Mobile Network, OTT App Provider Return on Invested Capital Headed in Opposite Directions

The financial return on invested capital has been a key issue for virtually all communications service providers for several decades. Originally, the issue was more simply: the return from investing in a next generation network, either fiber to the home or fiber to the neighborhood. 

With the evolution of the communications, software and content businesses to Internet Protocol format, new and more challenging questions have been arisen, especially the issue of how to create value in a loosely-coupled business ecosystem. 

Accenture research, for example,  has found that from 2002 to 2010, return on invested capital for mobile operators declined by 32 percent globally. 

At the same time, content owners, aggregation platforms and device manufacturers saw their ROIC rise significantly—50 percent or more in some cases. 

In other words, mobile operators’ investments are being monetized more effectively by content, device and over-the-top (OTT) service companies. 

That is a difficult problem for an access provider, since the very nature of the ecosystem (loosely coupled) means that the access provider no longer has control of what services and apps can be created and used by access customers. 

According to recent analysis by PwC,  the return on invested capital (ROIC) generated by telecom operators has decreased over the last three years (about 2010 to 2013)

PwC estimates the cost of capital for a typical operator in Europe is around eight percent to nine percent and, for them to create shareholder value, returns generated need to exceed the cost of financing. 

But with heavy levels of regulation and competition faced by network operators in the markets they operate, this hasn’t always been the case.

Handset manufacturers, new media companies and content providers have seen their returns grow, PwC says. 

Fixed networks have the weakest returns on invested capital with a 1.5 percent gain over the last decade, Bernstein equity analyst Craig Moffett has argued.

Mobile networks had a meager return of 0.3 percent. Cable TV operators garnered a 2.5 percent return. 

Satellite networks had the best return on invested capital at 5.5 percent.

Performance arguably is worse if one accounts for merger and acquisition activity, since part of the value is "goodwill," a soft metric. 

The point is that investments in the access networks business have gotten increasingly risky over the last couple of decades, as revenue and value have shifted to the applications people get access to using networks.