Global Telecom Revenue Will Grow 2.7% Annually, Through 2017

Worldwide telecom revenue will grow at a 2.7 percent compound annual growth rate between 2012 and 2017, according to Analysys Mason, representing movement from US$1.9 trillion in

2012 to US$2.1 trillion in 2017.

In developed markets, growth will come from mobile non-messaging data services and new services, since mobile voice and mobile messaging services will become commoditized.

In emerging markets, service providers will grow by adding significant numbers of new customers, Analysys Mason argues.

Total telecom revenue in the Europe, Middle East and Africa  region is forecast to grow at a 1.2 percent CAGR from 2012 to 2017, driven largely by revenue growth in the Middle East and Africa.

The contribution of voice services to total EMEA service revenue will decline from 47 percent to 39 percent through 2017.

Non-mobile video services will see a 5.8 percent CAGR, while region capital investment grows

at a 0.5 percent CAGR.

A disproportionate share of global revenue growth will be driven by the Asia Pacific region, where

non-messaging mobile data will contribute almost 82 percent of the overall increase in worldwide service revenue.

Telecom capital investment will grow at a CAGR of 1.7 percent globally between 2012 to

2017, Analysys Mason says.

Capex growth will be strongest in the Asia-Pacific and Latin American regions, but Asia-Pacific and EMEA will account for 66 percent of the total spending through 2017.

APAC telecom revenue will grow at a four percent CAGR, with mobile data revenue equaling mobile voice revenue in the APAC region by 2017.

Capex will grow at a 2.5 percent CAGR in APAC, mainly driven by mobile network deployments.

Revenue in North America will grow at a 2.3 percent CAGR between 2012 and 2017, with growth driven by the mobile segment.

Capex in North America will grow at a 1.8 percent  CAGR.

Telecom revenue in the LATAM region will grow at a 4.9 percent CAGR, lead by mobile service revenue. The number of subscribers in the LATAM region will grow at a 4.6 percent CAGR.

Peak Telecom is Coming

Most observers of global telecom revenue will note that, with a couple of possible exceptions, industry revenue has grown continuously, for as long as we have kept records.

On the other hand, one has to wonder whether telecom revenue will reach a peak at some point in the relatively-near future, as mobile adoption reaches saturation in every country and as every customer buys as much internet access as they prefer.

Looking only at the country of Malaysia, the trends are clear enough: Mobile growth is reaching an absolute peak, as is mobile broadband. Fixed line voice is declining, and has been dropping since about 2000, while fixed network internet access has grown to replace the lost fixed network revenue, but itself is nearly saturated.

source: Researchgate.net/

source: FCC

That does not mean service providers will stop innovating--or trying to do so--or seeking to add big new revenue sources. But that new revenue will mostly balance lost revenues in the core business, as voice, messaging and eventually, even internet access revenues fall.

Indeed, replacing lost revenue now is a major industry challenge. The global telecom industry is about a $1.5 trillion annual revenues industry. To move the needle, any new sources have to be large, simply to replace lost revenues from legacy sources.

This trend is seen in many developed markets, but now also can be predicted for fast-growing Asia Pacific markets as well.

http://slideplayer.com/slide/11399351/

Roughly speaking, to sustain three percent annual revenue growth, and assuming zero losses in all legacy sources, some $45 billion has to be added every year. But that is not realistic. With actual declines in voice and messaging revenue, and coming shrinkage and margin compression in newer sources such as internet access or video entertainment, service providers might have to replace as much as half of all current revenue in about a decade.

Revenue erosion big enough to remove half of revenue within a decade is roughly equivalent to a seven percent a year decline. So even if new sources grow three percent a year, losses still will happen.

To sustain revenues at their current level might therefore require annual growth of seven percent. That is not going to happen, in most markets. As James Sullivan, J.P. Morgan head of Asia equity research (all of Asia except Japan) telecom revenue growth is now less than GDP growth.

68 major telecoms groups – aggregate revenue, 2009-2016

source: Telco 2.0 Research  

Other analysts make the same argument, namely that revenue growth, at a global level, now is less than one percent.

Peak telecom is coming.

Global Telecom Revenue Will Hit $4.58 Trillion by 2017

Looking at global telecom revenue over the past several decades, and considering the latest revenue forecast from the Telecommunications Industry Association, it is hard to conclude anything but that the industry grows, year over year, every year.

