Another Year of Opex Cuts in 2010?

Though it seems to some observers that the emphasis on cutting operating cost has been a mainstay at most telecom service provider organizations for a decade already, analysts at Strand Consult said 'an increasing number' of providers will focus on reducing their costs in 2010.

 

What's different this time? There is a totally new level of 'lean,' Strand Consult analysts said, featuring new moves by service providers out of business areas, outsourcing parts of their businesses and also trying to adapt their business to a lower cost level.

 

None of that should be surprising if one assumes that structural change in the telecom business is inevitable. Consider one simple example. In the monopoly days, a service provider with no competition could conduct engineering and revenue exercises around voice service with one simple assumption: if capital was deployed, take rates would be very high -- 95 percent or so.

 

In a competitive environment, with a couple of facilities-based competitors in the market, that assumption goes out the window. When new infrastructure is deployed, for new services, take rates might be in the 20 percent to 30 percent range.

 

That completely changes the payback analysis. Where one might have assumed $1,000 per home of investment and then nearly ubiquitous subscribership, for example, with nearly complete customer acquisition, that is no longer the case.

 

The implications are huge. At a $1,000 per home investment, with 95 percent penetration, capital invested per customer is a bit more than $1,000.

 

These days, a hypothetical $1,000 investment might result in 20 percent penetration, meaning investment per subscriber is about $5,000 in capital. That stretches out payback periods at a time when investors want shorter payback, and obviously increases financial risk.

 

Given those requirements, it is safe to say there always will be just a few ubiquitous access networks built in any geography, while 20 percent to 30 percent share will be normal. There are other implications, but simply note that under such conditions, no monopoly service provider can afford to operate at 'monopoly' levels of human or capital investment.

 

If gross revenue is going to be challenged by competition, resulting in higher per-customer capital investment, other cost drivers in the business must be reduced. Efficiency gains are one of the safest predictions an observer could make.

 

Strand Consult also believes capital expenditure budgets will remain tight, but that would not be surprising, either, coming out of an uncertain and weak economic period.

 

Virtually all other forecasts I have seen call for tightness in 2010, with a new uptick trend starting in 2011. The reason the forecasts see capex budgets growing in 2011 likely is quite simple, and relatively unaffected by economic trends, for a change.

 

After a couple years of postponing projects, the inevitable happens: aging network elements simply must be replaced, capacity simply must be added and growth opportunities will require deployment of risk capital.

 

'There is no doubt that many operators have underinvested in their networks and will most probably continue to do so through 2010,' Strand Consult stated. 'In fact we will see a number of operators during 2010 that simply have network capacity problems and especially within the mobile broadband area will experience difficulty in delivering the services that they are marketing and selling to their customers.'

 

Other key trends for 2010 include initial steps toward allocation of new spectrum for mobile services, and also another new element of uncertainty in the mobile service provider business. Regulatory uncertainty will be the key issue, though opening new spectrum always brings with it the chance that new competition will arise, putting additional strain on existing business models.

 

Strand Consult, which focuses its work largely on European markets, thinks 2010 will bring a new spate of 'flawed or incomplete' new rules for telecom. That will increase risk and uncertainty, neither good for bold thinking and new initiatives.

 

After much-heralded efforts to slice voice prices across the European Union, Strand Consult predicts that the effort will have failed.

 

'We believe that we will see an increasing number of operators during 2010 that will announce that the lower roaming costs have not had any particular influence on their voice traffic and that their SMS roaming traffic in certain countries has grown significantly,' the company predicts.

 

Some other trends that have been growing for several years might accelerate in 2010. Infrastructure sharing is one such idea in the mobile segment of the business. Mobile operators will share physical assets such as tower sites, structures and maybe even radios and backhaul.

 

And consolidation will continue. 'With the price developments in the mobile area and the costs of running a mobile operator business, there will not be enough cash flow in the mobile market to support the current number of parallel networks in the future,' Strand Consult says. 'You don't need to be a rocket scientist to work that one out. 2010 will be the year where this process accelerates and where many will have a great deal of focus on this area.'

 

Also, at least in European markets, prepaid products will be the area where the most change could occur.

 

'The regulation of the telco industry is and will continue to be a nightmare,' Strand Consult argues, particularly in the mobile segment.

 

'In many countries new 800 MHz spectrum is being made available, while at the same time there is re-farming of the 900 MHz and 1800 MHz frequencies while new 2600 MHz frequencies also are allocated.

 

Faced with so many new frequency ranges, many operators will choose to 'wipe the slate clean' and start building completely or partially new mobile networks. That, by the way, is another reason why industry capital spending will start to tick up again in 2011.

 

The coming year will be a challenge for existing network infrastructure providers as the level of new competition from China-based competitors really increases. '2010 will probably be the year where NSN, Ericsson (News - Alert) and Alcatel will ask the EU and WTO to examine the Chinese phenomena,' Strand Consult predicts, particularly in the area of financing incentives.

 

'We believe that the 'old' infrastructure providers will view the financing packages that the Chinese are offering their customers as state support of a local industry fighting on the global market,' Strand predicts. 'The rhetoric we have seen in the airline industry, shipping industry and other business areas with large national interests will spread to the telco world and perhaps we will see something reminiscent of a small trade war'

 

Strand also makes a telling observation about the smartphone market, saying the trend is 'overhyped' in the press because of how fast sales are going in the United States. The global market is not adopting so fast.