Network assets back in favor as power tilts towards pipe owners - Ernst & Young - Croatia

Zagreb, 11 May 2009 — Despite the economic downturn, these are good days for asset-heavy incumbent telecoms operators with established networks, according to a new study of the telecoms sector by global professional services organization Ernst & Young.

The power of the pipe, a study based on in-depth interviews with 18 senior telecoms executives across Europe and North America, found that operators are responding to increased pricing pressures by seeking to build greater scale, be it through consolidation for the fixed operators or aggressive growth strategies in emerging markets for mobile operators. However, the main winners in the race to build scale have been those who already had it, the incumbents; though the uncertainty of unlocking the full value of their networks remains as strong and problematic as ever.

Vincent de La Bachelerie, global telecommunications leader at Ernst & Young, says, “As the downturn sees the focus switch from customer acquisition to retention, investors have recognized that the incumbents’ are biting back."

“Market conditions are challenging, and will remain so for some time. But the scale and balance-sheet strength of the integrated incumbent operators, and the roll-out of new networks, whether fixed or mobile, handing them increased broadband speeds, means they are currently regarded as a relatively safe haven.”

However, to unlock and reclaim the full value of their networks, operators will need to invest in new technologies and develop new competencies, especially around understanding their customers and rationalizing operations.

The bandwidth dilemma
The mobile internet is finally a tangible and growing service. However, consumers are demanding more bandwidth for a flat fee, and have strong affinities with technology brands. The appeal of data is a double-edged sword for telcos, because - in fixed line and mobile - it is driving up costs, as well as revenues.

Network owners are therefore facing numerous challenges in realizing value. There is a cycle of competitive intensity, which operators tell us is difficult for them to break out from. Regulators have stimulated competition, and operators now find themselves forced to keep investing heavily to stay in favor with customers, who want more for less. As a result, they are seeking a balance between driving costs down and continuing to invest in their networks.

Operators acknowledge that investment in the networks must continue. New technologies will remain key differentiators, both in terms of meeting customer demand for increased bandwidth and improved quality of service.

The regulatory burden
CEOs stated that regulatory uncertainties are their main threat to investment, as lack of clarity on future legislation is adding to their anxiety. As one technology vendor stated: “I hear a lot of operators say ‘why would I invest in an optical fiber access network when I don’t know how it will be regulated?’”

"To invest with certainty in the right areas, operators need clarity on key issues such as next generation access, spectrum allocation and functional separation," says La Bachelerie.

According to the study, to achieve this clarity, operators will need to engage even further with governments and regulators, negotiating to maximize the incentives for investment.

Operators agree that they must start leading change, not merely adapting to it. Knowing the customer, engaging in dialogue with policy makers and building the right partnerships will be crucial to safeguarding future opportunities.

Unlocking value: putting the pipe to new uses
When asked about their top three strategic priorities, CEOs put customer value and service innovation ahead of cost efficiency.

“Increasing the share of wallet with our current customers is the road to success,” said one telecoms executive.

According to the study, there is clearly more value that can be extracted from the amount that both consumers and corporates spend on communications, which is currently leaking away to other players.

One participant in the study observed: "If telecoms operators want to grow, they have to explore opportunities at the network boundary, where data is doing well."

Also, real-time customer analytics save time and money in achieving and leveraging a better understanding of the individual end-user. Only a minority of operators currently have real-time analytical functionality in place, but this will change.

La Bachelerie concludes: "As operators develop their strategies to capture these value opportunities, the most fertile area of the market is likely to be the middle ground between the 'dumb pipe' utility and the 'multi-player' consumer media provider.

“As new services are rolled out, and as governments press for further network investment, the uncertainty over the returns on network investments looks set to continue. Against this background, operators must make the most of their strengths.”

About the survey
In early 2009, Ernst & Young conducted in-depth interviews with senior executives from 18 telecoms companies and industry stakeholders across Europe and North America. The participants included not only major operators, but also technology providers and financial stakeholders.

The report can be ordered via GlobalTelecommunicationsCenter@uk.ey.

About Ernst & Young’s Global Telecommunications Center
In a rapidly changing environment, telecommunications operators are facing the challenges of growth, operational efficiency, convergence, technology and increasing regulatory pressures. Ernst & Young’s Global Telecommunications Center brings together a worldwide team of professionals to help you achieve your potential — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant industry issues. Ultimately, it enables us to help you meet your goals and compete more effectively.

It’s how Ernst & Young makes a difference. www.ey.com/telecommunications

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