Saturday, October 4, 2014

Sprint Layoffs Illustrate Fundamental Telco Problem

Sprint Corporation has announced a workforce reduction plan (layoffs) that might mean the loss of 1400 jobs at Sprint.

Sprint says the cuts will cost $160 million in Sprint’s second quarter.

Such cuts always are disruptive for the affected employees. But the downsizing is not unusual for service providers these days, as difficult as the process might be.

“Costs are going up and revenue is flat,” says Anup Changaroth, Ciena director, portfolio marketing. “In some markets, there is negative revenue growth.”

From 2002 to 2013 the largest 15 service providers lost 69 percent of their former revenue-per-subscriber revenue,” Changaroth said, quoting data provided by IBM.

Over the same period, profit margins dropped four percent to 22 percent.

Competition that attacks top-line revenue is part of the problem. Also, shifts in perceived value are an issue as well.

Nor is it clear such job cuts would have been avoided if Sprint’s bid to buy T-Mobile US had succeeded. Any large merger of that sort would be expected to result in some job losses, as “synergies” generally are possible.

Left on its own, Sprint, which many expect will fall from the third position in market share to fourth, simply has to find ways to cut cost, if it cannot grow revenues fast enough.

Also, if Sprint really wants to challenge T-Mobile US as the undisputed “value provider” among U.S. mobile companies, it would have to drive its operating costs lower, to compensate for expected hits to top-line revenue.

The planned employee layoffs, expected to be largely completed by October 31, 2014, will include management and non-management positions, Sprint says.

Sprint expects to recognize a charge of approximately $160 million in the second fiscal quarter of 2014 for severance and related costs, but Sprint also says additional material charges associated with “future labor reductions may occur in future periods.”

In other words, this might only be the first of multiple employee cuts.

As traumatic as the cuts might be, they are not unexpected. No firm that is having trouble on the top line can avoid making changes below the top line to preserve the bottom line. And with Sprint’s new resolve to take price leadership of the U.S. mobile market, the top line is going to be under pressure.

Sprint is not the first, nor will it be the last “old line” telco that has to confront the growing implications of a changing market. As unpleasant as such cuts might be, a shift of value in the communications ecosystem has been underway since at least 2000.

The phrase “software eats the world,” where value shifts to Internet apps and processes, captures the direction of the shift.

While it is reasonable for access and transport service providers to take measures to increase the value of their services, it is hard to ignore the broader shift of value creation and equity value to application providers, within the communications ecosystem.

Under such conditions, access and transport providers will find growing pressure to align costs to revenue, when value continues to shift to app providers.

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