPORTUNITY COMPETITIVE STRENGTH
COMPETITIVE LIFE CYCLE BARRIERS TO ENTRY
Economies of Skill # 40.5%
Stock Fairpoint Communications Inc. (FRP)
Business
Segment FairPoint
Moat 2009 Rating
Brand Perception 59.5%
70.6%
##
Cost Containment
76.9%
21
Routine Reliance " 11.4%
###Design Dominance ###
Nat'l Rank
Economies of Scale
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
06-
Q3
2007
2008
2009
ROIC WACC Reinvest Rate
0
20
40
60
80
100
2004 2005 2006 2007 2008 Q1-2009 2010e
WScore
s
W Scores Projections (Baseline) Projections (Management Impact)
0
5
10
15
20
25
06-
Q3
2007
2008
2009
-1%
0%
1%
2%
3%
4%
5%
6%
Stock Price Economic Profit
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By Week
$"
### Competitive % Disadvantage
34.5%
Economies of Skill
Business
Segment Paramount Pictures
2009 Rating
Economies of Scale "
Stock
62.8%
0.0%
Cost Containment ## 55.5%
Nat'l Rank
BARRIERS TO ENTRY
Viacom Inc. (VIA/B)
Although not immune to the advertising
slowdown, Viacom continues to remain
strong due to having multiple properties
such as MTV, Nickelodeon and VH1 under
one umbrella. Paramount Pictures is its film
entertainment studio, which represents
about 37% of Viacom revenues.
With their long history of successful pictures
such as Titanic and The Godfather series,
Paramount is now transforming its business
to rebuild its economic strengths.
Paramount has a 62.8% ranking in a Design
Dominance moat, showing how strong their
movies are with consumers. Teaming up
with Dreamworks Animation, they recently
made Monsters vs. Aliens and will release
new movies to the Star Trek and
Transformers series this summer.
Future strength for Paramount will come
from their delivery chain as they release the
power of their content via the web. The
studio owns thousands of pictures and, when
unlocked in the new digital landscape, profits
at Paramount will be re-energized.
INVESTMENT OPPORTUNITY COMPETITIVE STRENGTH
Routine Reliance "
Brand Perception " 28.7%
11.4%
Moat
MOAT KEY ## Weak Advantage
39.3%
Channel Lock-Out # 34.7%
No Advantage
Network Effect # 43.1%
##### Most Competitive
#### Strong Advantage " Non-Competitive
FINANCIAL SOURCE: Company Reports, Standard & Poor Compustat Database
T H E W R E P O R T 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009 22
TOTAL MOATS = 6
Switching Lock-In #
Design Dominance ##
%
COMPETITIVE LIFE CYCLE
0%
10%
20%
30%
40%
50%
60%
06-
Q3
2007
2008
2009
ROIC WACC Reinvest Rate
0
20
40
60
80
100
2004 2005 2006 2007 2008 Q1-2009 2010e
WScores
W Scores Projections (Baseline) Projections (Management Impact)
0
5
10
15
20
25
30
35
40
45
50
06-
Q3
2007
2008
2009
0%
2%
4%
6%
8%
10%
12%
Stock Price Economic Profit
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By Week
Percentile ranks within wRatings national coverage
By Week
Faced with declining readers, many of
today's major newspapers are struggling to
survive. USA Today is owned by the largest
newspaper operator, Gannett Company. The
Gannett news and web properties reach
about 70% of the population in their
locations, giving them a strong competitive
advantage in economies of scale.
USA Today, with its innovative multi-colorformat and unique writing style, represents
one of the most competitive news properties
today. Thinking of themselves as a clearing
house of media content available around the
clock, the "paper" is building a formula to
replace its traditional ad-supported revenue
model. For example, they recently struck a
deal to feed USA Today news articles directly
into the Apple iPhone.
Finding ways to monetize their strong
network effect advantage remains a top
priority for Gannett and other newspaper
companies, but USA Today is already
positioned well to weather this downturn.
#####
Business
Segment USA TodayStock Gannett Company (GCI)
INVESTMENT OPPORTUNITY COMPETITIVE STRENGTH
COMPETITIVE LIFE CYCLE BARRIERS TO ENTRY
Moat 2009 Rating Nat'l Rank
Economies of Scale #### 83.2%
Economies of Skill % 0.0%
Cost Containment ### 70.6%
Design Dominance ### 76.9%
45.1%
Routine Reliance " 11.4%
MOAT KEY ## Weak Advantage Channel Lock-Out
Most Competitive $" No Advantage
#### Strong Advantage " Non-Competitive
### Competitive % Disadvantage
23
Network Effect ##### 95.4%
TOTAL MOATS = 21
T H E W R E P O R T 2009 wRatings Corporation. All rights reserved. Media & Telecom 2009
FINANCIAL SOURCE: Company Reports, Standard & Poor Compustat Database
### 79.4%
Switching Lock-In ### 78.8%
Brand Perception #
0%
10%
20%
30%
40%
50%
60%
127
53
79
105
131
Series2 Series1 Series3
0
20
40
60
80
100
2004 2005 2006 2007 2008 Q1-2009 2010e
WScores
W Scores Projections (Baseline) Projections (Management Impact)
0
10
20
30
40
50
60
70
06-
Q3
2007
2008
2009
0%
1%
2%
3%
4%
5%
6%
7%
8%
Stock Price Economic Profit
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Terminology
T H E W R E P O R T
Our Coverage
Media & Telecom 2009 2009 wRatings Corporation. All rights reserved.
