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Operator Economics

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Operator Economics

  1. 1. Mobile operator Economics
  2. 2. The Economics of Being a Mobile Operator2 Purpose and background  The purpose of this presentation is to support Ericsson employees in creating Customer Value  Part 1, ”The Economics of being a Mobile Operator” creates an increased operator business understanding  Part 2, ”Translating benefits in to Monetary Values” show how Ericsson product and services could improve operator business External sources rather than Ericsson internal sources have been used for assessments and forward looking statements
  3. 3. The Economics of Being a Mobile Operator3 Agenda part 1  The Economics of being a Mobile Operator – The Big Picture – Revenues – Operating Expenses – Capital Expenditure – Margins – Cash Flow – Challenges
  4. 4. The Economics of Being a Mobile Operator4 The Big Picture  Market size  Overall business model  Level of profitability  Some definitions
  5. 5. The Economics of Being a Mobile Operator5 The whole picture of an operator’s business  Knowledge of both the revenue and the cost structure is necessary to understand the dynamics of a mobile operator  Levels and trends for the main revenue- and cost sources are included in the presentation REVENUES CAPEX* VALUE OPEX** Network Frequencies Buildings Implementation Terminals Office and staff Subsidies Distribution Customer care Churn Advertising Commissions Service offering Tariffs Subscription growthTraffic growth Competition Subscriber retention Quality Brand Market share Interconnect and roaming Network operation Source: Ericsson analysis (2005) * Capital Expenditure, CAPEX = Investments, e.g. the mobile network. Visible as depreciation and amortization in the Income Statement. ** Operating Expenses, OPEX = Running Costs, e.g. salaries and selling expenses
  6. 6. The Economics of Being a Mobile Operator6 Recouping the investment  It usually takes 3-5 years to generate positive EBITDA margin, and 5-10 years to become cash flow positive when setting up a mobile operation  When setting up new services, its margins can be very high, if successful. The typical pay back time is 0-4 years time time EBITDAmargin(%) 0-4 yrs 5-10 yrs 0-3 yrs 3-5 yrs New service New service Mobile operation Mobile operationIndicative Acc.freecash flow Indicative Source: Ericsson analysis (2005)
  7. 7. The Economics of Being a Mobile Operator7 Mobile operator margins are on average high Depreciation and Amortization Interest and Taxes Net Income Typical Income Statement for a mobile operator Revenue OPEX 15% 15% 10% 100% EBITDA Margin ~ 40% EBIT Margin ~ 25% Gross Margin=Revenues – Cost of Sales (e.g. airtime costs and terminals) EBITDA=Earnings before interest, taxation, depreciation, and amortization EBIT=Earnings before interest and taxation 15% Cost of sales Gross Margin ~ 85% 45% Referred to as OPEX Net Margin Source: Ericsson analysis (2005)
  8. 8. The Economics of Being a Mobile Operator8 Mobile Operator Revenues  Size  Categories  Typical ratios  Trends
  9. 9. The Economics of Being a Mobile Operator9 Telecom is big business Net Sales (BUSD 2004) comparison for selected companies Source: Infinancials (2005 ) 65 12 285285 101 194 Telecom Operators 67 20 52 29 2219
  10. 10. The Economics of Being a Mobile Operator10 The largest operators by Net Sales Top 20 represented >60% of global revenues 2004 Operators by Net Sales 2004 (billion USD) 78,4 73,9 71,3 64,6 63,9 45,0 42,8 41,1 40,8 35,0 31,0 30,5 27,4 27,2 23,3 20,7 20,3 19,5 17,6 16,2 0 10 20 30 40 50 60 70 80 90 DT NTTexcl. DoCoMo Verizon Vodafone FT DoCoMo Telecom Italia Telefonica SBC excl.Cingular BT NewCingular incl.AWE AT&T Sprint Kddi ChinaMobile MCI Bellsouth excl.Cingular China Telecom TIM KPN Sources: Infinancials (2005), Annual reports (2005), Investment banks (2005), Ericsson analysis (2005) Based on our Operator Monitor, which includes >40 operators and >80% of global operator revenues. Fixed Full Service Mobile
  11. 11. The Economics of Being a Mobile Operator11 Revenue structure: Voice is still the dominant revenue source Estimated average revenue distribution for mobile operators in W. Europe and the US (2004) Source: Strategy Analytics (2004), Ericsson analysis (2005) DATA OUTGOING VOICE ROAMING INCOMING 23,2% 6,7% 4,3% 40,2% 17,3% 15,8% 74,8% 13,8% 2,6% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% WE US Interconnect Roaming Voice Subscription Activation Data Bucket pricing trend  There are regional differences but voice represents the major share of revenues worldwide  In some markets, incoming call termination is an important revenue source, e.g. in WE.
