Leading French Mobile Ops are Between a Rock and a Hard Place

French mobile service providers are between a rock and a hard place. Facing significant competitive pressure that is hitting gross revenues, the incumbent mobile service providers also need to reduce costs to maintain profit margins. But they do not have complete freedom where it comes to those cost cuts.

The French Ministry for the Digital Economy has warned French telecom service providers they may make no job cuts as they restructure to meet the competition.

Of course, a rule of thumb is that operating costs (not marketing, finance, personnel or other overhead costs) amounts to about 50 percent to 55 percent of all costs for a fixed network operator, and about 40 percent to 45 percent of all costs for a mobile service provider.

Iliad, which launched its “Free Mobile” service in January 2012 in France, has been wrecking havoc on its competitors France Telecom, SFR and Bouygues Telecom.

Vivendi SFR, for example, anticipates a 2012 earnings decline of 12 percent. Average France Telecom revenue from each account will fall almost 10 percent in 2012.

Illiad signed up 2.6 million customers through mid-May 2012 offering no-contract service priced at two euros and another at 19.99 euros a month, significantly lower than had been offered by the other contestants.

Predictably, that has caused customer defections, and caused the other competitors to lower their pricing. That, in turn, is slicing revenue. Facing certain revenue shrinkage, the affected service providers are looking to cut costs to bring earnings back into line. 

Bouygues aims to reduce costs by 300 million euros, and cut 556 jobs, preferably using voluntary mechanisms.

Vivendi SFR wants to cut operating expenses by about 350 million euros ($437 million) in 2013, on top of the 450 million euros budgeted for 2012, Bloomberg reports.

Precisely how the French service providers can make cuts, without touching personnel costs, is a key question, since presumably regulators also do not want any slackening of network capital investment. 

Non-process costs account for 25 to 30 percent of the cost base for fixed network service providers, and about 35 percent to 40 percent for wireless carriers. But those costs largely are mandated.

Interconnection fees, taxes, customer premises equipment and uncollectible items comprise those costs, and are either not controllable by a service provider (fees and taxes) or are very difficult to adjust (a service provider can stop subsidizing devices or refuse to carry high-cost phones, but in a competitive environment are risky moves). 

Support processes typically account for 20 percent to 25 percent of the cost base for a fixed network provider, and about 15 percent to 25 percent for wireless carriers, and include such items as marketing, human relations, information technology and finance. 

You might argue that cutting IT and marketing would be counterproductive, for the most part, while finance and HR do not represent a large enough spending category to matter much.

Small wonder that many mobile service providers are looking to unload other international assets, in part to reduce debt burdens. But one also wonders whether reducing debt loads is part of an effort to slice operating costs as well.