Where in 2008 global revenue was about $2.9 trillion, in 2013 revenue had grown to $3.87 trillion. By 2017, TIA forecasts global revenue of about $4.58 trillion.

Over nearly every time period, global telecom revenue grows. The only possible exceptions were the years 1929 and 2001, but even there the dips were relatively slight.

For that reason, many consider telecommunications “recession proof,” a theory that was tested in 2000 and 2008. For the most part, aggregate revenue remained fairly stable, though there were some changes in composition of revenues.

And that generally remains the present revenue trend, where annual revenue, on a global basis, grows about 2.7 percent.

Recessions might have impact in some regions, from time to time, slowing growth rates. But even the 2008 global recession did not halt revenue growth.

The impact of the Great Recession beginning in 2008 is easy enough to describe. According to TeleGeography Research, revenue growth slipped from about seven percent annually to one percent in 2009, returning to about three percent globally in 2011.

To be sure, growth prospects vary between regions. In fact, growth in Western Europe has gone negative, perhaps the first time in history that communications revenue, at least in a region, actually has seen a declining trend.

So it might seem odd that service provider executives worry so much about revenue cannibalization. It isn’t a misplaced concern.

As now is clear, telecom products or services have life cycles, like all other products. For more than 150 years, voice services drove industry revenues. That did not change in the 1980s, when a global wave of deregulation and privatization began.

By the 1990s, however, profit margins clearly began to erode, as competition in the formerly high-margin long distance market eroded pricing.

By the mid-2000s, growth had shifted to mobile services, even if voice was the biggest contributor even for mobile services.

Most recently, Internet access and video entertainment have been the revenue growth drivers for fixed networks.

These days, “marginal costs” often mean “marginal revenue” for service providers. To be sure, one can argue that the marginal cost of one additional minute of use of a telecom network is almost nil.

That has implications for pricing, as a provider arguably could price slightly above marginal cost and still make a profit, provided fixed costs are covered and the pricing does not disrupt pricing of existing services and products.

That is a big “if.” The traditional problem with a massive shift to VoIP, on the part of service providers, is not so much the incremental profit or loss from VoIP, but the impact on the entire installed base of customers.

In other words, it is one thing for a service provider to match market prices for over the top voice. It is quite another matter to lower prices for all carrier voice to those levels. That is why “harvesting” has been the strategy for virtually all carrier voice providers.

Service providers rationally have chosen not to formally drop prices on carrier voice, but rather have chosen to lose share and call volume, to protect what remains of the revenue stream.

The argument can be made that prices have been lowered, but only because they are effectively hidden within triple-play bundles, allowing stand-alone voices to remain largely as they were.

The other change is that some service providers have shifted to “consume as much as you want” retail pricing, instead of a metered approach. In some cases, that represents a lower effective price for usage.

In other cases, because people only use so much of a resource, effective pricing on a “per unit of consumption” basis has not actually changed so much. A customer who typically uses 250 calling minutes a month, or 2 Gbytes of data a month, or 200 text messages a month, will not generally consume much more, even if pricing shifts from usage to “unlimited” rating.

But that is one sort of issue faced by mobile service providers, namely margin pressure.

Fixed network service providers face a different problem, namely abandonment of voice services altogether, since mobile provides a substitute.

So even if both mobile and fixed network providers face issues related to the stability and growth of their voice services, mobile faces quantitative changes. Fixed network providers face qualitative changes.

Mobile customers are not abandoning voice; fixed network customers are doing so. The obvious corollary is that future fixed network service provider performance will be dictated by how well service providers can find replacement services.

Growth, in other words, is not a given. Only in Western Europe has growth actually gone into reverse. But other markets face similar challenges.

Demand for fixed network voice is dwindling. Sooner or later, that matters, unless new revenue sources--of at least equivalent magnitude--can be created.

Mobile IoT Access Might Not Generate as Much Revenue as You Expect

As important as internet of things is likely to be for telecom revenue opportunities in the 5G era, it is not at all going to be easy to realize those gains. In a real sense, IoT and 5G represent the first era of mobility where the real upside has to come from applications, not access. 