  12. 12. The Economics of Being a Mobile Operator12 Average revenue per user (ARPU) A performance indicator to be used with caution 1999 2000 2001 2002 2003 2004 Early adopters Early majority Late majority Average Illustrative ARPU 0 10 20 30 40 50 60 70 ARPU AMPU Smart (Phi) Wind (Ita) KDDI (Jap) Telefonica Mov (Spa) Average Margin per User Q404 in USD Source: Merril Lynch (2005), Ericsson analysis (2005) ARPU can hide underlying trends and mislead ARPU ARPU does not take into account profitability Dilution effect Comparing apples with pears! Find out what is included in the ARPU. End user fees and interconnect? What about terminal sales?
  13. 13. The Economics of Being a Mobile Operator13 Revenue growth drives value But what is driving revenues? Value growth Revenue growth Performance & margins = + Subscriber growth/mix Traffic growth New services Fixed traffic substitution Termination and roaming Tariff development Competition Regulatory authorities Capital + Investors Source: Ericsson analysis (2005)
  14. 14. The Economics of Being a Mobile Operator14 0 10 20 30 40 50 60 70 80 1Q 02 2Q 02 3Q 02 4Q 02 1Q 03 2Q 03 3Q 03 4Q 03 1Q 04 2Q 04 3Q 04 4Q 04 MonthlyARPU(USD) Japan China Russia Sweden US Brazil Several reasons to great variations in ARPU between markets High ARPU when  Early stage of market adoption  Limited competition  High GDP per capita and high telecom share of pocket  Innovation - services with consumer value ARPU’s fall when  reaching late adopter market segments  competition increases - tariff pressure  services become commodities  increasing inactive subsciptions  multiple subscriptions  decreasing termination fees (regulatoy) Strong underlying like-to-like traffic growth and increased spending usually increases ARPUs as markets start saturating Source: Merril Lynch (2005), Ericsson analysis (2005) Saturation, increased usage Competition Innovation Competition Strong volume growth compansating price pressure Low spend, dilution effect
  15. 15. The Economics of Being a Mobile Operator15 Shifting from ARPU focus to CRM and market segmentation Which are the most valuable customers? 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Early Adopters Early Majority Late Majority It is better to segment users based on attitudes, spending and behaviour than way of paying bill (postpaid-prepaid) or who pays bill (consumer-business) Source: Strategy Analytics (2003), Ericsson analysis (2005) Indicative ARPU difference per user segment €perAnnum WE revenue per market segment
  16. 16. The Economics of Being a Mobile Operator16 0 0,05 0,1 0,15 0,2 0,25 0,3 0,35 0,4 0,45 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 USDperminute Global Average USA Japan Sweden UK US vs global average W. Europe postpaid USA Development of Revenue per Minute Competition is pressuring tariffs, driving usage Sources: Credit Suisse First Boston (2004), EMC World Cellular Database (2004), Merril Lynch (2005), Ericsson analysis (2005)  Competition has forced tariffs in the US to come down much lower than most other markets. Usage is also much higher as a result of this.  European price cuts have not reflected in the same increase in usage. The increasing price pressure in Europe can still lead to a sharp increase in usage.
