How to Create Value in the TMT Sector

By David DeanPatrick ForthNeeraj Aggarwal, and Frank Plaschke

This report builds on the fifteenth annual Value Creators report published by The Boston Consulting Group. It ranks the stock market performance of the top technology, media, and telecommunications (TMT) companies over five years, from 2008 through 2012.

The 2013 TMT Value Creators Report: The Great Software Transformation

Of the 191 TMT companies analyzed, 76 are from the technology industry, 62 from the media industry, and 53 from the telecom industry. To be ranked, companies needed to have been publicly listed for all five years, with at least 25 percent of their shares publicly traded. We also imposed a minimum market capitalization of $8 billion for technology and telecom companies and $3 billion for media companies.

The overall rankings track performance in local currency from 2008 through 2012. For companies that are listed in exchanges outside their home country, returns were calculated in the currency of the exchange.

In addition, we show the contributions of the four components of total shareholder return (TSR) in order to assess how each company creates value. The first two elements—sales growth and change in profit margin—represent a company’s fundamental value. The third element—the change in multiple—conveys investor perception of the company. We calculated the multiple as the ratio of the combined market value of equity and debt to EBITDA. All three elements contribute to establishing the change in a company’s market capitalization. The last element combines cash dividends, share repurchases, and debt repayments in order to determine the contribution of cash payouts to a company’s TSR.

In 2008, when the five years covered by this data begin, Twitter and Android were in their infancy, and Apple’s App Store opened with 500 applications. There were about 4 billion mobile phone and device subscriptions—nearly 3 billion fewer than today. Sina Weibo, the Chinese microblogging service, had not yet been born; today, more than 500 million users post 100 million messages on the site each day.

That brief historical sketch makes clear the challenge of reviewing trends in the TMT sector over periods any longer than the gestation period of a baboon—about half a year. Even so, there is value in looking backward for lessons and clues suggesting a path or range of paths forward.

Among the 25 industries analyzed, the media industry rose from ninth place to sixth, with a 7 percent annual TSR. The tech industry, with a 4 percent annual TSR, fell from sixth to twelfth place. The bottom dropped from the telecom sector, which fell from sixth to twenty-fourth place. (See Exhibit 1.) With a –2 percent annual TSR, the telecom industry bested only the metals industry’s –11 percent TSR in the five-year rankings. (To put these numbers in perspective, the average annual TSR for all 1,616 companies in BCG’s study was about 4 percent.)

The five-year period captured in this report includes performance during 2008, a year of financial meltdown and tumult. Those five years were especially brutal for poor-performing tech companies that had not adapted to the post-PC era. During the recovery, media companies fared better than tech and telecom companies.

Industry averages mute the strong performance of individual companies. The top ten performers within the TMT sector did considerably better than the industry average. (See Exhibit 2.) (Overall, the average TSR of the top ten companies in each industry outpaced their industry averages by between 11 percentage points in insurance and 32 percentage points in pharmaceuticals.)

Several TMT companies made the list of top ten large-capitalization TSR performers. Among 137 companies with market capitalizations exceeding $50 billion, Tencent was number one, with an annual TSR of 33.8 percent, up one spot from the previous rankings; Samsung broke into the top ten in fourth place, with an annual TSR of 23.4 percent; and Apple was sixth, with an annual TSR of 22.1 percent, down three spots.

With its tablet and cloud businesses, is a technology company masquerading as a retailer. It came in seventh overall among all large-cap companies with an annual TSR of 22.0 percent. The five-year success of Tencent, Samsung, Apple, and in generating value for their shareholders stems directly from their success in taking advantage of the digital metasystem that we describe in the body of this report.

Only four tech, four telecom, and three media companies from the previous year’s ranking maintained a place in the top ten. Five-year rankings generally smooth out annual fluctuations, so this reshuffling is especially noteworthy. (The tech companies that also appeared in the prior 2007 through 2011 rankings are ARM Holdings, Apple,, and Cerner; the media companies are Baidu, Tencent, and Naspers; and the telecom companies are DiGi Telecommunications, Advanced Info Service, Taiwan Mobile, and American Tower. More on these companies later.)