Even if connectivity revenue has driven industry growth for all of its history, that is likely to begin a historic change in the 5G era. This is more than a new emphasis on "moving up the stack."

Eventually, if not so clearly at first, revenue either will be dominated by applications or total telecom revenue will shrink. 

By 2025, Analysys Mason predicts, global mobile operator revenue will reach about $888 billion (fixed network revenue not included). Some expect or hope that special-purpose wireless networks and fixed networks will play connectivity roles, with direct or indirect revenue models, as well. But the direct mobile opportunity seems to lie outside connectivity, per se.

Connectivity revenues earned by mobile ISPs will amount to about $28 billion. With the caveat that the forecasts might be too pessimistic, if correct, that prediction suggests there is not as much internet of things connections revenue as many might believe.

If correct, that reinforces the argument that most of the potential revenue upside from IoT for ISPs will come from participation in other segments of the ecosystem.

It always is important to differentiate between robust growth of broad IoT revenue streams and the portion that specifically will accrue to mobile and other ISPs in the form of connectivity revenue.

It is the same issue we faced early in the development of either internet retailing, mobile payments and smartphone markets. Total transaction value (the value of merchandise purchased through online channels) is not revenue for telecom providers. Nor is transaction value the same as profit, for any ecosystem participants.

Analysys Mason estimates total revenue from IoT solutions enabled by mobile operators (devices, applications, connectivity) of something greater than US$200 billion in 2025, with revenue growing at a compound annual growth rate of 18 percent.

But telecom access revenues, though growing, might still represent just about three percent of total telecom industry revenue by 2025. Machina Research research suggests “connectivity” might be the absolute smallest revenue opportunity within the ecosystem.

source: Machina Research

2014 Telecom Revenue Growth Picture is Mixed

Of all the trends affecting the global telecom business since the advent of competition, nothing is more striking than  diverging strategy and revenue performance.

For example, telecom service providers in Asia and North America are posting three perent to four percent annual revenue growth, while revenues in Europe have been dropping for some years.

Moody's Investors Service has said  the outlook for telecommunications service providers is “stable” in the  Asia Pacific region, with “ moderate revenues and earnings growth” and  gradual declines in profit margins.

"The telecommunications companies that we rate in Asia Pacific should record average revenue growth of around four percent over the next 12 months to 18 months, a level which is broadly in line with average GDP growth rates in the region," says Yoshio Takahashi, a Moody’s analyst.

In contrast, Europe's telecom operators will see a fifth year of revenue decline in 2014, although operating margins will stabilize, helped by cost cutting and the end of regulatory cuts to mobile call termination fees, Moody's said.

About the best outcome would be “revenue stabilization” in 2014, Moody’s says, with the telecommunications service sector remaining on negative outlook.

"While we expect revenues to stabilize or marginally decline by zero percent  to -0.5 percent in 2014, it is not clear how sustainable any recovery will be," said Carlos Winzer, a Moody's Corporate Finance group SVP. "We have had a negative outlook on the sector since November 2011 and would expect to see a predictable and sustainable one percent to three percent annual revenue growth to make it stable."

Moody's estimates that the European industry's average EBITDA margin will be down approximately one percent in 2013, but will probably stabilize in 2014.

In Latin America, Moody’s think both 2013 and 2014 will be good years. Moody's says South African, Russia as well as Middle East, market trends are more stable than in Europe.

In the U.S market, the mobile segment of the business “will continue to generate strong levels of free cash flow,” acording to Moody’s.  Earnings (EBITDA) minus capital spending growth, a proxy for free cash flow, will accelerate to 13 percent to 15 percent in 2014 for the six largest carriers.

“We also expect overall industry EBITDA to gain eight percent next year as industry service revenues grow three percent to four percent,” Moody’s forecasts.

Moody's expects that prices in some of the most competitive European markets will continue to drop Integrated incumbent operators such as Deutsche Telekom, Orange, KPN, Telefonica and Portugal Telecom will fare better than companies with just mobile or fixed offerings.

That’s an important observation: the firms that will fare best own both fixed and mobile assets. The other obviously significant observation is that revenue growth rates now have diverged around the world, with some regions faring better than others.

Despite the tough European conditions, or perhaps because revenues are challenged, Moody’s forecasts an average capex/revenue ratio of approximately 18 percent or higher in 2014.