  17. 17. The Economics of Being a Mobile Operator17 Increasing traffic is very profitable ~80% margin on incremental traffic Source: Ericsson analysis (2005) Illustrative example with per minute tariff Provided available network capacity:  Very high operational gearing with on average ~75% margin per additional traffic minute  On data the margin on additional traffic is ~90%On own NW ~20% of traffic ~100% margin To other mobile ~10% of traffic ~65% margin To fixed ~25% of traffic ~95% margin Incoming ~45% of traffic ~100% margin Revenue / Cost (€) Revenue Cost Average RPM Average CPM
  18. 18. The Economics of Being a Mobile Operator18 Operator A 50% market share Operator B 25% market share Operator C 25% market share 0.10 Fixed operator 0.01 0.08 0.08 0.01 0.10 0.10 0.10 Termination fees are a significant part of revenues and margins The mobile termination rate (MTR) is the price for interconnecting operators for the provision of mobile termination service. Mobile termination is an interconnect service between an MNO’s point of interconnection and the mobile subscriber being called. Illustrative  Lower termination rates enable lower tariffs  Regulators are driving rates towards cost based pricing  Mobile interconnect rates in average 15 times fixed rates (2004) – how does that compare to the difference in the cost of call termination? Sources: OVUM (2004), Ericsson analysis (2005)
  19. 19. The Economics of Being a Mobile Operator19 Outgoing traffic Mobile to fixed Mobile to mobile Source: Strategy Analytics (2004), Ericsson analysis (2005) Incoming traffic Fixed to mobile Mobile to mobile Illustration of traffic flows (based on Europe, 2004)  Mobile to fixed traffic flows at lower cost than fixed to mobile, which results in a good margin for mobile operators  No termination fees on on-net traffic - margins increase with market share  The profile of outgoing call volumes continue to shift towards mobile to mobile traffic flows at higher cost than mobile to fixed Margins increase with market share Traffic patterns affect profitability Call termination at lower cost
  20. 20. The Economics of Being a Mobile Operator20 Few operators score high on both size and share of data revenues Trend of increasing data share of revenues everywhere Sources: EMC (2005), Ericsson analysis (2005) Data revenues in % and BUSD Q404 E-plus T-mobile Czech Rep. T-Mobile UK Bouyges France T-Mobile Germany Orange UK SK Telecom China Mobile KDDI NTT DoCoMo Smart Globe 0 0,5 1 1,5 2 2,5 3 15 20 25 30 35 40 45 50 Data share of revenues (%) Datarevenues(BUSD) Operators with >15% data share of revenues are included Mainly SMS Mobile data leaders Trend  Revenues from new services vital for future growth as voice gradually becomes a commodity with flat rate or bundled pricing  Global trend of increased share of revenues from data services
  21. 21. The Economics of Being a Mobile Operator21 Sources: OVUM(2005), Ericsson analysis (2005) KDDI, Japan: Flat rate tariff on data lead to a sharp increase in usage Perceived cost control is key for usage of new services  Increased take up and usage make investments in capacity necessary  First mover advantage slightly reducing churn and increased portion of gross adds  Increased take up of data services has also resulted in increased sales of premium content  Some cannibalisation effect on voice usage from increased usage av data communication Freecashflow time CAPEX & NW OPEX Premium Content Higher data take up Reduced churn & Increased Market share Revenue cap from flat rate
  22. 22. The Economics of Being a Mobile Operator22  Landline voice use fell for the first time in 2002 in W. Europe, trend continued in 2003-2004.  Mobile voice represents a larger share of revenues, than traffic  Tariffs and availability of fixed network service influence.  Portugal has >50% mobile share of voice traffic. By ~2009, mobile is expected to overtake fixed voice traffic in Europe. Mobile phone users start impacting fixed traffic trends Source: Strategy Analytics (2004), Analysys (2004), Ericsson analysis (2005) European example: ”True mobile penetration” Same trend in all markets, but from different levels
