To finance professionals in telecom companies, the advice of Jayesh Easwaramony, Vice President - ICT Practice in Frost & Sullivan (http://bit.ly/F4TJayeshE), is to focus on cost-efficiency rather than just cost reduction. During a brief interaction with Business Line, on the sidelines of the recent ‘Amdocs InTouch Business Forum 2011’ in Singapore, Jayesh also spoke of three things that may interest the telco CFOs. “One, CFOs want better cost visibility since the nature of investments is changing rapidly. Two, the choice of metrics continues to change as the business model evolves; for example, is revenue per minute important in a data-centric world? And three, as EBIDTA margin reduces and new services are not as profitable as voice and SMS, cash flows are impacted in the short-term, so CFOs have a very important role to play in the telcos.” Our conversation continues over the email.
Excerpts from the interview.
Is cost reduction a sustainable focus area for telcos?
The telecom industry value chain is complex, so we have to divide it into network infrastructure, operations, distribution, creation of services, and customer acquisition, to understand where cost reduction is pertinent. Cost reduction should be pursued in the relevant areas such as infrastructure, operations, and distribution, since some of the services are commoditising, and capex-to-sales ratio for telcos is still high.
In many developed and also developing countries, revenue growth has stalled and telcos are becoming mere pipe providers, hence cost-efficiency is a major focus area in the interim. The key objective is to be cost-efficient rather than just focusing on cost reduction, by constantly benchmarking costs with other telcos, especially in areas of subscriber acquisition costs, margin per minute, and asset utilisation, and also other industries like FMCG, and retail, for specific areas.
However, they should be wary of overdoing this since revenue growth is equally important; and that will result from new business models and innovation. Recently, companies such as HP changed their approach from an overly cost reduction model to a judicious mix of new product development and cost reduction.
The other challenge is that certain new operators can start from a very different cost base by using the latest network equipment, and that puts cost pressure on the incumbent telcos. The other important area as Indian telcos increasingly diversify into the enterprise business or have complex managed services deals is to take care of commercial and risk management in long-term contracts.
How are platforms impacting telco revenues?
Platforms are chipping away at telco revenues in two ways:
(1) Opportunity loss: Platforms that embrace web-based approaches are creating new usage that could have been captured by telcos (e.g. VoIP calls or apps that could have been additional revenue for telcos). For instance, Skype has close to 8 million paying subscribers generating close to $8 per month. Although this maybe less than 1 per cent of global fixed line voice revenues, there are 150 million regular users who would have given the telco some revenues if the price was attractive. So, if you add other platforms like messenger etc., the opportunity loss is much higher.
(2) Substitution: In certain markets, we find SMS traffic coming down due to instant messaging or status update via social networking sites. Such substitution is a direct impact. However, operators could be revenue neutral/positive if they are able to make data revenues; but if the subscriber is going to use WiFi, then it is a loss.
The larger threat is that platforms are serving the basic consumer needs of entertainment, communication, personalisation, information and participation directly rather than through the telcos by the creation of developer communities who are producing apps and other services. Moreover, platforms have global scale and faster time-to-market. There are several cases in the ICT industry where the value shifts rapidly to a platform like the Windows-Intel platform compared to IBM in the 80s.