In Asia, Moody’s predicts mobile service provider capex will decline to about 20 percent of revenue in 2014.

But it is possible European capital investment could increase, especially as Vodafone begins to upgrade its networks and other competitors invest to keep up.

But Asia remains a bright spot for the global industry. Moody's forecasts average adjusted EBITDA margins in the region will contract by approximately 0.5 percent to one percent in 2014.

"Increased data usage on mobile phones will continue to drive the Asia Pacific industry's revenue growth, although rising mobile-penetration rates and competition will slow the pace of growth,” Moody’s said.

But profit margins will stay at 37 percent to 38 percent. The area to watch in Asia is financial leverage, which will remain “moderately high,” Moody’s says,  as the companies deploy excess cash to increase shareholder returns, rather than significantly reducing debt.

While specific in-market consolidation deals may be completed in the next 12 months to 18 months in Europe, Moody's does not expect a wave of cross-border consolidation.

The four largest integrated incumbent telcos, including Telefonica, Deutsche Telekom, Orange and Telecom Italia, are either in selling mode or do not have much flexibility or appetite to lead this process.

But that obviously should shift attention to U.S., Mexican or other potential acquirers.

The main point is that competition now has lead larger telecom providers to diverge, in terms of strategy, revenue models and actual revenue growth.

France Telecom Revenue, Profit Fall as Evolution Continues

France Telecom’s third-quarter 2011 profit fell by 5.2 percent to €3.99 billion. All regions in which it operates, except Spain, had negative results. In France, revenue dipped 4.6 percent.

But France Telecom grew customers by 8.6 percent, pointing to a profit margin erosion issue. France Telecom attributes 1.7 percent of the revenue pressure to regulatory change.

Some of the revenue weakness was caused by a delay in iPhone 4 availability, while slower SMS, voice and roaming income also played a role, as did declining home phone line connections. On the other hand, France Telecom is doing better on the market share front, and loss of landline accounts is slowing.

Everything Everywhere, the joint venture with Deutsche Telekom’s T-Mobile UK, also saw revenue dip by 4.3 percent, with data and text messaging revenue growing 14 percent to comprise 42 percent of average per-customer revenue.

To be sure, the key revenue trends France Telecom is facing have been in place since the mid-2000s. As data from 2007 shows, mobile operators were almost certain to see a shift of revenue from voice to other services in the future, if only because mobile voice essentially was saturated, calling prices were high and VoIP alternatives were coming.

Also, a 2007 estimate of landline and mobile provider revenue contributors in five additional years showed about what one would expect. Analysts at the Yankee Group expected revenue from mobile data and TV, as well as broadband to be high-growth areas, and one would have to agree that has been the case. Beyond that, it has been much less clear what additional lines of business could fuel equivalent growth.

Up to this point, France Telecom primarily has used out-of-region strategies to maintain its growth, a strategy that is not exhausted.

France Telecom Profit Falls 5.2 percent

For Most Telcos, Net Revenue Gain Comes not from 5G but Elsewhere

For the foreseeable future, net changes in telco revenue can happen only at the margin. Over the next decade, mobile operators, for example, will replace half their 4G accounts by 5G accounts. So the issue is whether average revenue per account stays the same; increases or decreases. 

Assuming at least a stable ARPA, the balance of revenue changes will come in fixed network services. And there the issue is whether new revenue sources offset expected losses in consumer and business service revenue. 

Keep in mind that revenue-neutral product replacement is necessary, but will not help telcos grow total  revenues. Product replacements only swap legacy revenue for new sources, as in the example of 4G accounts being replaced by 5G accounts. 

All things equal (operating costs; marketing costs; capital investment; revenue per account), swapping 5G for 4G results in zero net revenue gain. All revenue growth beyond zero must come in other areas. 

On a global level, revenues appear flat. But revenue contributors change substantially every decade. In fact, telcos routinely lose half of present revenues every decade. That seems unthinkable, but has happened. 

“Over the last 16 years we have grown from approximately 25 million customers using wireless almost exclusively for voice services to more than 110 million customers using wireless for mostly data services,” said Lowell McAdam, former Verizon Communications CEO.