  23. 23. The Economics of Being a Mobile Operator23 There is life after 90! Still good growth in subscriptions in saturating markets Penetration varies between age segments. Youth penetration likely to grow and subscription will be kept for life, leading to higher penetration in older segments Sources: Strategy Analytics (2003), Merril Lynch (2005), Ericsson analysis (2005) 80 85 90 95 100 105 110 3Q04 Penetration (%) Ireland Finland Denmark Netherlands Austria Spain Taiwan UK Czech Rep Norway Greece Hong Kong Portugal Israel Italy Sweden Reasons for >90% penetration are:  more than one SIM card per person  m2m  non active subscriptions  other Presently 16 countries with >90% penetration
  24. 24. The Economics of Being a Mobile Operator24 Mobile Operator Operating Expenses  Size  Categories  Typical ratios  Trends
  25. 25. The Economics of Being a Mobile Operator25 Business operation is increasingly in focus SUBSCRIBER ACQUISITION (18.8%) SUBSCRIBER MGMT (9.4%) SUBSCRIBER RETENTION (7.9%) G&A (6.8%) MOBILE NETWORK CALL TERMINATION (~20%) ROAMING (~5,7%) TRANSMISSION POWER, SITE RENTAL O&M, OTHER OTHER MARKETING & SALES (11.4%) Commissions, Distribution (10.3%) Terminal Subsidy (8.5%) NETWORK OPERATION (20%) DEPRECIATION AIRTIME FEES (25.7%) G&A, SUB MGT. (16.2%) SUBSCRIBER ACQUISITION & RETENTION (38.1%) CAPEX BUSINESS RELATED 54.3% AIRTIME & NETWORK RELATED 45.7% THE “MINUTE FACTORY” OPEX~ 60-65% of revenues CAPEX~ 15% of revenues Recent trend Please note: This estimate is for European mobile operators, and is to serve as an OPEX structure example Source: Strategy Analytics (2004), Ericsson analysis (2005)
  26. 26. The Economics of Being a Mobile Operator26 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Business related Power O&M Transmission Site rental Other  Network operation share of OPEX estimated to have increased  Number of sites will typically drive network OPEX  Variations in the cost split as transmission may CAPEX or OPEX, and the cost of power, labor and site rental is market specific Source: Ericsson analysis (2005) Breakdown of network operations cost is very company specific Complexity+ 3G/NGN networks in parallell with 2G/legacy
  27. 27. The Economics of Being a Mobile Operator27 Subscriber acquisition cost (SAC) is the most important EBITDA influencer Source: Ericsson analysis (2005) Investment: terminal, commission, SIM card, distribution, advertising, selling) Monthly ARPU: traffic, subscription fee, other CAPEX, monthly OPEX: capacity, billing, customer care, other Terminal revenue, connection fee  Typical levels are 100-150€ in Europe and 350-400 € in the US  Average SAC may increases with competition, change in bargaining power towards terminal suppliers, new feature rich terminals, (e.g. 3G) with higher ASP, increased share of postpaid gross additions SAC
  28. 28. The Economics of Being a Mobile Operator28 High spenders value may be eroded by subsidies on contract extensions Time for break-even (months) -300 -200 -100 0 100 200 300 NPV late adopter on prepaid NPV early adopter on postpaid 2 4 6 8 10 12 14 15 16 17 18 19 20 21 22 23 24 25 26 ........................................................................ Contract expiry vs. Subsidy value “Late Adopter” (low spend)  lower acquisition cost  generates a positive NPV sooner  generates a lower long term value Source: Ericsson analysis (2005)  Focus is shifting from acquiring new subscribers to retaining the most valuable customers  The retention budget must be spent in accordance with the preferences of the targeted customer segment  Which subscriber is preferable depends on the subscriber lifetime (churn) Scenario: Subscriber Lifetime Value “Early Adopter” (high spend)  subsidies on contract extension erodes value
  29. 29. The Economics of Being a Mobile Operator29 0 100 200 300 400 500 600 700 800 900 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% Annual churn rate Costofchurn(millionUSD) W. Europe APAC USA Source: Ericsson analysis (2005) Even a small churn reduction has very high value  The cost of churn equals the cost of replacing the subscriber with a new (SAC)  Important reasons for churn are price, quality (coverage and capacity) and brand. New handset can trigger the decision  Avoiding churn can have higher value for a new service than the NPV it adds to the business Example: Annual cost of churn for an operator with 10 million subscribers
