How Will Service Providers Find Investment Capital When Revenues are Falling?

European service provider revenues from fixed network services across Europe will decrease at an overall rate of around two percent a year through 2020, while mobile service provider revenues decrease 1.5 percent per year through 2020, analysts at A.T. Kearney have forecast.

The decline in European  fixed telephony revenues accelerated in 2012 (-8.3 percent in 2011 and –31 percent over the last five years), driven in part by a negative five percent growth of fixed lines in service, according to European Telecommunications Network Operators association.

Since 2005, fixed line subscribership is down 22 percent.  The bad news is that mobile revenues, long the driver of industry growth, also are declining (-0.6 percent), according to ETNO.

That poses a problem for service providers as they contemplate investments in next generation networks built to supply very high speed Internet access connections.

The reason is that it is difficult to increase capital investment in any business when gross revenue is falling. The more typical strategy, in such cases, is to harvest the declining business, when possible, saving scarce capital for investment in new and growing lines of business.

To be sure, telecom executives already are working to boost revenue and reduce cost. But the combined effect of revenue, operating cost and capital investment  reductions would still result in a decrease in the European telecom sector’s free cash flow from €44 billion in 2011 to just €23 billion by 2020, A.T. Kearney analysts also project.

That makes heavy new investments problematic, as necessary as they might be.

By some estimates, it will cost as miuch as 200 billion euros to upgrade all European fixed networks for Internet access at 100 Mbps. That would be tough to do if free cash flow is but €23 billion.

The latest estimate from the European Telecom Network Operators association suggests telecom service revenue will decrease by close to three percent in 2013 among major European countries, representing a drop of about €7.1 billion.

Across Europe as a whole Etno estimates that revenues will decrease by 3.7 per cent in 2013, twice the decline in 2012.

In 2012, total capital expenditure across the industry reached €46 billion, of which €26 billion was invested in fixed networks and €20 billion in mobile, according to Idate, which also has forecast potential costs of upgrading European fixed networks as high as €229 billion.

The problem is that, as a rule of thumb, fixed network service providers invest no more than about 17 percent of revenues in capital investment every year, according to Infonetics Research.

Some might argue that network capital investment in many markets is far lower than that, representing single-digit percentage of revenue spent every year in all forms of capital investment.

The problem is that at €23 billion free cash flow, all of Europe’s fixed network operators collectively would not be able to spend much more than about $4 billion a year to upgrade their networks. At that rate, it would quite a long time to rebuild European fixed networks to support gigabit speeds.