THE RIS­ING COST OF TEL­COS

HWM (Singapore) - - THINK - BY DR. JIMMY TANG

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?"

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