  30. 30. The Economics of Being a Mobile Operator30 Changes in churn has a significant impact on a company’s financials  Operators with high churn tend to have lower EBITDA margins  Churn rises with the competitiveness in the market, which also drives the unit SAC  Churn can be used as an indicator of an emerging profitability issue Correlation between churn rate and EBITDA margin for 92 operators worldwide in Q404 Source: Merril Lynch (2005), Ericsson analysis (2005) -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 0,0% 0,5% 1,0% 1,5% 2,0% 2,5% 3,0% 3,5% Monthly churn Q404 EBITDA%Q404
  31. 31. The Economics of Being a Mobile Operator31 Regional churn development Source: Merril Lynch, Ericsson analysis (2005) Churn has been fairly stable, but may increase depending on competition and changes in the handset replacement life Monthly Churn (weighted averages) 0,0% 0,5% 1,0% 1,5% 2,0% 2,5% 3,0% 3,5% 4,0% 4,5% 5,0% Q102 Q202 Q302 Q402 Q103 Q203 Q303 Q403 Q104 Q204 Q304 Q404 NAM LAM WE China Japan/Korea Other APAC CEMA GLOBAL WEIGHTED AVERAGE Sharp increase in churn in India, Indonesia, Philippines (various reasons, e.g. price wars, reaching low end segments with less loyalty, heavy promotions) Flat rates for voice and data
  32. 32. The Economics of Being a Mobile Operator32 Mobile Operator Capital Expenditure  Size  Categories  Typical ratios  Trends
  33. 33. The Economics of Being a Mobile Operator33 CAPEX to Sales has decreased to ~15%; but slight increase 2004 CAPEX to Sales vs. EBIT % 0% 5% 10% 15% 20% 25% 30% 35% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Capex/Sales % EBIT % Sources: Infinancials (2005), Annual reports (2005), Investment banks (2005), Ericsson analysis (2005) Averages of the world’s top 44 operators, representing >80% of global revenues (fixed and mobile)
  34. 34. The Economics of Being a Mobile Operator34 0% 10% 20% 30% 40% 50% 60% 2000 2001 2002 2003 2004E Europe North America APAC Latin America Global Average APAC and LA (growth markets) show highest CAPEX ratio Reasons for overall decrease of the CAPEX ratio:  operators shift from building coverage to capacity  price pressure  compensation for previous over- investment  declining subscriber growth There is growth of CAPEX in absolute terms, and equipment CAPEX growth may be higher Source: UBS Warburg (2004), Ericsson analysis (2005) CAPEX to Sales per region
  35. 35. The Economics of Being a Mobile Operator35 ~50-75 of mobile operator CAPEX is spent on the network Equipment for the mobile network and other assets, e.g. frequency license, cars and buildings Installation and site establishment is usually included CAPEX depreciation shown as cost in profit- and loss statement  hardware ~5-10 yrs  software ~3 yrs  frequency license ~10-20 yrs  buildings ~30 yrs Mobile network CAPEX Other CAPEX ACCESS NETWORK CORE NETWORK TRANSMISSION NETWORK BUILD SERVICE NETWORK CAPEX~15% of revenues Illustrative Source: Ericsson analysis (2005)
  36. 36. The Economics of Being a Mobile Operator36 Mobile Operator Margins  Size  Categories  Typical ratios  Trends
  37. 37. The Economics of Being a Mobile Operator37 On average, mobile business shows good margins Global Wireless Ebitda Margin 20% 25% 30% 35% 40% 45% 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 -20% -10% 0% 10% 20% 30% 40% 50% 2002 2003 2004E 2005E EBITDA(%) China Mobile China Unicom Vodafone Group Telefonica Moviles TIM America Movil EBITDA margin of some key Ericsson customers Sources: UBS (2004), Ericsson analysis (2005)
  38. 38. The Economics of Being a Mobile Operator38 Capital intensive industries enable high margins R2 = 0,818 0 2 4 6 8 10 12 14 16 18 0 2 4 6 8 10 12 14 16 18 20 EBIT margin % Capex/sales% Telecoms 04 Utilities 04 Energy 04 Basic Materials 04 Technology 04 Consumer, Cyclical 04 Industrial 04 Consumer, Non-Cyclical 04 Sources: Ericsson analysis (2005), UBS Warburg (2004) Telecoms vs. other industries  Telecom has been able to deliver high margins, demanding high capital intensity  Top line growth slows, decreasing capex ratio and potentially margins  Industry needs to focus on value creation to find growth and maintain margins Trend*
