WHY IT’S TIME FOR TELCOS TO UP­GRADE

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Finweek English Edition - - FRONT PAGE - By Mar­cia Klein

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.

New part­ner­ships

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.”

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