Wednesday, July 24, 2013

Europe Telco Revenue Decline is Momentarily Unstoppable

Global telecom revenue growth has been slowing for some time, in most markets other than emerging countries, it is safe to say.

It also is safe to say the worst-hit region globally is Europe, where service providers with significant exposure to Europe reported worse results in 2012 than they did in 2011, according to Ovum analyst Adaora Okeleke.

In fact, “the primary goal of Europe’s telcos is to stabilize their performance,” said Steven Hartley, Ovum telco strategy analyst. As is the case for other service providers facing maturing legacy revenue streams, European service providers face the challenge of growing new revenues in emerging markets faster than revenues decline in their core European markets.

And the problem there is that average revenue per user will be lower in the new markets. So European carriers are losing high gross revenue and higher margin customers while trying to gain lower gross revenue, lower margin customers.

“The overall revenues of European telcos were substantially lower, and growth in their emerging market operations was not enough to offset the losses in their domestic markets,” says Okeleke.

Even efforts to gain greater scale could backfire, though. European regulators and service provider executives also favor consolidation in Europe as one way of boosting performance. That’s logical.

Telecom is a scale business, so additional scale should help. The emphasis, Ovum might say, has to be placed on the word “should.”

Scale strongly correlates with net debt, number of employees, revenues, capital employed, and EBITDA, says Emeka Obiodu, Ovum principal analyst. That’s just another way of saying that bigger operators are larger, quantitatively, on every financial or operating dimension other than profit margin, return on capital or earnings per share, for example.

But that’s the problem. Ovum analysis suggests scale is not directly correlated to better financial performance on the profit margin, return on capital, earnings per share or
net debt as a percentage of EBITDA.

Ovum forecasts that telco revenue growth will slow to a compound annual growth rate of two percent between 2012 and 2018. Most of the actual growth will happen in emerging markets, while revenue is likely to stay stuck in a declining mode in Europe.

The growth that does occur will largely come from emerging markets, with China playing a major role, Ovum says. Mobile services, and especially mobile data, are key as well.

Telcos in the Asia-Pacific region and emerging markets experienced some growth but at a slower rate than in 2011, Ovum says. The exceptions were China Telecom and China Mobile, which both reported significant revenue uplifts in 2012.

Service providers in Japan, North America, and South Korea also fared better than their counterparts in Europe, though the revenue growth rates are expected to slow until at least 2018.

The conventional wisdom for most telcos is that they must develop new revenues while becoming much more operationally lean. It’s hard to disagree. But it also is hard to envision that telcos can do what some suggest, namely becoming as efficient as application providers.

“Telcos could feasibly play a role as service enablers, but they first need to adopt the leaner structures of over-the-top players such as Google.” says Okeleke.  

One might say that is virtually impossible. A more reasonable goal would be to operate a high-bandwidth access network as efficiently as a cable operator does.

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