The Ledger

A digital finance blog

The Ledger

Posted by Patrick Youngs

A global revolution in the telecoms market - the 3 core changes

Telecoms profits are being squeezed with costs from development, spectrum and legacy systems eating revenues. These have driven major change in individual companies as well as the market as a whole. Here we discuss the 3 biggest contributing factors to a changing telecoms ecosystem.


Consolidation

Triple-play providers, quad-play providers, a single bill for landline, mobile, internet and TV all from one brand. The reduced value telcos see from voice and SMS (landlines are already marginalised) coupled with regulatory pressure, particularly in Europe, are crushing revenues from individual sources. The only way basic services, once the cash cows of consumer telco, can be sold is by packaging them with higher value products.

Neal Milsom, ex-CFO of EE referred to bundles as the future of telecom revenues at the recent GTB Finance Summit in London.

In mobile, operators are separating the sale of handset and data plan, complicating revenue recognition and cash flows but paving the way to the telco standing as a true service provider, isolated from the hardware brands which currently take most of the praise.

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Consolidation is a sign of the telcos taking action as old revenue streams disappear. They will keep investing in OTT services but the bundling of all services and the isolation of hardware will give them enough power to stand their ground against constant revenue erosion. Costs are reduced and higher packaged prices can be charged for a more stable core proposition.


Divestment

In a similar vein to the unbundling of  handsets, numerous telcos are moving away from traditional network structures. Deutsche Telekom are selling mobile towers across Europe to their suppliers, paying for a managed service instead.

Other companies are putting less stock in their owned networks too; the upcoming acquisition of O2 by Hutchison 3G in the UK shows the reduced value of the network as a differentiator. The two core mobile networks in the UK are a combination of O2 with Vodafone and EE with BT and Three. This latest deal crosses these two networks meaning the end customer could receive services from either one. It's only a matter of time before the network assets themselves become less important and are decoupled from the services run over them.

The value of the network itself remains high, with fibre investment, LTE roll out and 5G development continuing apace. But this valuable asset will be shared between service providers and not drive differentiation for a single player.

Murat Dogan Erdem, CFO of Turkcell called fibre networks the "safest investment in telecoms" at the GTB Finance Summit.


Mergers & acquisitions

Despite regulators repeated attempts to block telecoms mergers in geographies around the world (Telia & Telenor, O2 & Three, AT&T & Deutsche Telekom), M&A activity is rife amongst the largest players around the world. This convergence of markets allows cost savings through centralised network and services resources but also reduces competitive pressures on market leaders.

Michiel Strater of ING cited the "perfect storm of available financing" at the recent GTB Finance Summit in London.

The low costs of delivery combined with the newly unlocked purchasing power for additional revenue generators such as content will force out smaller players. Markets will still have space for smaller MVNOs and over-the-top players, but direct competition will be slim.


The world of telecoms is getting smaller and more powerful which should give us all better services at better prices but the increased power of regional and global operators could take a stand on the speed of development and how much the consumer has to pay for it.

Aptitude Software sponsored the Global Telecoms Business Finance Summit earlier in March, contributing to the panel discussions and supporting the finance function within the telecoms industry.

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