European Telcos Face Huge Cost Cutting Challenge

By Gary Kim February 11, 2014

Operating cost cuts would never be surprising in any industry facing multi-year revenue declines.

Nor have such cost cutting imperatives been unusual in industries facing higher competition. So it comes as no surprise that operating cost containment has emerged as a key issue in the global telecom industry.

Nowhere is that more true than in Europe, where telecom service providers will see a fifth year of revenue decline in 2014, although operating margins will stabilize, helped by cost cutting and the end of regulatory cuts to mobile call termination fees, credit rating agency  Moody's has said.

The issue is how much more will have to be done, if aggregate revenues continue to shrink, as many now forecast. The telecom industry in Europe, and perhaps also in the United States, could see profit margins drop from 35 percent or 40 percent to as low as 15 percent over the medium term, Arthur D. Little analysts have argued.

Even if partly compensated for by significant growth of revenue volume, service providers facing margin compression of that sort will do what they always must do, namely, cut costs even further. Some have argued that operating cost cuts of about 30 percent are necessary. Others think even that is too conservative.

In fact, a new analysis suggests cuts of as much as euros 100 billion may well be required in the European telecom business, according to a new report by AlixPartners, a business advisory group, according to the Financial Times.

“In order to stem the tide of revenue decline, tthey must admit the difficult truth that their business models need to be fundamentally redesigned and further simplified,” said Eric Benedict, managing director at AlixPartners.

That will be especially crucial if new revenue sources prove difficult to create, or if new revenue sources remain smallish. That would not be unexpected, some argue, given the shift to over the top and third party apps and services delivered over the Internet, and difficult to “capture” in a traditional telecom service provider environment.

Edited by Cassandra Tucker

Contributing Editor

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