Mobile operators must contend with stagnating revenue growth resulting from reduced consumer spending. To improve profit margins in this environment, companies must find ways to simplify their operations and refocus scarce resources on activities that offer the best returns. Mobile?Europe runs extracts from a white paper from CapGemini that looks at how mobile operators can suceeed in this quest for margin
CapGemini's Telecom, Media and Entertainment team analysed various cost reduction measures across three key areas: network operating expenditure (OPEX), subscriber acquisition (SAC) and retention costs (SRC) and the costs of servicing customers. It modeled the potential savings that could accrue from adoption of these measures, and its analysis shows that a typical mobile operator in Europe is positioned to improve EBITDA margins by up to four percentage points within four years by the judicious implementation of these measures. However, there exists significant challenges in doing so.
The Context
Telecom operators in Europe are facing some of their toughest times in recent months. After a period of high growth, mobile telcos are now faced with a credit crunch that is impacting their growth plans and an economic slowdown that is affecting consumer spending. For some time, strong growth in mobile revenues had diverted the focus of operators from driving down costs. In a growing and competitive market, operators had focused on launching a wide portfolio of voice and data products, technology upgrades and ramping up their customer service functions, resulting in complex structures and systems.
In light of the current revenue challenge, mobile operators now have to shift their focus from growth strategies to simplifying their businesses and driving down costs to sustain healthy margins. Particularly since operating costs for most operators have been gradually rising over the past few years, and it seems there is scope for targeted OPEX improvement measures.
Network OPEX
For the mobile operator that we have modeled, network OPEX accounts for over 26% of OPEX. We have identified three key areas of network expenses that operators can focus on in their drive to cut costs. We estimate cost savings initiatives focused on network OPEX are likely to result in a 2.7-3.8 percentage points rise in EBITDA margins, based on the extent of measures that are deployed. EBITDA uplift is loaded towards the end of the four year period due to the progressive deployment schedule that the measures entail.
Backhaul Ownership
With rapid increases in backhaul capacity driven by network upgrades, most operators are caught in a situation where their increasing share of payouts to backhaul owners are driving down their current margins. This has prompted some operators to venture out into building their own transmission networks.
For instance, Vodafone Germany has embarked on an initiative to build its own backhaul and estimates that it could save up to € 60 million annually in OPEX due to this shift. In Italy, the company has already migrated over 80% of its backhaul to their self-owned links.
However, savings through backhaul ownership are closely tied to the traffic requirements of the operator. We have modeled our analysis on the assumption that base stations would require a backhaul capacity of up to 6 E1 lines, as opposed to the current average of 2. As such, we believe operators that are seeing a strong upswing in traffic or those that are already operating at high capacity utilisation rates are likely to benefit most by taking ownership of their backhaul.
Our analysis reveals a potential upside between 1-1.85 percentage points in EBITDA margins by implementing this measure. In bringing backhaul in-house, operators will need to follow a phased approach where they first identify the sites, prioritise them based on capacity utilisation forecasts and finally select the appropriate technology between microwave and fiber.
Energy Savings
Our analysis suggests that by deploying focused initiatives around improving cooling efficiencies and reducing energy consumption at mast sites, operators stand to realise a tan-gible savings potential.
Integra-ting these measures into our cost savings model, we believe that a savings of up to 4.5% can be obtained on the electricity OPEX costs of an operator. These savings translate into a direct uplift of EBITDA margins by 0.16-0.19 percentage points. We have modeled these savings as a one-time measure for implementation on existing sites.
Network Sharing
For larger operators, the key advantage is the opportunity to monetise assets that have already significantly depreciated, thereby offering them a steady revenue stream. For smaller operators, the case for network sharing appears even more attractive as these operators can convert significant parts of their CAPEX into OPEX and in the process also achieve a faster rollout.
An analysis of the potential savings that can accrue through sharing of network elements, including the Radio Access Network, reveals that operators with moderate coverage can achieve EBITDA upsides of around 1.0 percentage point while operators with nationwide coverage can achieve an EBITDA improvement of over 1.4 percentage points.
Subscriber Acquisition and Retention Costs
Subscriber acquisition and retention costs (SAC/SRC) form the single largest OPEX element for most mobile operators. Handset subsidies account for the bulk of these costs with a 69% share while dealer commissions account for almost 15%.
Increasing Contract Duration
The duration of contracts offered by operators is closely tied to the amount of handset subsidy that the operator incurs. Consequently operators are experimenting in varying the duration of the contract to reduce the impact of high subsidies for feature and smart phones.
