Telecom is a tough business in the 21st century

Network costs are on the rise. An insatiable appetite for more data is forcing telecommunication companies to invest heavily in next generation networks. At the same time competition has gone global creating, enormous price pressure in most markets.

According to a February 2011 study by United States (US) based network equipment maker Tellabs, if the current trend continues, network costs for operators in various regions across the globe may exceed revenues by 2013 to 2015.

The study forecasts that network costs are likely to exceed revenues in North America by the fourth quarter of 2013, in the developed markets of Asia Pacific such as Australia, Japan and South Korea by the third quarter of 2014, and in Western Europe by the first quarter of 2015.

To survive, telecommunication companies really only have three options, to expand, to create economies of scale, identify and develop new revenue streams or create leaner operations. For Gulf Cooperation Council (GCC) operators, the focus has been on expansion. In 2004, GCC telecommunication companies were operating in only six markets outside their home countries. Today they operate in close to 80 countries. In the last five years alone, GCC telecommunication companies have invested more than US$33 billion (QR120 billion) in cross-border deals. But most other regions do not have telecommunication companies with this kind of cash.

The focus in most markets is on reducing costs without impacting service quality. Thus key cost optimisation strategies include networking outsourcing, organisational restructrucing and rationalising asset portfolios.

Network outsourcing

Recent examples of networking outsourcing abound. In November 2011, Zain Iraq entered into a strategic five-year network outsourcing and optimisation agreement with Ericsson.

In July 2011, Vodafone Italy outsourced the management of field service operations of its fixed and mobile networks, as well as the fixed core network nodes to Ericsson. As per the deal, about 300 of Vodafone Italy’s employees were transferred to Ericsson.

In the same month, Australia’s Telstra announced plans to outsource its administrative functions such as capital expenditure accounting and account activation, eliminating about 300 jobs.

And in June 2011, Clearwire outsourced a part of its customer care operations to TeleTech Holdings, a leading US-based business process outsourcing (BPO) services provider. Under the deal, about 700 Clearwire employees were transferred to TeleTech.

Organisational restructuring

In a prime local example of organisational restructuring, in January 2012, Qtel announced a major corporate transformation in Qatar, which will enable Qtel to focus on core functions that are essential for future success and sharpen the level of support for customers.

Similiarly, in June 2012, the Vodafone Group rolled out ‘Evolution Vodafone’ a programme to transform global processes by creating Shared Service Centres, a global procurement centre and a single unified information technology (IT) system to take advantage of economies of scale and unified global processes.

Then in September 2011, Spanish multinational Telefónica announced an organisational restructuring, to streamline its operations and pursue growth opportunities in digital services. One of the major changes in the restructuring includes creation of a Global Resources unit, designed to ensure the profitability and sustainability of its business by leveraging and unlocking economies of scale.

Rationalising asset portfolio

Many large operator groups, including Deutsche Telekom, France Télécom and Vodafone are re-evaluating their asset portfolio, and are pursuing mergers or disposals of their underperforming assets to increase group profitability.

In August 2011, Vodafone Group entered into talks regarding a potential merger of Vodafone Greece with Wind Hellas Telecommunications, a Greece-based integrated telecommunications provider. The merger is projected to help Vodafone gain substantial cost savings from synergies in operations and increased scale.

In January 2011, Qtel also acquired an additional 25 percent of Tunisian outfit, Tunisiana and now holds a 75 percent stake in the company and in 2012 Qtel acquired additional stakes in existing subsidiaries Asiacell Iraq and Wataniya Kuwait.

Increasing collaboration

Interestingly, telecommunication companies are increasingly collaborating to optimise costs. Focus areas for collaboration include network sharing, joint network deployments and joint sourcing of equipment.

For a typical mobile operator, network costs represent between 20 to 30 percent of operating expenses, and about 60 to 70 percent of capital expenditure. With rising data traffic requiring increased network investment, network sharing is becoming popular among telecommunication companies to reduce network expenses. Usually, only the radio access networks (RAN), including the antennas, towers and transmission equipment, are shared while the companies’ core networks are kept separate.

In August 2012, ictQatar issued guidelines for technical standards on infrastructure rollout network and exchange sharing between service providers in Qatar. ictQatar has, from the outset, supported and emphasised infrastructure sharing between telecom operators for the benefit of the customers and the public at large.

In August 2012, Vodafone entered into a partnership with Zain group to synergise their roaming agreements and brand names to improve network coverage and trim costs. By June 2012, Qtel has expanded its roaming agreements with more than 625 various international partners to offer customers better roaming rates/connectivity. In July 2011, France’s Bouygues Telecom and United Arab Emirates (UAE) Etisalat joined the Telefónica Partners Program. The programme allows joint procurement of network equipment and handsets through Telefónica’s global procurement unit, Telefónica Global Services. In April 2011, France Télécom’s Orange and Deutsche Telekom agreed to form a 50:50 procurement joint venture by combining their respective procurement operations covering purchases of customer equipment, network equipment, service platforms and IT infrastructure.

In May 2011, Orange Austria and T-Mobile Austria announced plans to start network sharing and joint network deployment in the fourth quarter of 2011. Although their initial focus is expected to be on expanding 3G-network coverage, the cooperation could be expanded to 4G networks as well. Perhaps counter-intuitively, collaboration between competitors is helping to improve network coverage and quality. So how much more can telecommunication companies do to reduce costs?

The pressure on cost is not going to just disappear. The smart operators will focus on creating sustainable cost-efficiencies through ongoing and continuous cost management efforts. The challenge is to do this while at the same time investing in new business models and innovation to grow the business. Most GCC operators are well placed to compete locally and abroad, but the most successful will be those operators that can successfully expand and grow while at the same optimise their costs.