The telecom sector is under pressure from a number of sources: cable operators, over-the-top (OTT) providers such as Google and WhatsApp, and newcomers on the mobile market. At the same time, the level of investment is high, due to spectrum auctions and the roll-out of next-generation networks for FTTH and LTE. Furthermore, all these new technologies ('all IP') are much more efficient than what was used previously, allowing the operators to run their networks with a lot less people. To top it all off, there is also the economic crisis. This is all leading to pressure on results, dividends, balance sheets and ratings. What can be done? Go in search of cost savings as well as new revenues sources.
Costs
When it comes to costs, the big telecom operators have a wide range of options. Finding new revenue sources is a bit more difficult, as we're talking about network companies and sales organisations that don't exactly have innovation at the heart of their endeavour. The alternative has to be then developing new propositions.
Let's start with the cost savings. Apart from yet another round restructuring and trimming costs, the telcos have shown there are many more options:
- Selling towers.
- Network sharing for cost savings.
- Local mergers for cost savings: Japan (SoftBank and eAccess), the US (T-Mobile and MetroPCS) and possibly India (Telenor and Tata).
- International mergers and acquisitions to realise synergies: America Movil (Netherlands and Austria), SoftBank (Japan and the US).
Others are listing subsidiaries on the stock market: Telefonica (Germany and likely Latin America), TeliaSonera (MegaFon and Kcell) and Bharti Airtel (infrastructure arm). The joint venture EE, owned by Deutsche Telekom and France Telecom, may also be planning an IPO. While listings don't lead to cost savings, the proceeds can be used to pay down debt, hence lowering interest payments. A danger here though is that a very profitable business or quickly growing activity is sold, leading to a reduction in revenues.
Splitting up the company, which is apparently under consideration at Telefonica and Telekom Austria (the home market from respectively Latin America and East Europe), as well as Vivendi (telecom from media), is also unlikely to lead to direct savings. This is more about creating investment vehicles with a better balance of risks and returns.
Revenues
In terms of revenues, a few initiatives have emerged at various operators:
- Launching their own OTT services. T-Mobile USA has Bobsled, T-Mobile Poland has freeyah,Telefonica has TuMe and Orange has LibOn. Together, with Vodafone as well, they are bringing Joyn to the market (text, voice, video calls).
- Venture capital and the creation of 'digital' divisions (see our commentary 'SingTel makes new strategic step').
There is another, completely different trend underway to protect revenues: regulation. The incumbents are lobbying hard at the national regulators and in Brussels and at the ITU for a more friendly regime, where they will be able to capture more revenue from OTT players (by levying an extra charge for delivering content, a highly contentious measure) and from wholesale customers (which Vodafone is already contesting).
Conclusion
It's clear the telecom sector is going through a difficult period. But it should be noted that there are any number of ways to reduce all sorts of costs. Cultivating new revenue sources is probably more difficult. Telecom companies would do well then, in this period of efficient next-generation networks, to re-assess themselves. What do we do well, what don't we, and what can we leave to partners? This includes issues such as connectivity and innovation on various levels (technology, equipment, services, propositions). And which structure is best for these choices? This implies a choice between vertical integration and a structural separation of networks and services. It remains to be seen if the sector can survive the current phase with the ongoing initiatives, or if more drastic measures are needed, such as big mergers or structural separation.
