Telcos' Quest for Growth in 2004
New report reveals hurdles operators face as they flex leaner muscles
9 February 2004
In the 3 years following the market crash, European telecom operators have made dramatic efforts to cut costs; yet according to a new IDATE and Cap Gemini Ernst & Young jointly authored research report, in 2004 operators need to improve operational efficiency and asset management further, as well as generate additional revenues.
“Telco Strategies After the Crisis: The Quest for Growth” finds that while remedial action taken since spring 2000 has delivered a greater level of stability-demonstrated by recently reduced debt levels, increased profitability, and stronger operational margins-fundamental challenges remain. In particular, these include an ever-declining Return On Capital Employed (ROCE). Current strategies must therefore be geared towards timeline and process-driven investments if the sector is to become the investor’s friend again.
Based on primary and secondary research, the team found that significant opportunities remain for cost reductions in operations that are generally still too complex, along with numerous examples of non-strategic asset management.
The authors have identified two fundamental issues that, if unresolved, will continue to hinder operators’ ability to seek out future growth:
- Operational efficiency: Room still exists to increase operational efficiency, this time from the bottom up. The European variation in fixed-line EBITDA and the relatively large proportion of operational costs spent on personnel, indicate that bottom-up improvements could deliver a significant benefit. For example, Telecom Italia’s EBITDA margin is 44.4% (as % of revenue in H1 2003) and Deutsche Telekom’s is 29.9%. And while a leading player like Telecom Italia has been able to bring personnel down to 19% of total operational costs, France Telecom for instance is still at 36%.
- Asset management: There has been a repositioning of tangible and intangible assets through financial accounting (in particular for 3G licenses). Now operators must seek to maximise fixed assets and infrastructure whether through CAPEX, or by new technologies that improve network capacity. Previously favoured sale and leaseback deals may still be possible, but generally they are a short-term balance sheet fix. Asset management strategies must look at implementing processes that will have a longer-term positive impact on the bottom line.
According to Marc Aafjes, senior consultant at the global C4 Strategic Research Lab, this streamlining trend is only half of the solution to the recovery process: “Whilst we have seen real benefit from some dramatic cost cutting in the early part of the downturn, it’s now time to give the growth end of the equation due attention”.
The research confirms the sector has matured and reveals that continued pressures on fixed-line tariffs will temper the double-digit growth of the 1990s. Growth strategies must therefore respond to this-bringing profitable products and services on stream.
The report highlights four major levers operators can use to enhance their performance and trigger growth:
- Development of new products and services: In the aftermath of the market crash, a pessimistic view prevailed of the capacity of new products and services to create major sources of growth. However, recently the market has displayed a much more balanced view, placing greater emphasis on product innovation. Recent success in mobile data services has led to increased optimism as it becomes clear that consumers are willing to spend on multimedia services. And in the business sector, development in VoIP and MPLS technology is refuelling business spend on telco technology.
- Packaging and bundling: D evelopments in operators’ marketing policies show a profound transformation of the industry, with the convergence of segments and the emergence of a unified approach to customers. Following their US counterparts, European telcos are developing bundled products that combine various services. Initially tariff-oriented, these bundles are becoming more content-oriented, by integrating mobile, fixed, and Internet services, signalling the development of a comprehensive approach to the customer, in contrast with the prevailing segmented approach.
- Adaptation of value chain: The creation of a services environment open to Internet protocols involves deep-rooted changes in the related business. Some operators are gambling that such a transformation would result in a transition from a telecom economy to an Internet economy, in which operator’s earnings would essentially come from exchanged traffic.
- Investigation of external growth: With more cash available, operators are also beginning to look outside their own organisations for growth. While a complete rebound in operators’ external strategies is unlikely, they are approaching mergers and acquisitions with caution. Yet with debt reduction and operational efficiency remaining at the heart of policy, for the time being alliances are a safer alternative and investment is restricted to specific product and geographic markets.
“Telcos will also need to strengthen those muscles to maximise the remaining growth opportunities that are desperately needed to conquer the ROCE challenge”, concludes Sophie Bismut, senior consultant at the IDATE Industrial Analysis Department.
” We believe that telcos need to capitalise on the momentum already built through the first round of their operational efficiency and asset disposal activities. However, they will need to shift the emphasis towards bottom-up process-improvement-driven measures to ensure that trimming fat does not turn into cutting into muscle. Maintaining and strengthening their muscle is essential for telcos if they are to take advantage of the emerging growth opportunities and impact the revenue lever, which-like operational efficiency and asset management-is critical to addressing their ROCE challenge. From an organisational standpoint, this implies striking an appropriate balance between sometimes-conflicting priorities and maintaining a holistic view across the business.”
Notes to editors
About the Cap Gemini Ernst & Young Group
The Cap Gemini Ernst & Young Group is one of the world’s largest providers of Consulting, Technology and Outsourcing services. The company helps businesses implement growth strategies and leverage technology. The organisation employs approximately 50,000 people worldwide and reported 2002 global revenues of 7.047 billion euros. More information about individual service lines, offices and research is available at www.cgey.com
About IDATE
IDATE is a centre for exchange and analysis specialising in the telecommunications, internet and media sectors. Since 1977, major European policy makers, regulators and solution providers rely on IDATE for dependable analyses and forecasts as well as ad hoc consultancy. More information is available at www.idate.org
