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July 05, 2012

Data Tsunami will Wipe Out All Telco Profits, Unless Drastic Changes are Made

By Gary Kim, Contributing Editor

Here’s a really scary way of looking at how mobile and fixed network operating metrics might have to change…

“Costs per gigabyte must decrease by 90 percent every three to four years” just to keep service provider revenues and costs in the same relationship as they are now, according to Norman Fekrat, IBM (News - Alert) Global Business Services partner and VP.

And the bad news, according to Fekrat, is that at the moment, service provider costs are “increasing when it needs to decrease.”

“The cost structures need to be reduced significantly,” not incrementally, he said. And that won’t be easy.

Telecom is, by its very nature, a capital-intensive industry, so although some savings might be wrung out of capital intensity, many would say there is only so much to be done on that front. A service provider could stop investing in higher bandwidth and more efficient networks, for a time. But sooner or later, competitive pressures and end-user demand will force additional investment.

Price hikes and changes in retail packaging will also help, but Fekrat says only major changes in operating costs will do.

Service provider executives with large union work forces will not want to say so in public, but labor costs clearly are a part of the overall cost reduction effort. That’s about the only conclusion one can draw if the mobile network is, for example, becoming a data network. As some economists have noted, Web application businesses can run well with far lower human capital intensity than a traditional telecom business. And to survive, mobile and other telecom networks have to start operating like other modern data networks and applications in terms of operating cost.

Revenue is the other issue. “OTT data growth [is] eroding profits,” said Fekrat. In fact, “financial analysts are measuring the industry incorrectly.”

Focusing on legacy voice services is obscuring the real problem, which is that data services is where the future lies, and where the mismatches between cost of service and revenue per service are most out of line.

He thinks service providers will have to move to an alternative notion of “profit per gigabyte per service type,” where the actual cost of delivering a service is, for instance, matched to the bandwidth consumed.

Said Fekrat: “The time for change is now before the data tsunami erodes all profits.”

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Edited by Braden Becker
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