Smart operators can sustain key profitability metrics such as EBITDA margin and Capex to sales ratio even if traffic grows twentyfold, claims Rewheel, a Finland-based consultancy specializing into mobile data profitability and network procurement. The consultant says that while the revenue upside potential in mature markets is limited, on the cost side LTE, multimode networks and the falling gear prices open a window of opportunity for substantial savings.

Antonios Drossos, Rewheel’s managing partner shared his firm’s experiences in a speech opening Mobile Broadband World 2010, the annual gathering of telco strategists representing among others Vodafone, DT, Telefonica and Telenor groups. The conference takes place in London this week.

Drossos presented the findings from a Rewheel case study of an incumbent mobile operator from a big European country. Rewheel analyzed the operator’s annual financial reports and applied their business modeling framework to predict what would happen in the next five years to key profitability indicators such as EBITDA margin and Capex to sales ratio if the traffic load of the existing network platforms would keep growing exponentially.

“Capex associated with capacity upgrades is eating up a growing share of many operators’ technology budget but up until now most CTOs managed to keep the total Capex spend under control by holding back non capacity-related investments such as 3G coverage rollout”, said Drossos. “But the new wave of soaring smartphone traffic and resuming coverage rollouts (UMTS900, LTE) across the continent will further increase the CAPEX pressure and soon there will be a point where operators will face a difficult dilemma. Increase total CAPEX and see their cash flow deteriorating or freeze Capex by starving the network from the needed capacity and risk top-line revenues. It does not need to be that way”, he added. The consultant explained that the third and probably only viable option is to migrate to a low cost and much more scalable network platform.

According to Rewheel the upcoming LTE rollout wave opens a window of opportunity for the operators to modernizing their entire mobile network.  “After an operator committed to the purchase of the LTE gears, it loses its power to bargain a favorable swap deal for the old network and may get trapped for many years in the un-upgradeable hardware platforms and prohibitively expensive software pricing schemes”, warned Drossos.

Rewheel’s analysis showed that by utilizing UMTS 900 to cover rural areas, modernizing the network infrastructure to low cost multimode gears including LTE in hotspots, as well as trimming non-network related capital and operational expenditures by 10%, the operator will be able to sustain its profitability metrics such as EBITDA and EBIT margin, even if data traffic is to grow twenty times the current level.

Rewheel’s findings resonate well with the recently reported network swap activities like the ones announced by Telenor last week. Speaking at a presentation to analysts and investors, Telenor CEO Jon Fredrik Baksaas said that full network swaps across their operations will play central role in the group level cost efficiency program aiming to reduce its Capex to 10 percent of sales by 2013, from 13 percent last year, while preparing for over tenfold data traffic increase by 2015.

Rewheel pointed out that the competitive cost base achievable by network modernization is only one element in the profitability equation. Drossos emphasized that CFO, CMO and CTO teams must work together and find the financially optimal tariff segmentation, terminal subsidization, coverage extension, capacity expansion and spectrum management roadmaps.