It is an illustrative comment for several reasons. It illustrates Verizon’s transformation from a fixed network services company to a mobile company. But the comment also illustrates an important business model trend, notably that of firms in telecom needing to replace about half their current revenues every 10 years or so.

In the U.S. telecom business, for example, we already have seen that roughly half of all present revenue sources disappear, and must be replaced, about every decade.

According to the Federal Communications Commission data on end-user revenues earned by telephone companies, that certainly is the case.

In 1997 about 16 percent of revenues came from mobility services. In 2007, more than 49 percent of end user revenue came from mobility services, according to Federal Communications Commission data.

Likewise, in 1997 more than 47 percent of revenue came from long distance services. In 2007 just 18 percent of end user revenues came from long distance.

Though revenue attrition has been clearest for fixed network voice, the same process has been seen for mobile voice, text messaging, long distance revenues, mobile roaming and business customer revenues overall, in many markets. 

We can disagree about how much new revenue some communications service providers will have to create over a decade’s time, to replace lost legacy revenues.

If global telecom revenue is about $1.6 trillion to $2 trillion, and assuming about half the revenue is earned in mature markets, then the revenue subject to disruption ranges from $800 billion to $1 trillion.

Half of that represents $400 billion to $500 billion. That, hypothetically, is the potential amount of global revenue that might be lost, and would have to be replaced. The good news is that most of the replacement will come as 5G displaces 4G subscriptions. 

What is equally certain is that a huge amount of revenue from new services will be necessary, even if consumer purchases of Internet access--and replacement of 4G by 5G--happens.

One fundamental rule of thumb is that, in mature markets,  service providers must plan for a loss of about half of current revenue every decade or so. That might seem shocking, but simply reflects historical developments.

Nor is that rate of change unusual. In the digital consumer electronics business, it might not be unusual for an executive to predict that half the products that drive sales volume in 10 years “have not been invented yet.”

What is new for the telecommunication business is that product replacement now is a fundamental issue, even if for 150 years the only product was voice.

source: IBM

In 2001, in the U.S. market, for example, about 65 percent of total consumer end user spending for all things related to communications and video services went to "voice."

By 2011, voice represented only about 28 percent of total consumer end user spending.

Over that same period, mobile spending grew from about 25 percent to about 48 percent. Again, you see the pattern: growth of about 100 percent (losses of 50 percent require gains of 100 percent, to return to an original level,  as equity traders will tell you).

Video entertainment spending likewise doubled.

In the U.S. market, one can note roughly the same pattern for long distance and mobile services revenue. Basically,mobile replaced long distance revenue over roughly a decade.

At one time, international long distance was the highest-margin product, followed by domestic long distance.

That changed fundamentally between 1997 and 2007.

Over that 10-year period, long distance, which represented nearly half of all revenue, was displaced by mobile voice services.

In the next displacement, broadband is going to displace voice.

That is not yet an issue in some regions that still are adding mobile and fixed network subscribers, but already is an issue in most developed regions, where voice and messaging revenues already are declining.

source: STL Partners

Though some might continue to hope that higher Internet access revenues will offset voice and messaging revenue dips, the magnitude of voice revenue declines will be so sharp that in many markets, even additional Internet access revenues will be insufficient in that regard.

In fact, rates of revenue growth have been dropping in all regions since at least 2005, according to IBM.

At least so far, ability to fuel growth by extending service to customers with low average revenue per user will continue to drive revenue growth, even for legacy services, for a while. The only issue is when saturation is reached in each particular market.

When that happens, the same pressure on voice and messaging revenue already seen in mature markets will be seen in presently-growing markets.

Those changes can be hard to discern, as the top line obscures changes in revenue contribution from the largest sources. Voice, messaging and long distance services have fallen dramatically. Consumer fixed network usage of voice no longer drives financial results, its place taken by internet access (broadband). 

Mobility now drives growth in most markets, and especially the data services component of mobile revenues. Subscription growth still is highly meaningingful in developing Asia and Africa. 

source: Delta Partners 

Basically, 5G mostly prevents telco revenue from declining. It does not drive revenue growth. If we expect continued declines in fixed network voice, then broadband and other new services will have to be relied on for most of the growth, in most markets, by most operators. 

The lucky scenarios will happen when mobile-first operators actually are able to drive higher ARPA in the 5G era.