Global trends in telco OpEx

For the first two thirds of its 30-year history as a dynamic, competitive market, the telecommunications sector was firmly focused on revenue growth rather than operational efficiency. However, over the last 10 years revenue growth has proven elusive, forcing communications service providers (CSPs) to focus increasingly on cost management and, more recently, cost cutting. This excerpt from our new report, Cloud and automation: Changing CSPs’ OpEx outlook, explains. With customers requiring faster speeds and greater reliability to satisfy their insatiable demand for connectivity, it has never been an option to reduce investment in the network. Furthermore, investors have rewarded operators that have invested early and heavily, be it in deploying fiber or committing to LTE and 5G. CSPs have focused on reducing OpEx rather than CapEx because a large proportion of CapEx (around 60% to 90%, according to our estimates) is on the network. Furthermore, OpEx is two-and-a-half to three times higher than CapEx, so there is more scope to identify cost-cutting opportunities.

EBITDA margins

Comparing trends in OpEx between operators and identifying year-on-year trends can be difficult because expenses include disposals and acquisitions which can end up distorting the overall picture. A better measure of OpEx trends is operators’ EBITDA (earnings before interest, tax, depreciation and amortization) margins. The table below shows annual revenue and operating expenses for 30 CSPs from 2018 to 2020, calculated by subtracting EBITDA from total revenues.

Expenses amount to between 48% and 79% of the operators’ total revenues. Over the last five years, 14 of the 30 companies have seen their EBITDA margin rise by more than five percentage points (and conversely, their expenses fall by more than five percentage points). Eleven of the companies experienced a rise of zero to five percentage points in their EBITDA margins. The EBITDA margin declined for only five companies. Overall the operators’ combined revenue grew by a compound annual growth rate of 2.5% between 2018 and 2020, while OpEx grew by .63% per year. In 2018 the combined OpEx of these companies ($911 billion) was equivalent to 67.7% of their combined revenues of $1,344 billion. By 2020 it amounted to 65.3% of their total revenues of $1,412 billion. We can conclude that operators are sensibly managing their cost bases. However, breakdowns of direct and indirect costs, which are not publicly available, would provide greater insight. For example, we could understand the extent to which operators have been able to deliver cost savings across their IT estates (mainly indirect costs) or whether there is a downward or upward trend in subscriber acquisition costs (direct costs).

Future OpEx trends

A growing number of CSPs are committing to cutting OpEx overall, and they are confident that new digital technologies and ways of working can drive efficiency gains. They have been less specific about precisely where these costs cuts will occur, however. Further “belt-tightening” measures and eradication of mid-level management roles may offer limited savings, so operators likely will need to depend on successful automation initiatives. Investors have learned to treat operators’ bold statements about OpEx cuts with a degree of caution. The savings achieved in one part of the business may be wiped out by higher costs in another. This seems to be especially true in IT and network departments, where operators have made reasonable progress in delivering efficiency gains. For example, speaking at an investors’ conference in January 2021, Verizon Consumer CEO Ronan Dunne said the company is on track to meet its five-year goal (announced four years ago) of cutting $10 billion in OpEx. While Verizon’s financial results show progress, the ride has been bumpy, resulting in overall savings so far that are only a fraction of the goal.

Several European CSPs have committed to OpEx cuts in the period from 2021 to 2023, and executives indicate this will be driven by digitization.

New technology

As CSPs transition from hardware-centric to software-centric businesses and migrate IT and network workloads to the cloud, their costs will be impacted. Spending will shift to OpEx with increased use of public cloud services, and automation will reduce staff costs. We’ll discuss these changes in detail in Section 3, but it is helpful to have a snapshot of operators’ current spending on CapEx and OpEx to set the stage. The graphic below shows 2020 estimates for global CSP spending based on TM Forum’s analysis of CSPs’ 2020 financial results plus IDC’s estimate of $1.6 trillion in total global telecoms operator revenue for 2020. This figure varies from $1.5 trillion to $1.7 trillion because not all CSPs release financials and some numbers are overstated as in some cases sales of devices and reporting of wholesale revenues may represent double counting.

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