THE RISING COST OF TELCOS
One of the most discussed topics at MWC 2014 recently was the rising cost of telecom operators and their subsequent revenue decline due to the increased use of OTT (Over-The-Top) services. With the rapid acceleration of technology and internet-based services that has indirectly caused the decline in revenue from traditional telco services, operators are finding it increasingly difficult to justify their continued investments in implementing new telecommunications technology and infrastructure.
Traditionally, operators have to deal with investments from the purchase of spectrum rights to support the necessary mobile infrastructure. Most countries, like the United States, India, United Kingdom, Germany, and even Singapore, conduct spectrum auctions to operators interested in expanding their mobile services. Technological advancements in telecommunications such as the new LTE (4G) standard, or the need for greater bandwidth, has made it necessary for operators to purchase new spectrum bands. However, spectrum auctions often run into high costs as operators try to outbid each other to secure the finite amount of bands offered. In the United Kingdom alone, the auction of 3G radio spectrum raised £22.5 billions for the government in 2000. In India, the 3G and 4G spectrum auction earned the government revenue totaling over US$17 billion.
Such high cost is not without its repercussion. The 2001 telecoms crash in Europe was blamed on the excessive bidding of 3G spectrum in the UK and Germany. Operators spent so much on spectrum that they were no longer able to pay for the 3G equipment that they had licensed, let alone improve their existing network infrastructure. This led to unprecedented losses and subsequently damaged Europe’s telecommunications industry, which at that time was technologically ahead in the world.
The rapid pace in which technology is progressing is further complicating the problem. The change from one generation to another generation of mobile technology is getting shorter. 3G’s lifespan, for example, was only about 10 years long and was quickly replaced by 4G as recent as only 3 years ago. At MWC 2014, some operators were already talking about the deployment of next generation LTE-A services, which would require further investment by operators in terms of spectrum licensing and equipment upgrades.
The cost to keep up with spectrum licensing alone, according to operators, has taken a toll on how much more operators can invest. Building civil infrastructure, adding new mobile base stations and physically wiring up all the locations to provide the wide coverage that customers demand requires a sizable investment.
Speaking at the Huawei Broader Way Forum, operators argue that regulatory bodies should promote a healthy telecommunications ecosystem and the high cost of spectrum due to the auctioning process is damaging. They reason that a country’s telecommunications infrastructure is an important resource, akin to electricity, water and transport playing a vital role in economic and social development. They added that such escalating costs are preventing them from improving their services and further stifling innovation.
Although operators are earning from its subscription services, which include voice and messaging, it’s apparent now that they were never prepared for OTT services challenging their traditional revenue model. OTT services like WhatsApp and Skype have, over a short span of time, eroded the operator’s voice and SMS revenues.
“The main problem we have as an industry is we have been unable to monetize this increased demand ... and [average revenue per user] has fallen over time,” said SingTel’s chief executive Chua Sock Koong during her keynote at Mobile World Congress. Orange’s CEO Stephane Richard also echoed the same concern: “The risk for us is being excluded from the world of services. If that happens, we’ll be downgraded to simple pipes.”
It’s quite clear that consumers are now using ‘free’ services that use the internet as its transport medium. Voice, messages and even multimedia content are being transferred over the internet for a fraction of the cost, bypassing costlier operator services. For consumers, it’s the most cost effective (sometimes a more reliable) form of communication but for operators, these present themselves as lost opportunity.
Would charging OTT players be a way to help operators recover from declining revenue? Although SingTel’s CEO hinted at such a possibility, regulators like IDA were quick to point out that internet service providers are not permitted to block legitimate internet content to consumers.
If they can’t earn directly from existing OTT players, operators would then need to get into the OTT game themselves. However, the question remains if there’s room for more OTT services and whether operators are already too late to join the OTT game. Ultimately, it’s up to operators to decide if they want to catch up with their own solution or work with current OTT players to create a new revenue model that creates better value for their customers.
Competition is good, whether they are between operators in bidding for spectrum or with OTT players in service revenue. Market forces such as these will undoubtedly bring about innovation and choices for consumers. But in any competition, there will always be a loser. The problem here is, an operator cannot afford to lose, as failure in providing telecommunication services will have far greater socioeconomical impact. Are consumers then ready to pay more to get the latest mobile technology or are regulators willing to sacrifice advancement in telecommunications for the sake of competition?
"Would charging OTT players be a way to help operators recover from declining revenue?"