EU telcos struggle most in first quarter

Ovum
Most telecom operators have reported 1Q13 earnings now. The results were largely as expected. Most telcos face flat to declining revenues, putting their cost base under pressure.
 
For telcos representing over 90% of the global market, revenues and capex both dropped by roughly 1% in 1Q13 versus 1Q12 (YoY).
 
The telcos with the slowest growth were also among the largest: Telefonica, FT Orange, Telecom Italia, and KPN. A weak European economy and ongoing cuts to mobile termination rates are the main causes.
 
Exposure to emerging markets is no guarantee of growth, either; America Movil’s revenues grew just 0.2%, for instance. By contrast, Verizon, Softbank, KDDI, Comcast, and Time Warner Cable grew nicely in 1Q13 despite their size. Even NTT grew revenues, by 2%, in terms of yen.
 
Price pressures, tough regulations, and new competition – both OTT and traditional – are not going away. But making an early move to new technology platforms, while expensive, does help deliver revenue growth. Rationalizing costs, both opex and capex, is likely to continue though, and operators will keep searching for new revenue streams as they tackle Big Data.
 
Global revenue growth goes negative on back of weak European results
 
On a year-over-year basis, operator revenues declined in 2Q12 and 3Q12, after ten quarters of post-financial crisis growth. Then 4Q12 delivered a modest recovery, with revenues up 2.1% versus 4Q11.
 
Early data from 1Q13 indicates a double dip, as revenues fell by over 1% from 1Q12. If constant exchange rates are used, revenues would have grown slightly, but by less than 1%. It’s a similar story with preliminary capex, down roughly 1%; constant exchange rates improve the measured growth only slightly. We’re not out of the woods yet.
 
More aptly, we should get used to the woods. Finding growth in this market is a constant challenge. Competition is always a threat, and a good thing for end users. Smartphones have enabled all sorts of new OTT applications, particularly in messaging, to eat into mobile revenues. The majority of many large operators’ postpaid user base is now on smartphones, including Verizon (61%), AT&T (70%), and DT (68%).
 
Smartphones also have displaced consumers’ spending; there is only so much disposable household income available to spend on telecom. Without subsidies, that becomes more apparent. Telefonica, for instance, removed handset subsidies in its Spain unit in March 2012; excluding the impact of mobile termination rate (MTR) cuts, its mobile service revenues in Spain have declined by 12% YoY in the last two quarters.
 
 
Adding in MTR makes it worse. The regulator-imposed cuts to MTR have hit most major European mobile telcos hard, and will affect operators in stages throughout 2013 and beyond; see Ovum’s report The Regulation of Mobile Termination Rates in Europe for more information.
 
Operators making progress in lowering opex, but capex is still under pressure
 
Slow growth has been a reality for many years in the developed world, only worsened by prolonged weak economies. Most large telcos have started cutting into their operational costs. That includes consolidation of divisions, layoffs, outsourcing, process improvements, IT and network optimization, renegotiation with suppliers, and lots of other things – rarely does a single tactic do the trick.
 
Capex has also been under pressure, but there has been no capex collapse. Operators recognize the need to spend capital to support the base and build competitive advantage. In 1Q13, preliminary data points to operators spending an average of just over 15% of revenues on capex, in line with 1Q12.
 
The more important element of capex is who is spending big, on what. Emerging market operators yet to tap their whole addressable market is one answer. China Unicom, Oi (Brazil), Rostelecom (Russia), Axiata (Malaysia), Idea Cellular (India), Entel (Chile), and Indosat (Indonesia) all had capital intensity ratios of above 20% in 1Q13. Much of their spending is on wireless infrastructure – in some cases, HSPA+/LTE upgrades.
 
But NTT, Softbank, KPN, Liberty Global, Charter Communications, and several others in more developed markets also saw capital intensity ratios well above average in 1Q13. The LTE push is important for some of them, but video is as much a driver, as operators both upgrade the underlying fixed broadband infrastructure and the CPE, which is often rolled into capex.
 
The success of Verizon’s FiOS platform, which was hugely expensive to build, may be a motivating factor for some. FiOS subscribers now generate an impressive ARPU of $150 per month for Verizon, and total FiOS revenues grew 15% YoY in 1Q13.
 
Monetizing the base
 
Operators are spending their capex on much more than fast access speeds. Competition whittles away margins on broadband access services alone. Also important is being able to provide users with specific, personalized experiences for which they are willing to pay.
 
The worlds of Big Data analytics and application enablement come into play here. This offers opportunities for new vendors: start-ups (Awasi, Guavus, iPoque, Zettics, Mobixell, etc.), mature specialists (Amdocs, Allot, Bytemobile/Citrix, Procera, etc.), and large IT vendors like Oracle.
 
Telcos that learn how to tap the value of their networks through these vendors and the NEPs like Alcatel-Lucent, NSN, Cisco, and others, may find the path that leads to revenue growth.
 
Matt Walker is a principal analyst for network infrastructure at Ovum. For more information, visit www.ovum.com/

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