WHY IT’S TIME FOR TELCOS TO UPGRADE
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Revenue from data is growing at a significantly slower rate than the increase in data traffic.
just a few years back, the growth in telecoms groups’ revenue, profits and share prices was rampant, and the pace was seemingly unstoppable. Today things don’t look as peachy, as they struggle to maintain growth momentum in a world of slowing voice revenue growth, falling data tariffs and squeezed margins.
Vodacom’s latest results, released on 16 May, sum up the problem. Demand for data continues to soar and data revenue growth is outstripping that of voice. But revenue from data is growing at a significantly slower rate than the increase in data traffic.
Vodacom’s experience mirrors that of its local and international peers. This is an industry-wide problem with no immediate solution, a challenge that could weigh heavily on telecoms earnings and share price growth for the foreseeable future. Ericsson’s recent Mobile
Business Trends report, which tracks global trends, showed operators’ mobile service revenue grew at a pedestrian annual average rate of 2.7% between 2010 and 2014…and it is slowing. Service revenues from mobile data, however, grew at a compound annual rate of 34% over the same period, and data now accounts for over 40% of service revenues globally. But companies are finding it increasingly difficult to grow revenue and profit in line with usage.
To corroborate this trend, figures from Strategy Analytics show that mobile operator service revenue declined for four quarters in 2014/15 before showing a meagre 0.1% growth in the third quarter of 2015. But global mobile data traffic increased 71% year-on-year in the third quarter, a figure not reflected in revenue.
Ericsson said that “a key challenge faced by mobile operators today is to turn the growing usage of mobile data services into greater revenues. The growth of mobile service revenue has dropped below 2%, compared to 10% to 15% growth a
decade ago”, it said. “This is despite high growth in both subscriptions and mobile data traffic.”
The problems telecoms companies face include increased price competition, a decline in traditional voice revenue and lack of ownership of content, which is being developed and sold by others.
All of these factors feed into the disconnect between the growth of data revenue and consumption.
The need for new business models
Telecoms companies operating in emerging markets have been somewhat protected. They have grown revenue between 5% and 8%, which is higher than in mature markets, due to their ability to attract more subscribers in relatively less saturated markets than developed economies.
Unfortunately for Vodacom, MTN and Cell C, South Africa is, in in this regard, a relatively mature market. This is why data revenue is increasingly critical.
The big challenge for telecoms operators is that they are all taking stabs at various strategies, but there is no single solution, said Dobek Pater, director and analyst at Africa Analysis.
On the release of Vodacom’s results for the year to March, Vodacom Group CEO Shameel Joosub said the demand for data continues to be the group’s key driver. What is telling, however, is that while Vodacom’s data traffic growth was 46.8%, data revenue was up 28.5%.
MTN recently reported a 123.3% spike in data traffic for the first quarter, year-onyear, accompanied by a relatively meagre 20.1% increase in data revenue. According to Ericsson, operators are taking numerous actions “to accommodate the shift to a data-centric world”.
Some of the strategies include:
Promoting smartphones and various subscriptions so that users evolve their usage.
Trying to increase data revenues by getting customers to connect multiple smart devices and adopt higher data speeds.
Trying to develop and monetise content, apps and services.
Telecoms companies are also looking at new business models to try to get more out of their networks.
McKinsey, in a recent report on telecommunications titled Telecommunications industry at Cliff’s
Edge – Time for Bold Decisions, outlined five things which will determine the future success of telecoms companies:
The ability to exploit the advantages of big data through advanced analytics to predict customer behaviour and therefore reduce costs.
Development of video and “over the top” (OTT) content, which is film and TV content delivered via the internet, without requiring subscription to traditional cable or satellite services.
Consolidation to share assets, get better access to spectrum, scale up and invest in ICT infrastructure.
New operating models that focus on value, cross-border expansion and partnerships.
Digitisation to improve customer service and reduce operating expenditure.
Pater said Vodacom results indicated that voice minutes of use (calls) continue to increase, so voice usage is certainly not dying, although revenue is in decline, largely due to competitive downward pressure on tariffs, decreasing mobile termination rates and an increase in third-party voice services like WhatsApp calls.
Data is where the growth is, but operators have not hit on any universal solution to increasing data revenue faster, which, for many operators, is moving towards half of total data revenue, largely due to declining
prices, Pater explained.
Some of the strategies include a big push to get more smart devices into people’s hands so they consume more data.
We are, however, getting to a point where data revenue is on a par with voice revenue, he said, and will soon see data revenue surpassing voice. This will assist in halting potential overall revenue decline, but Pater expected that while data traffic will show a healthy increase, the price of data will continue to lag.
Operators needed to look at growing data-dependent services and generate revenue through volumes.
They need to develop partnerships with OTT content providers and look at the potential development of their own OTT services to replace third-party providers.
The larger telecoms companies will move more strongly into fixed line and focus on business as, for example, Internet Service providers, Pater said.
They will also increase their focus on the residential market, including expansion through acquisitions. These will also drive a convergent strategy, where they can offer bundled, fixed and mobile packages.
Large operators are going to consolidate their position in the market, and increasingly look at potential media services to play in the content space themselves, rather than just deliver content. To date, they have not had much success in this area. Customers tend to identify more with companies that provide content and mobile devices – like Apple or Facebook, for example, and there is a danger that telecoms companies “might be disintermediated by service providers traditionally playing in that space”.
None of the telecoms operators, for example, have been successfully able to sell their own branded phones.
“The era of printing money and being successful in spite of themselves is coming to an end in mature mobile markets,” Pater said.
It is not just mobile network providers that are feeling the pinch. Despite the continued increase in mobile users, the Australian Financial Review recently pointed out that “for investors contemplating prospects for the smartphone market… Asian suppliers just provided a few hints: It’s going to get worse before it gets better.”
Results from suppliers that make devices like iPhones, LED lights and screens for mobiles, which are “positioned early in the supply chain so they often signal what’s ahead”, point to a deteriorating market and, possibly, “sliding sales, crumbling prices and an unfettered battle for market share”.
“For investors contemplating prospects for the smartphone market… Asian suppliers just provided a few hints: It’s going to get worse before it gets better.”