Your Competitive X-Ray
APPENDIX
Why Our Ratings Work
24
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Total Moats (TM)
Delivery Scores
How well a company performs on each of 12 attributes. Each
score is indexed using 100 as the median across all national
desires in 2004. A score of 100 indicates the company is
delivering fully against consumer expectations. See Desires
Scores.
Return on Invested Capital is a non-standard accounting financial
measure that quantifies how well a company generates cash with
capital they invest in their business.
Expectation Scores
Economic Profit (EP)
Weighted Average Cost of Capital is the required return needed to
make an investment worthwhile in which each portion of capital
common stock, preferred stock or debt is proportionally weighted.
The sum of all moat ratings, which is not a simple count of M's.
Companies can receive a negative moat rating if performance is poor.
Moat or M Rating
How high up consumer expectations and needs are on each of12 attributes. Each score is indexed using 100 as the median
across all national desires in 2004. A score of 100 indicates the
company is delivering fully against consumer expectations.
See Delivery
The percentage more consumers are willing to pay if
companies met their expectations. A small gap betweenDesires and Delivery scores with a high Pricing Power indicates
an increasing demand for innovative approaches.
Weighted Average Cost of Capital (WACC)
!Rating
Similar to a five-star rating system used for hotels, we rate companies 1
through 5 Ws, with 5 the most competitive and 1 the leastcompetitive.
W Score
2009 wRatings Corporation. All rights reserved.
Pricing Power
A measurement of a companys ability to earn a consistent profit
above their cost of capital and their ability to protect that profit
through competitive advantages with consumers.
A companys ability to perform above the industrys 65%
percentile on a unique set of attributes that define competitive
advantage. Moats are barriers to entry companies create to
sustain economic profits.
T H E W R E P O R T Media & Telecom 2009 25
The difference between return on capital and opportunity cost
of capital. We define EP as ROIC minus WACC.
Return on Invested Capital (ROIC)
TERMINOLOGY
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26T H E W R E P O R T Media & Telecom 2009 2009 wRatings Corporation. All rights reserved.
WHY OUR RATINGS WORK
The Study. Ever since Gary Williams
Macintosh software company missed the
Microsoft Windows market in the late
1980s, he has been on a quest to discover
what truly drives a companys competitive
advantage.
The Benchmarks. To see if a company built
a sustainable competitive advantage, we
started with 2,628 companies and filteredthem by market cap and revenue. We then
looked for two telltale signs of competitive
advantage: 1) High market share and 2)
High ROIC. Only 15 companies met the
65th percentile mark or higher for 5
consecutive years.
The Moat Makers. We then wanted to
see HOW those top companies built barriers
to entry, or moats, to protect theiradvantages. Using the top 15 companies as
a starter set, we analyzed data from
135,000+ consumer interviews to
empirically find the nine sources of
competitive advantage. We call these
companies Moat Makers.
The Results. Our ratings work because they
use a core set of Moat Maker algorithms to
determine the strength of a companys moatin comparison to
industry peers.
3Deliver on
Consumer
Desires
Economies of Scale
High Volume in Focused Area
Economies of Skill
Time-Based Core Competencies
Cost Containment
Comparative Quality at Fair Price
Design Dominance
Real Functional Distinctiveness
Brand Perception
Perceived Trusted Leader
Routine Reliance
Frequent Usage Based on Habit
Channel Lock-Out
Control Distribution for Choice
Switching Lock-In
Fear Loss of Time/Money/Status
Network Effect
Exponential Growth with Each Node
2001
2002
2003
2004
2005
Rolling 5-year analysis
starting in 1999
Market
Share1
2 ROIC
ANHEUSER-BUSCH*
CITIGROUP*
COCA-COLA*
DELL
GLAXOSMITHKLINE
HOME DEPOT
LOREAL
MICROSOFT
MORGAN STANLEY
NOKIA
PEPSICO
TJX COMPANIES
UNITED PARCEL SERVICE
WALGREENS*
YUM BRANDS
* Ten-Year ROIC & Market Share
ANHEUSER-BUSCH*
CITIGROUP*
COCA-COLA*
DELL
GLAXOSMITHKLINE
HOME DEPOT
LOREAL
MICROSOFT
MORGAN STANLEY
NOKIA
PEPSICO
TJX COMPANIES
UNITED PARCEL SERVICE
WALGREENS*
YUM BRANDS
* Ten-Year ROIC & Market Share
SUPPLYCHA
IN
PROD
UCTS
DELIVERYCHAIN
4Out-Perform
Competitors
THE STUDY & BENCHMARKS THE MOAT MAKERS
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FAIR-PRICE +
SAMPLE AREAS
FAIR-PRICE
Trust
EMOTIONAL NEEDS
PRIORITIZE SPENDING TO BUILD ADVANTAGES
- Operations:
Locations
Locations UNIQUENESS +
SafetySafety / Low-Risk
UNIQUENESS +
- Management:
FUNCTIONAL NEEDS
- Products:
Quality
UNIQUENESS
LEADERSHIP
T H E W R E P O R T
FROM MAIN STREET TO WALL STREET
Most companies today equate demand with
lead generation so they focus on internal
activities such as advertising, PR and
marketing materials.