  39. 39. The Economics of Being a Mobile Operator39 Challenges  Differentiation  Growth  Scale and operational excellence
  40. 40. The Economics of Being a Mobile Operator40 Different needs in different stages Sources: Merril Lynch (2003), Ericsson analysis (2005) Different phases are characterized by different business needs, which put different requirements on vendors Investment Growth Maturity Heavy expenditures • New infrastructure • Market investments • Risk/opportunity analysis • Early adopter strategy Expansion • Positive return • Building brand • Mass market channel strategy Best-in-class • Economies of scale • Cost effectiveness • Maximize return • Service differentiation Business Issues Yearly Returns Pioneers Early and Late Majority / Laggards Consumer Adoption Early Adopters / Early Majority Telecom 1999? Telecom 2004? Telecom 2009? Cooperation / ConsolidationFragmentation
  41. 41. The Economics of Being a Mobile Operator41 20% 25% 30% 35% 40% 45% 50% 55% 60% -20% -10% 0% 10% 20% 30% 40% 50% 60% Revenue growth in 2003 and 2004 EBITDAmarginin2003and2004 Growth of revenues is stagnating Margins stable, but slightly down 2004 General decline of growth rates. EBITDA margins pressured in competitive market (USA, Japan) and growth markets, e.g. China. Consolidation and operational excellence is likely to increase margins again. Total market China TelecomChina Mobile Bell South AT&T KDDI Telekom Italia Deutsche Telekom KPN Telefonica France Telecom VodafoneSBC Verizon Cingular BT Group DoCoMo Sources: Infinancials, Annual reports, Investment banks, Ericsson analysis (2005)
  42. 42. The Economics of Being a Mobile Operator42 BUSINESSCONCEPT GROWTH Source: Ericsson analysis Operators are starting to explore alternative growth strategies NEWEXISTING ORGANIC MERGERS & ACQUISITIONS Operators enter related business segments, e.g. by triple play bundles Mobile TV launched in several markets Most operators still show risk aversion DoCoMo is exploring growth in the credit card and venture capital businesses Major consolidation in the US market to grow business and ease competitive pressure Signs of increased activity from multi-country operators, looking to expand in EU, CEMA, LA and Asia Increase usage and ARPU by tariff schemes, data and enhanced voice services Focus shifting to subscriber retention, and 2G to 3G migration Fixed substitution initiatives by mobile operators, convergence by integrated
  43. 43. The Economics of Being a Mobile Operator43 Source: Ericsson analysis (2005) Responding to growth stagnation Increased focus on business issues Pre-configured easy to use phones Education at sales point Defend mobile termination fees Increase share of termination on own and partner networks Reduce SAC by lower subsidies and commissions Utilize scale to reduce cost for terminals and thereby subsidies Reduce churn (brand, tariffs, quality, services) Selective retention efforts e.g. for subsidies on contract extensions General: Reduction of G&A and labor costs Synergies from alliances and acquisitions Operational excellence Outsourcing and hosting Network sharing Vendor selection/Cost of ownership Reduced complexity of systems Fewer sites Own sites and transmission Billing Customer Care Airtime Fees 197 BUSD (25%) Network Operation 157 BUSD (20%) Marketing and Sales: 220 BUSD (28%) CoS&OPEX: 786 BUSD Other: 31 BUSD (4%) Subscriber Acquisition and Retention Sales, A&P Call termination on outgoing calls Roaming fees G&A 181 BUSD (22%) Site rental, transmission, power, O&M Various Reduce bad debt Improve charging systems Agreements, alliances SAC is the biggest EBITDA influencer and subsidies will be in focus when reducing costs
  44. 44. The Economics of Being a Mobile Operator44 Agenda – part 2  Translating Benefits in to Monetary Values – Total Cost of Ownership – Revenue Generation – Time To Market – Quality Benefits – Reduced Risk
  45. 45. The Economics of Being a Mobile Operator45 20 Low Total Cost of Ownership – Equipment? – Installation? – Transmission? – Services? – Software? – Training? – Selling? – Others? What types of costs do an operator face with implementing this solution?
