Interesting investors and shareholders in telcos’ digital transformation is hard because attaching dollars to benefits has proved elusive – but that’s changing. TM Forum’s Chief Analyst, Mark Newman, examines 25 of the largest telco groups’ returns on digital investment, based on interim results from the last three to six months.
This is the first part of a three-part series, which originally ran in its entirety in our Digital Leader Network newsletter. In this installment, Newman, looks at the global trends that define the telco sector and the OpEx and CapEx developments in the industry.
Clearly, most CxO teams feel the need to show their digital credentials when presenting financial results. Hence many – and the presentations that accompany them – contain references to elements of transformation programs. It is important that CSPs do this to demonstrate an understanding of the challenges and opportunities that digital approaches, processes and architectures can deliver.
We analyzed the most recent interim results announcements (in some cases the three months ending June 30, 2017, in others the three months ending September 30, 2017) of 25 of the largest CSP groups across the world. This has allowed us to identify the key digital narratives during that period and, crucially, examples of initiatives where the CSP has put real numbers against them.
The companies whose results we analyzed for this research are: América Móvil, AT&T, Bharti Airtel, China Mobile, China Unicom, Deutsche Telekom, Etisalat, KPN, Liberty Global, Ooredoo, Orange SingTel, StarHub, STC, Swisscom, Taiwan Mobile, Telefónica, Telekom Austria, Telia, Telstra, Telenor, Vodafone, VEON, Verizon and Zain.
Global trends from the two quarters
Globally, there are broad trends that characterize the communications service providers’ (CSPs) sector. They include:
- Investment in fixed networks and technologies, and fiber to the home or building.
- ‘Convergent’ operator strategies – the building of integrated fixed (including broadband and TV) networks and services.
- The rollout and continued growth of pay-TV services.
- Strong take up of LTE and mobile data.
- A focus on customer experience.
- The transition to unlimited data mobile price plans.
There are pronounced regional variations, both in the financial performance of different CSPs and their digital ‘fluency’, which is what we are assessing. In terms of overall financial performance, European CSPs, and in particular the large operator groups, are recording solid results and displaying cautious optimism about their short- to medium-term prospects.
The US market is becoming more competitive, although incumbents retain strong profit margins and confidence in their diversification initiatives.
No clear pattern is emerging across Asia – Indian operators have had a tough time competing with new market entrant Reliance Jio. SingTel’s performance was strong. In China, growth has slowed, but operators are benefitting from robust take-up of LTE and fiber.
Africa and the Middle East is, perhaps, the region that faces the most challenges, with markets suffering slowing mobile growth and fierce competition on prices.
The CSPs that talk most effusively about their digital initiatives are KPN and Telefónica; China Mobile seems to be making most progress in terms of developing solutions for new verticals. However, we cannot assume that CSPs that divulge the most information about their digital initiatives are necessarily those with the most advanced digital transformation programs.
We have grouped the different elements of digital transformation into categories, and in each case provide an overview and a specific example with key performance indicators (KPIs) taken from quarterly financial results.
A mixed picture on operating expenditure
Two operator groups – Telenor and KPN – made especial references to operational expenses (OpEx) savings in their quarterly results directly related to transformation programs.
- Telenor announced a 4 percent cut in its OpEx in the period from July to September, following a 7 percent cut in the previous quarter. The company has shifted its strategy in 2017/18 to focus on efficiency and simplicity. The savings have been made in personnel, sales and marketing, the centralization of IT systems and a reduction in call center staff due to greater use of digital channels.
- In its results session with financial analysts, Deutsche Telekom said it expected earnings before interest, tax, depreciation and amortization (EBITDA) to rise for the second half of 2017/18 as a result of savings from improved and automated IT processes.
- Liberty Global is forecasting a flat indirect cost base for 2017/18, aided by the centralization of technnology and IT resources into a single operating structure.
- KPN’s OpEx fell by 4.3 percent in the period from July to September and 4.1 percent in the period from April to June compared with the corresponding periods in 2017. A large part of the savings have come from a simplification program focused on:
- digital and simple service and delivery;
- a flexible and simplified network and operating model; and
- a Lean cost structure.
This simplification program – now in its second wave – has generated run-rate savings of €65 million per year.
However, OpEx reductions were not a common feature across all, or even most, CSPs. Many had increased OpEx in areas including retail (in an attempt to drive more traffic to their own shops) and brand (promoting a single brand across the group).
CapEx is a definitive, downward trend
Many CSPs are reporting significant cuts in capital expenditure (CapEx). This is particularly true of mobile networks, where the major phase of LTE roll-out is nearing completion. Fixed network investment, on the other hand, is trending upwards as CSPs seek to build convergent network and service propositions. Some of the more striking CapEx reductions include:
- Telekom Austria whose CapEx in the three months to 30 September was 25 percent below the corresponding period in 2016.
- Middle Eastern and Asian telecoms group Ooredoo with a 32 percent reduction in CapEx in the three months to June 30, compared with the corresponding period in 2016.
- Dutch KPN whose CapEx in the three months to 30 September, 2017, was 24 percent below the figure in the corresponding period in 2016.
- Verizon’s CapEx in it finanial year to date (March to September) is $11.4 billion compared with $11.3 billion at the same time in 2016.
- Telenor announced a 22 percent reduction in CapEx in the period from July to September compared with the corresponding period in 2016.
- Vodafone’s capital intensity in India will fall from 20 percent in 2016/17 to the ‘high teens’ in 2017/18.
- AT&T has stated that once its network become more than 50 percent virtualized (it is 40 percent there today), cost savings will exceed the costs of additional investment.
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