Telcos Increasing Revenue Uncertainty

By Gary Kim April 18, 2012

“Uncertainty” has become an important issue with most contestants, in most markets throughout the global telecom business over the last decade or two. Thirty years ago, the issue was privatization of former state-owned telephone companies and deregulation, which has now reshaped most markets internationally.

Competition was a key development for a number of reasons, but perhaps the biggest impact was on expected revenue and profit margins. In a “monopoly,” executives could predict with good accuracy the take rates and revenues for their services.

So long as revenue was primarily driven by rate-regulated voice connections, forecasting revenue was a fairly simple process. For the most part, all one needed to know was the number of subscribers and the monthly rate paid by those customers.

Also, under monopoly rules, the return from any investment likewise was predictable. Not only were investments monetized at fixed rates, but lack of competition also meant the “cost per passing” of any network, and the “revenue per passing” were highly correlated, if not correlated on a one-for-one basis.

Cable operators could reliably forecast take rates from 50 percent to 80 percent, depending on the type of market, while telcos could reliably forecast voice take rates in the 90-percent range.

Large-scale technology changes also debuted in the 90s, from signal compression, to optical fiber, to Internet Protocol to microwave to Moore’s Law – all of which collectively changed the cost of being in the business, allowing new competitors to enter deregulated markets.

So while some say the global telecom industry is entering a period of unprecedented revenue uncertainty in regulated services, as Alan Quayle rightly argues, others might suggest this has been the case for two decades or more.

Quayle recently surveyed industry participants about what they expected, in terms of revenue sources and volumes between now and  2019. Results said optimists expected revenue growth between one percent and 1.75 percent, with mobile and fixed data driving the bulk of the growth, while mobile voice remaining flat and fixed voice declining. That easily would pass for today's conventional wisdom.

Optimists expect total regulated revenue of $1.6 trillion in 2019, a relatively sanguine outcome in a business with several challenges.

But there are pessimists who expect a flat revenue environment through about 2014, while others think revenues could decline by 2019 by about two percent, yielding annual global revenue of about $1.4 trillion.

In either scenario, though, new and unregulated services are critical for future revenue growth.

Unregulated revenue, either way, will grow faster from a lower base than some sources of regulated revenue. Quayle estimates that unregulated businesses will have 3- to 6-percent annual growth rates over the near term.

On the other hand, mobile data will grow faster, at 6 percent to 9 percent. Fixed network data revenues will grow at 3 to 4 percent annual rates in the near term. Mobile voice will be flat to up by about 2 percent annually, while landline voice will continue to contract at negative five percent annually to seven percent annually, over the next couple of years.

Though the possibility of recessions in some regions is one source of uncertainty, there are structural trends of more importance. Over the top messaging will create revenue pressure for mobile service providers.

For fixed network providers, mobile broadband increasingly will become a viable alternative to fixed network broadband, especially in market segments such as young singles, Quayle argues.

Long Term Evolution and family data plans are expected to accelerate this trend.

Market saturation and aggressive price competition from non-incumbent service providers will create pressure as well, especially in the mobile segments of the business. For fixed network providers, facing losses of voice accounts, the issue is not so much competition as shrinking demand.

Edited by Braden Becker

Contributing Editor

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