The big TSR losers in all three TMT industries were companies that have failed to transform their business models. Exhibit 3 shows the range in the four components that make up TSR performance. In each industry, all but one of the top ten performers exceeded the industry average for sales growth. In other words, companies cannot shrink and restructure their way to strong TSR performance. They need to grow. Top media and telecom performers got support from positive changes in valuation multiples, and technology got a boost from margins. Dividends also helped the top media stocks. Industry breakdowns follow.


As mentioned earlier, Apple and Samsung were two of the most successful large-cap value creators in the rankings. Two other big tech winners were Catamaran, a software and service company focused on the health industry, and ARM Holdings, which designs low-power chips for phones, tablets, and other mobile devices. Software, IT services, and semiconductor companies did particularly well: Catamaran is one of six software and IT-services providers and ARM is one of two semiconductor companies on the top-ten list. (See Exhibit 4.)

The technology industry as a whole experienced declining sales growth and a contraction in multiples over the five-year period. Sales growth, for example, contributed 9 percentage points of TSR from 2006 through 2010 but only 5 percentage points from 2008 through 2012. The tech industry, of course, is actually composed of many subindustries whose performance varies widely. The seven consumer-device companies and the 22 software and IT-services companies generated an average annual TSR of 7 percent over the five years. Both subindustries benefited from sales growth and improving margins. Several other subindustries fared far less well. Computer hardware companies in the sample, victims of slow sales and contracting multiples, generated –7 percent annual TSR. Telecom-equipment, IT system, and office equipment suppliers also generated negative returns as rising R&D costs and price pressures took their toll.


Six of the top ten media performers are focused on emerging markets, compared with four of the top ten last year. (See Exhibit 5.) Tencent, a Chinese social-media company; Naspers, a diversified South African media company with a large stake in Tencent and a presence across Africa, Latin America, and Eastern Europe; Media Nusantara Citra, an Indonesian media company; and Baidu, a Chinese online search and Web company, all reported annual TSR exceeding 20 percent, compared with the industry average of 7 percent. Tencent and Baidu, in particular, have generated TSR through growth and despite margin contraction. Indeed, sales growth is largely what distinguishes media companies from emerging and mature markets.

Nearly all of the top media performers have been engaged in M&A and other transactions meant to adapt to the changing landscape. The number one media value creator, for example, was Starz, a U.S. premium cable and satellite channel that, during the five-year period, acted as a holding company for a wide variety of ever-changing media and entertainment assets. (Starz was spun off from Liberty Media in early 2013.) The company generated an annual TSR of 48 percent from 2008 through 2012. During that time, a series of restructuring moves and changes in capital structure led to the creation of a pure-play programming entity. In 2013, through September 30, Starz returned 112 percent.


The telecommunications industry is in a tough place, in both mature and emerging markets. The sample’s –2 percent annual TSR would have been even worse without the contribution of 5 percentage points from dividend payouts. (See Exhibit 6.) In particular, the telecom operators that have generated impressive TSR have received a strong boost from dividends. DiGi Telecommunications, Advanced Info Service, and Taiwan Mobile, all top-ten telecom performers, each generated annual TSR of at least 20 percent by relying on dividend yields of about 10 percent.

Without a major shift in industry fundamentals, these payouts to shareholders will be unsustainable for many companies. Nine of the 44 telecom operators for which data are available had dividend payouts that exceed earnings. Twelve of the 44 companies are also earning less than the estimated cost of capital. (See Exhibit 7.) The challenges will not get easier as operators are forced to upgrade their networks to provide high-bandwidth digital services. Over the past ten years, operators in emerging markets have increased their debt load at a 9 percent annual rate; in mature markets, the annual increase is 2 percent. Like dividend payments, this rising debt load will become increasingly difficult to manage without stronger revenue growth than most telecom operators have experienced over the past five years.

Small companies dominated the top-ten telecom list. Their collective market capitalization of $160 billion is only about one-third larger than Verizon’s or Vodafone’s. An analysis of the top ten telecom companies with market capitalizations exceeding $25 billion presents a far different picture. The annual TSR of these companies is 6.1 percent, compared with 16 percent for the overall top ten. Dividends contributed a 5 percentage point kick to both top-ten large-cap and overall top-ten value creators. (See Exhibit 8.)

The list of the top ten large-cap telecom companies also highlights the revenue challenge of operators. With the exception of American Tower, Telefônica Brasil, and MTN Group, the latter two both based in emerging markets, none of the companies experienced annual sales growth above 5 percent.

How to Create Value in the TMT Sector