Do Telcos Reap the Best Returns on Invested Capital?

By some measures, the connectivity business is neither the “worst” nor the “best” industry where it comes to revenue growth or profitability. But connectivity is among the “best” industries where it comes to the effective use of capital, using either the return on capital employed (ROCE) or return on invested capital (ROIC) methods. 

Industry	Average ROCE
Telecommunications	15%
Energy	12%
Financials	11%
Healthcare	10%
Technology	9%
Consumer Discretionary	8%
Consumer Staples	7%
Industrials	6%
Materials	5%
Utilities	4%

Industry	Average ROIC
Telecommunications (Mobile)	17%
Telecommunications (Fixed)	13%
Energy	12%
Financials	11%
Healthcare	10%
Technology	9%
Consumer Discretionary	8%
Consumer Staples	7%
Industrials	6%
Materials	5%
Utilities	4%

ROCE is calculated by dividing earnings before interest and taxes (EBIT) by capital employed. Capital employed is the total assets of a company minus its liabilities. This means that ROCE measures how effectively a company is using all of its assets, including its debt, to generate profits.

ROIC is calculated by dividing net operating profit after taxes (NOPAT) by invested capital. Invested capital is the total amount of money that a company has invested in its business, including equity, debt, and other liabilities. This means that ROIC measures how effectively a company is using its equity and debt to generate profits.

Here is a table summarizing the key differences between ROCE and ROIC:

Characteristic	ROCE	ROIC
Formula	EBIT / Capital employed	NOPAT / Invested capital
Denominator	Total assets - liabilities	Equity + debt + other liabilities
Perspective	Company's perspective	Investor's perspective
Ease of use	Easier to calculate	More difficult to calculate
Relevance	More relevant for comparing companies in different industries	More relevant for comparing companies in the same industry

In general, a higher ROCE or ROIC is better. This means that a company is using its capital more effectively to generate profits. However, it is important to consider the industry that a company is in when interpreting these ratios. For example, a company in a capital-intensive industry, such as manufacturing, may have a lower ROCE or ROIC than a company in a less capital-intensive industry, such as software.

ROCE is based on pre-tax figures, while ROIC is based on after-tax figures. This means that ROCE may be more volatile than ROIC, as it can be affected by changes in tax rates.

Edge Computing, Private Networks, APIs Won't Drive Net Revenue Growth for Telcos by 2030

Respondents from eight telcos believe their revenue prospects are highest in such new areas as edge computing, private networks and wholesale access, such as allowing third parties access to network features. 

While logical beliefs, and while revenue might be a positive number in all these cases, service providers, on the whole, are likely to find disappointment in these sources as a way of moving the revenue needle. 

Put simply, there is not enough revenue in those areas to offset the huge reliance on traditional subscriptions. 

source: STL Partners

Using estimated revenue from a variety of sources, including IDC, International Telecommunication Union, GSMA and ABI Research, for example, global service revenue might grow an additional $250 billion from 2023 to 2030. 

Revenue from new sources including edge computing, private networks and other horizontal services might add about $300 billion. But revenue from the mainstay subscription revenues might decline $250 billion as well. 

Revenue Source	2023 ($ billions)	2030 ($ billions)
Mobile subscription revenue	1,200	1,400
Fixed network subscription revenue	300	250
New revenue sources	100	400

 In other words, new revenue sources will be welcome, but might only offset declines in the legacy drivers of revenue. 

Revenue Source	2023	2030
Mobile subscription revenue	$1.5 trillion	$1.2 trillion
Fixed network subscription revenue	$0.5 trillion	$0.4 trillion
Edge computing	$0.3 billion	$3.2 billion
Private networks	$0.2 billion	$2.72 billion
IoT connections	$0.1 billion	$1.42 billion
Total

Of course, if one were to compile a list of forecasts for new revenue put together by suppliers, one would see a different set of numbers. New sources such as private networks might add $2.5 trillion in new revenue, for example, by 2030. Does that seem credible for an industry that only grows about two percent a year, and generates about $2 trillion a year in annual revenues?

Likewise, edge computing is thought by some proponents to represent $2.9 trillion in new revenue, in an industry generating only about $2 trillion in total revenue in 2023. 

Revenue Source $ Trillion	2023	2030
Mobile subscription revenue	1.50	1.20
Fixed network subscription revenue	0.50	0.40
Edge computing	0.30	3.20
Private networks	0.20	2.70
IoT connections	0.10	1.40
Total	2.60	8.90

The point is that revenue growth of such magnitudes represents a cumulative annual growth rate in excess of 23 percent. That is an order of magnitude higher than analysts expect the global service provider business to grow, overall. 

The only real issue is how far short the predictions of new revenue from edge computing, IoT, private networks and all other sources will fall short of the aggressive predictions. 

Even if "Fiber is Always the Answer," It Does Not Change Buyer Behavior

Incumbent internet service providers claim they need financial support from a few major hyperscale app providers as they arguably cannot sustain their home broadband networks without such support. 

Governments, on the other hand, have pursued all sorts of policies to ensure that home broadband service is affordable for citizens, resulting in “low prices” for home broadband, in many countries. But low prices are a disincentive for investment, and governments want that as well. 

So some of those governments now seem receptive to the idea that perhaps they have pushed for “low prices” at the expense of sustainability of their ISP supplier bases and incentives for investment. 

Which is a bit of a seemingly-enduring paradox. To a large extent, incentives for investment, which require relatively higher prices, but lead to faster speeds, clash with the desire for low retail costs, which are a clear disincentive to invest and tend to result in lower speeds.

But even a shift to “all fiber” access does not necessarily solve the “low price, high speed” dichotomy, though that can be the case. 

Even where fiber-to-home networks are widespread, and considered the “best” home broadband platform, they sometimes face facilities-based competition from hybrid fiber coax networks, for example. 

In many such cases, only 40 percent to perhaps 50 percent of customers buy those services from the FTTH provider. In markets where there is no significant facilities-based competition, and there are “best, better, good” service plans, we see the same pattern.

Country	Network	Best Plan Price	Best Plan Speed	Good Plan Price	Good Plan Speed	Better Plan Price	Better Plan Speed	Take Rate for Best Plan	Take Rate for Good Plan	Take Rate for Better Plan
United Kingdom	Openreach	$50/month	1000 Mbps	$35/month	500 Mbps	$45/month	750 Mbps	20%	60%	20%
New Zealand	Chorus	$75/month	1000 Mbps	$50/month	500 Mbps	$60/month	750 Mbps	15%	65%	20%
Singapore	Singtel	$80/month	1000 Mbps	$50/month	500 Mbps	$65/month	750 Mbps	10%	70%	20%
Australia	Telstra	$100/month	1000 Mbps	$60/month	500 Mbps	$75/month	750 Mbps	15%	60%	25%

As with any other consumer product, not every customer buys the “premium” product version. So is “fiber always the answer?” Yes, in a long-term sense, for fixed networks, as a physical media choice. 

But even when a single FTTH wholesale network operates, customers still seem to choose “good enough” service plans, not the “best” and not the “value” tier, either.