But in order to understand how demand is
generated, we must start by examining how
consumers buy. Most researchers believethat decisions follow a logical process, where
consumers weigh the utility of an offering
against their budget to buy (or not buy).
Decisions are far more complex, and require
a series of trade-offs between emotional,
functional and economic needs. These trade-
offs are where companies must create
unique sets of advantages that cannot be
duplicated by competitors, what we callmoats. Nine moats exist within three
business areas (Supply Chain, Products and
Delivery Chain).
The wRatings' COMPETITIVE X-RAY
provides a full 9-moat analysis to help
companies prioritize their spending needs
based on their ability to build competitive
advantage.
Competence
Multi-Year Analysis
Customer Relations
PRODUCTS
Sourcing
Market Share
2009 wRatings Corporation. All rights reserved. Media & Telecom 2009
Earnings Per ShareLogistics
How Markets Evaluated
GROWTH
SUPPLY CHAINManufacturing Free Cash Flow
How to Build Pricing Power: Competitive Advantage
FAIR-PRICE +
WALL STREET DEMAND
Sales Revenue
27
MAIN STREET DEMAND
Precision
Variety
CompetenceConnection
How Consumers Buy
Usefulness
Culture
Time-Sensitivity
LEADERSHIP +
Consistency
SAMPLE AREAS
Simplicity
DELIVERY
CHAIN
Equity & Book Value
Engineering
Product Lifecycles
Business Process
DURABILITY
Stability
FAIR-PRICE +
Usefulness
CORPORATIONS
UNIQUENESS + Communities
Time-Sensitivity
Simplicity
Consistency
LEADERSHIP +
Culture R & D
SAMPLE AREAS
LEADERSHIP +
Quality Economic Profit
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2009 wRatings Corporation. All rights reserved. 28Media & Telecom 2009
OUR INDUSTRY COVERAGE
T H E W R E P O R T
1,468We cover companies that represent all 10
sectors of the US economy. To make
company selection easy for customers to
rate them, we structure companies with a
more consumer-friendly nomenclature.
Because some companies generate revenue
through multiple channels (e.g. Apple's
iPhone, iPod, Macintosh, etc.), we track
companies at the business segment level.Ratings from individual business segments
can be combined to form a single rating for
a stock. Since 1999, our historical database
contains 1,500+ business segments that
contribute to 1,200+ companies. About
100+ business segments are private firms
we track in order to accurately assess their
public rivals competitive strength.
Our research team operates in 13-weekincrements. During the course of that time,
we pre-qualify a panel, conduct interviews
with them and analyze the data on each
company in our database. Our analyst team
then writes and publishes individual reports
on many of the companies covered.
For an up-to-date listing of the wRatings
coverage, go to www.wratings.com.
Business Segments Covered
58
127
52
159
108
53
125
109
79
181
134
72
108103
Automotive
Consumer Goods
Electronics
Financials
Health Care
Home
Industrials & Materials
Media
Restaurants
Retail
Technology
Telecom
TravelUtilities & Energy
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Gary A. Williams Greg [email protected] [email protected]
wratings.com capgemini.com
wRATINGS CORPORATION CAPGEMINI U.S.
2325 Dulles Corner Blvd. 623 Fifth AvenueSuite 500 33rd Floor
Herndon, VA 20171 New York, NY 10022
703.788.6532 212.314.8000
FOR MORE INFORMATION
Media & Telecom 2009
CONTACT wRATINGS
T H E W R E P O R T 2009 wRatings Corporation. All rights reserved.
CONTACT CAPGEMINI
29
ABOUT 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
its clients with insights and capabilities that boost their freedom to
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
balance of the best talent from multiple locations, working as one
team to create and deliver the optimum solution for clients. Present
in more than 30 countries, Capgemini reported 2008 global
revenues of EUR 8.7 billion (approximately USD $12.74 billion) and
employs over 90,000 people worldwide.
More information is available at www.us.capgemini.com.