In the European context, we have modeled a scenario where the current average of 18 month contracts is extended to 24 months. An increase of over 40% in the customer lifetime value can be achieved by extending the duration of the contract.
However, consumers are likely to resist any extension of contract durations. In order to drive uptake of extended contracts, operators will need to create loyalty benefit plans that encourage customer stickiness.
Our analysis shows that by extending contracts and implementing progressive loyalty benefits, operators can realize EBITDA uplift between 0.44-0.48 percentage points at end of the fourth year. However, challenges arise around managing revenues, customer expectations, and in the distribution of subsidies. Nevertheless, the challenges are not insurmountable and the measure, in itself, offers scope for operators to embark on a new low-cost subsidy path.
Direct Sourcing of Handsets
Our analysis shows that large operators that have significant purchasing power can reduce costs involved in handset sourcing by procuring handsets directly from ODMs. ODMs have in-house design and manufacturing facilities and offer a significantly faster turnaround time, in comparison to traditional OEMs. Moreover, the lack of a strong brand for the ODMs, and relative scale of the operator gives the latter significant bargaining power in negotiating procurement of handsets. Indeed, operators such as Vodafone have experienced a price differential of over 16% between an OEM and an ODM for sourcing comparable budget handsets.
We have modeled a progressive rise in sourcing low cost handsets from ODMs, with the upper limit capped at 35% of budget handsets at end of year four. Our analysis reveals a potential upside of 0.12-0.2 percentage points to EBITDA margins at end of year four. Sourcing higher volumes and feature rich handsets from ODMs are likely to result in significantly higher savings for operators. However, a key challenge for operators will be to ensure sustained after sales support from the ODM.
Customer Service Costs
Our analysis of cost cutting measures focused on customer service reveals three initiatives that have not been implemented by operators in Europe extensively and have potential for margin uplift:
Paperless Billing
Research on the cost differential between paper and e-bills shows a differential of up to 59%. Building these savings into our analysis shows scope for EBITDA margin uplift of 0.1 percentage points for operators at the end of year four, assuming a rise of 3% in number of subscribers opting for an e-bill. Operators could strive to increase uptake through focused promotions and providing enhanced functionality in ebills to drive up savings.
Hutchison (3) Austria initiated a drive to migrate its customers to e-bills in mid 2007. At that point in time, 3 was sending out over 480,000 paper invoices per month, each having between 5 to 100 pages. Having seen limited success with opt-in strategies, 3 opted for aggressive opt-out measures resulting in strong success. They achieved a conversion rate of over 85% as opposed to their conversion target of 65%.
Unstructured Supplementary Service Data (USSD) based Self-Care
USSD is a real-time messaging service that functions on all GSM phones and has seen multiple deployments across emerging markets. Operators could build mobile portals that could be accessed through USSD, and benefit from the lower costs and faster query resolution that the service offers. By offloading some of the most common customer service queries such as those around bill payments, balance and validity checks, and status of service requests, operators can reduce the burden on their contact centers, and consequently, the cost involved in servicing each consumer. However, lack of regulation and limited interoperability among operators for consumers who are roaming have resulted in the service seeing limited traction in Europe. Operators will need to collaborate among themselves to ensure uptake of USSD services.
A Time Slot Approach to Customer Calls
Our measure envisages a scenario where customers are assigned specific time slots during which they can contact customer service, with calls outside the time slot being treated as regular charged calls. However, such a measure will have to be tempered by a minimum Quality of Service (QoS) guarantee, and offset by incentives (such as free minutes) for a drop in QoS.
By utilising the time slot approach to customer calls, we believe that operators could achieve a reduction in the number of resources deployed by over 37%. However, the implementation of this measure is likely to be challenging, given the complex analytics that drive the slot designs and managing the apprehension of customers. Nevertheless, we believe that sound implementation of this measure will result in EBITDA margin uplift by 0.2 percentage points by end of year four.
Conclusion
In conclusion, telcos will need to concentrate on gaining tactical benefits from cost reduction initiatives in the near-term and create sustainable cost advantages, with an emphasis on operating margins, before they can look at creating long term value through growth strategies. Operators will have to identify complexities in their systems, processes and cost structures and develop a roadmap to systematically mitigate them. Mobile operators will also need to identify activities that offer the maximum value realisation and redirect financial and operational resources on these activities to create lean and efficient businesses.
About the authors of this article:
Jerome Buvat is the Global Head of the TME Strategy Lab.
Sayak Basu is a senior consultant in the TME Strategy Lab.
