By Stéphane Téral, Principal Analyst, Infonetics Research.
How far can service providers go without breaking the bank? That is the question that arises when looking at the unstoppable ascension of operating expenditure.
In 2011, service providers worldwide generated $1.83 trillion (€1.4 trillion) in total revenue –including both mobile and fixed line services – up 5.9 percent from 2010.
However, they consumed roughly $1.4 trillion (€1.1 trillion) of this revenue to run their operations, an eight percent increase over the previous year.
At the same time, they have been able to generate a lot of cash flow by capping their capital expenditure.
In fact, since the Great Telecom Crash of 2000, service providers have learned the hard way that they had to repay huge debts and sweat their assets.
In other words, they have limited investment in the network as much as possible and balanced cash management between debt and dividends, which remained steady during the disinvestment cycle from 2001 to 2004.
In the meantime, opex has kept rising, and there seems to be no end in sight.
Prior to the financial crisis, opex was approximately four times capex and growing at 10 percent each year.
In 2009, opex fell one percent while capex declined five percent; last year, opex rose eight percent and capex seven percent.
While doing extensive digging in the opex bucket, we found that “marketing and selling expenses” was the main culprit.
For example, smartphone subsidies in mobile communications services are driving the increase rather than true operating network costs, which typically range between 15 percent and 25 percent of total service providers’ opex.
A close look at the trend line shows a steady increase in opex between 2006 and 2008, and again in 2010 and 2011.
The first increase is directly correlated to a steep decline of access lines – people ditching their wireline service and replacing it with mobile-only services – that led to under-utilized public switched telephone networks (PSTNs).
The second increase reflects the impact of smartphone subsidies that took off in 2007, paused during the recession in 2008 and 2009, resumed in 2010, and escalated last year.
Given that mobile opex as a percentage of revenue is generally trending between 57 percent and 75 percent, while fixed-line opex ranges between 80 percent and 90 percent, perhaps mobile operators thought they had a comfortable buffer before hitting the wall!
Key to this is the fact that that the PLMN (public land mobile network) is by no means as old as the PSTN.
Put another way, the GSM journey only started two decades ago, while most Western PSTNs are more than a century old at this point.
Consequently, it’s harder to manage a very long PSTN life cycle than to operate a still young PLMN.
Nevertheless, at the pace mobile opex has been increasing, smartphone subsidies are no longer sustainable.
We can expect to see, therefore, more and more mobile operators end phone subsidies for new customers the way Telefónica and Vodafone Spain have done recently.
Apparently, the policy change is expected to reduce Telefonica’s expense on device subsidies by 25 percent.
I can’t wait to see the positive impact on opex.