Telco Capital Investment: Running Harder to Stay in Place

IVR Technologies : Convergent Billing - VAS
IVR Technologies
IVR Technologies, Inc. is a leading software development company providing a fully integrated application, media and billing server to next generation networks.

Telco Capital Investment: Running Harder to Stay in Place

Competition has negatively affected the potential return from any major capital investment in carrier networks. One recent illustration is a warning by Fitch Ratings that telcos will have to invest more network capital than they used to, just to maintain earnings where they are.

“While investment in data networks is still economically justified, weakening cash
flows from traditional services means that telcos have to spend more capital simply to maintain EBITDA at the same level,” said Fitch Ratings.

That actually is not a new problem. Fixed network telcos have had to face the problem for a decade, and is easy to understand. In a monopoly environment, either a cable company or telco could safely assume that “cost per home” and “cost per customer” were about the same, when evaluating a network upgrade.

In a highly-competitive environment, “cost per home” and “cost per customer” diverge
sharply, depending on customer penetration. If a service provider makes an investment, passing three homes, only one of which is a customer, then the cost per customer is 300 percent higher than cost per home. The same sort of dilemma was faced by fixed network telcos pondering fiber to home upgrades. Voice revenues would not increase, and a decade ago, one might have argued that upgraded copper facilities would handle demand for high-speed access.

So the one new service with incremental revenue was video entertainment. So, essentially,
the fiber to home upgrade business case had to be driven by incremental video revenues, in a market where cable had half the market, and the two satellite providers had the other half. That would make the telco the fourth provider in
the saturated market. That is a tough business case, indeed.

Now mobile service providers are encountering the same problem, as over the top apps erode
demand for carrier voice and messaging. To be sure, observers will note, use of over the top apps (especially video) increases demand for mobile data. That is true. But Fitch notes that the boost in data usage does not translate into proportionally higher telco EBITDA, because data services have lower margin than the voice and messaging services the mobile data services replace.

That is another way of saying that revenue per bit is challenged. The problems might not yet be so pronounced everywhere, but Fitch does note that even some markets in growing Asia could be exposed. Philippines mobile service providers earn about 30 percent of total revenue from text. for example. In other markets, including India, Indonesia and Sri Lanka, smartphone penetration is relatively low, and carrier voice and text prices also are low, reducing the potential for OTT substitution.

Changing demand for carrier voice and data also is affecting retail pricing plans. Whether particular products are best sold on a metered or unmetered basis is an important issue. Generally speaking, it will make sense to meter usage of a high-demand product, and supply declining demand products on a flat rate basis. Sometimes the approach changes with the product lifecycle. At one time, international voice and national long-distance were drove profit for the whole business, and it made sense to meter and rate usage.

These days, with cheap OTT alternatives, voice does not drive revenue growth, and the
issue is how to protect what remains of a declining business. Under those circumstances, bundling voice and texting inside a bundle, and charging on a
flat rate basis, makes sense. Telcos have learned that triple-play bundled services not only increase revenue per account, and also reduce churn.

They now also have learned that converting metered services to non-metered services
inside bundles has additional value, namely reducing revenue loss for legacy services that have declining levels of demand.

In the Netherlands, for example, KPN saw a 13
percent fall in consumer mobile service revenue in the fourth quarter of 201111, and warned of a poor 2012 outlook, in large part because its declining voice and messaging services were not protected by being moved to a bundle, Fitch Ratings argues.

In contrast, Vodafone's Netherlands business saw a much smaller impact in the same quarter because of its earlier introduction of integrated tariffs that
protected some level of voice and messaging revenue, Fitch Ratings argues.

So we are likely to see a bigger shift to bundles putting voice and texting inside usage plans sold at a flat rate, at least in markets where demand for voice and texting is flat or declining.

Source: IP Carrier

Feedback for Telco Capital Investment: Running Harder to Stay in Place

Leave a comment