{"id":386,"date":"2009-08-16T22:14:42","date_gmt":"2009-08-16T22:14:42","guid":{"rendered":"http:\/\/dev2.savacoolsecviar.com\/?p=386"},"modified":"2020-10-07T11:20:29","modified_gmt":"2020-10-07T18:20:29","slug":"cell-phones-are-like-hamburgers","status":"publish","type":"perspectives","link":"https:\/\/www.md7.com\/de\/perspectives\/cell-phones-are-like-hamburgers\/","title":{"rendered":"Cell Phones Are Like Hamburgers"},"content":{"rendered":"

\"AGLWhether or not you are a McDonald\u2019s restaurant fan, there is no denying that the foodservice retailer has one of the most successful business models ever conceived \u2014 and not for the reasons you think. When McDonald\u2019s Corporation founder Ray Kroc asked a group of business students what business he was in and they replied \u201cfast food,\u201d he quickly corrected them and said, \u201cNo, I am in the real estate business.\u201d Although McDonald\u2019s Big Mac hamburgers may have been a tasty fast food novelty, it was Kroc\u2019s well-selected real estate that actually sold burgers. But there is much more to that story.<\/p>\n

In a similar manner, you could say that the operators of cellular networks are not in the \u201cphone business\u201d but in the real estate business. Without well-located cell sites, they would not have adequate coverage and thus could not sell much airtime no matter how cool the latest handset. Although well-managed real estate has proven to be the key to a successful business model, wireless network operators haven\u2019t exactly followed Kroc\u2019s path. Let\u2019s take a look at the lessons operators could learn from hamburgers.<\/p>\n

Kroc struggled to make money in what most consider to be his primary business, selling the method originated by brothers Dick and Maurice \u201cMac\u201d McDonald for mass-producing hamburgers in less than a minute. Kroc credited Harry Sonneborn, a former vice president of finance at Tastee Freeze who became McDonald\u2019s chief financial officer and later its president and chief executive officer, for McDonald\u2019s \u201creal moneymaking engine . . . its little-known real estate business,\u201d wrote John F. Love in McDonald\u2019s: Behind the Arches.<\/p>\n

\"\"<\/p>\n

In 1955, Sonneborn suggested that McDonald\u2019s should control the real estate used by franchisees, as the idea was described in Forbes Greatest Business Stories of All Time by Daniel Gross and the Forbes magazine staff. In 1956, Sonneborn helped Kroc create Franchise Realty. Through Franchise Realty, McDonald\u2019s made money by \u201cleasing or buying potential store sites and then subleasing them to franchisees, initially at 20 percent markup and then 40 percent markup,\u201d the book said. Eventually, franchisees would \u201cthen pay McDonald\u2019s either a minimum rate or a percentage of sales \u2026and \u2026 the company would collect more and more rent as its costs remained constant.\u201d<\/p>\n

In the early days of McDonald\u2019s growth, Kroc would fly over the growing suburbs looking for open land near a church steeple because he wanted to be where the people were. In the cellular phone industry, I am sure a site acquisition agent or two also have driven around looking for church steeples.<\/p>\n

Besides the fact that cell phones don\u2019t taste good even with cheese, the difference between the two industries is in those early days of rapid growth. Unlike Kroc, who flew the countryside looking for the best locations to lease to franchisees, tower site acquisition agents drove every back road and alley looking for the best coverage, as fast as they could. They weren\u2019t focused on making a profit for their clients on the real estate itself. Most weren\u2019t even given incentives to find the best deal, because signed leases were pay points on their service contracts, regardless of rent amounts. In the end, they were more interested just getting a site leased so the operator could offer coverage more quickly. But as they say, location, location, location is the key to real estate, and if the cellular operators weren\u2019t going to watch the long-term dollars spent on those sites, someone else was. The two primary beneficiaries were the tower companies that started popping up nationwide and the thousands of real estate owners who just happened to own the tallest site in an area or the one at a critical roadway intersection. Because cellular operators were more focused on speed to market and coverage than they were on the price of real estate, debt was bound to fund tower development and building owners got insane deals for rents on what is, for the most part, unusable space \u2014 rooftops.<\/p>\n

The hamburgers and cell phones comparison diverges further. There are far more cell sites offering coverage than there are McDonald\u2019s locations offering hamburgers, and the operators built their networks as tenants rather than landlords.<\/p>\n

This is the defining difference between cell phones and hamburgers. Kroc made more and more money from his real estate holdings as their leases transpired, but the cellular operators are experiencing ever-escalating rents costs and tighter margins. Over the long term, rent is by far the largest expense in operating a cell site. This is an expense operators didn\u2019t pay much attention to when they were rapidly expanding networks and adding subscribers. Now they have no choice but to focus on it.<\/p>\n

Think like Ray Kroc<\/h3>\n

Kroc followed Americans to the suburbs, and cellular network operators are following the world everywhere. There are more than 30,000 McDonald\u2019s restaurant locations worldwide. That does not even begin to compare to the more than 242,000 cells sites nationwide, a number that will continue to grow exponentially during the next five years. And we are far more addicted to our phones than we are to our burgers \u2014 well, most of us, anyway. All this is said to make the point that operators of cellular networks would do well to think like Ray Kroc and take command of their real estate before the networks collapse because of untenable operating costs.<\/p>\n

Ultimate competitor<\/h3>\n

Biographers describe Kroc as the ultimate competitor who was so ruthless that after buying the naming rights from the McDonald brothers for the outrageous price of $2.7 million, he opened a location one block from their original store just to drive them out of business. He was also obsessed with standards, such as his insistence that all potatoes be cut to exactly 9\/32 of an inch to become a McDonald\u2019s fry. Cellular network operators are obsessed with standards, too. They are constantly trying to \u201craise the bar\u201d so you can \u201chear me now\u201d when we \u201cstick together\u201d on the \u201cnow\u201d network. But historically, they have not been competitive in the management of their real estate portfolios.<\/p>\n

Real estate is the core asset for thousands of companies, and they manage it as such. With the exception of oil and gas exploration companies and railroads, rarely has a company had as large a real estate portfolio as cellular operators. From the beginning, the cellular network operators have focused on their \u201chamburgers\u201d \u2014 that is to say, their technology \u2014 and have done a great job of it. But now they need to focus on their real estate assets either internally or through outsourcing, or their \u201chamburgers\u201d won\u2019t be worth a dime.<\/p>\n

This realization is dawning on operators around the globe. I argue that President Obama is not the only change we will see in the next few years.<\/p>\n","protected":false},"excerpt":{"rendered":"

Whether or not you are a McDonald\u2019s restaurant fan, there is no denying that the foodservice retailer has one of the most successful business models ever conceived \u2014 and not for the reasons you think. 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