The telecommunications industry has seen a hike in investments since the New Economy shock in the 90s. Spectacular investments, particularly in the pursuance of new licences and larger market footprints, have tempted telecommunication operators worldwide. Often there was not a strong focus on value creation and profitability. As a result, the business environment became tougher than ever before.

Operators across the globe are experiencing the same ­dynamics reaching from stagnating or even decreasing revenue growth and high operating costs to alarming debt ratios and returns on investment (ROI) that often fall below their cost of capital. Operators around the world are going through ­similarly difficult business environments: revenues have plateaued and even falling in cases; debt ratios have grown to alarming levels while returns on investment have plunged below profitability. Network operators are under growing pressure to reduce their cost base. Price erosion and pressure on revenues as well as low ARPUs in certain markets are hurting margins substantially.   

Mission impossible?

The cost challenges are driven by several key factors: Firstly, privatization and telco markets liberalization resulted in high competitive environments in emerging as well as in developed markets. Although competition has been there for some time in many markets, it has been getting tougher. Over-supply and irrational business models by distressed competitors as well as lean and virtual competitors such as mobile virtual network operators dramatically increase pressure.   

Secondly, many of the industry players are forced to move from a “hunting” to a “farming” mode. The focus is not to enlarge the customer base at any cost, but rather to leverage the ­reached ­scale and cope with the profitability pressure. It’s about profitability instead of unhealthy revenue growth. Shareholder ­expectations regarding performance improvement and a general tightening of margins as a result of slower growth and the replacement of legacy profitable services by broadband and IP services are the main drivers for this rethinking. Aggressive pricing, e.g. flat rates, especially in countries with low ARPUs as well as price regulation further accelerate margin declines.

Further, the current credit crunch and following economic downturn have impacted investor confidence heavily. This led to scarce financial resources and to shifting financing more and more from debt financing to internal fund generation. ­Current capital structures revealed by most telecommunications ­providers make it a massive challenge to pay back their high levels of debt and fund future capital requirements. In retrospect, we can realize a major decoupling trend resulting in a “revenue – cost – traffic Dilemma”. The current ­evolution of revenues and costs will further increase the gap between the two. The notion of “economies of scale” doesn’t seem to be ­applic­able here. When service usage and the customer base of an operator increases, costs are actually supposed to decrease thanks to ­synergy opportunities and advantages of scale. ­However, a ­reality check shows a disproportionate rise in network capacity due to broadband services and stagnant or marginally increasing revenues due to flat rates and price reductions. This results in “Diseconomies of scale”.    

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