  46. 46. The Economics of Being a Mobile Operator46 21 Revenue Generation – New sources of revenue? – Differentiated charging? – Network rental – Subscription Fees? – More Airtime? – New Data Customers? – Site and Tower Rental? – New Applications and Services? – Improved Services? – Better Coverage? – Transmission Rental? What are some expected sources of revenue for this solution (Both existing and new)?
  47. 47. The Economics of Being a Mobile Operator47 22 Steps in Rolling Out Solution (TTM) – Ordering/delivery? – Installation? – Training? – Construction? – Implementation? – Billing? – Upgrade network – Testing? – Support? What are the various things that have to be done in order to successfully implement this solution?
  48. 48. The Economics of Being a Mobile Operator48 23 Quality Impact – Higher Voice Quality? – Higher Call Connection? – Less Dropped Calls? – Better In-Service- Performance? – Improved MTBF? – Reduced Downtime? – Support? – Capacity/Congestion? – Customer Care – Billing? What quality concerns does the operator have related to this solution?
  49. 49. The Economics of Being a Mobile Operator49 24 Reduced Risk/Security – Reliability of the vendor – Obsolescence of the solution – Large Capital Expenditure – Poor market knowledge – Poor support for the solution – Lack of local support – Future proof – Lack of products (terminals)? – Financial costs – Not right competence What are some of the business risks that the operator faces by deploying this solution?
  50. 50. The Economics of Being a Mobile Operator50

Notes de l'éditeur

  • The 20 largest operators by Net Sales represent ~ 62% of the global telecom operator revenues, depending on if e.g. NTT/NTT DoCoMo and TI/TIM are separated or not. With the consolidation of some of the major players the share is forecasted to increase. One major deal among this players will increase the concentration of revenues with ~1% (Global operators revenues ~1300 BUSD).
    The wireless players are climbing the list.
    In our analysis of the development of revenues, costs and margins in this document, we monitor the performance of the whole operator community, represented by 45 operators (all opcos consolidated) and over 85% of the global operator revenues.
  • This is a snapshot of the average revenue distribution 2003, according to Strategy Analytics.
    As you know voice still represents the major part of the revenues, over 80%. Of the voice revenues, please notice that 40% are the variable voice revenues generated by the own subscribers.
    A large part of the voice revenues are generated from business deals with other operators:
    INTERCONNECT on incoming voice is an important income source for mobile operators. There are also costs associated with IC (own subscribers making calls to subscribers belonging to another operator) and this is covered in the OPEX section.
    Data is increasing. Still it is mainly the SMS revenues here.
  • There is a lot of focus on the average revenue per user (ARPU) and how this will develop. We would like to put up a warning.
    1. Different anayst and operators include different things in ARPU. Is it subscriptions or subscribers or active subscribers? Is it only revenues generated by the subscribers or are fees from other operators, like interconnect, included?
    2. It may be a misleading indicator, hiding some of the underlying developments. The reason is that it is an average. Better would be to compare the same group of users from one year to another (same store growth), and to know which the good and the bad users are. With the recent influx of low usage customers (Late Majority users), the average has gone down. At the same time usage is increasing among the early Adopters.
    The figure shows how the three overall market segments EA, EM, and LM all have an increasing ARPU, but that the average decreases due to a high influx of LM.
  • Just like markets are diverse, there are great differences within an operators subscriber base in terms of usage and spending. When looking at external reporting, from operators or from analysts, the usual way to segment the subscriber base is between prepaid and postpaid, which does not say much more than how you wish to pay the bill, or between business and consumer, which does not say more that who pays the bill.
    We made an indicative picture to the right of the difference in spending between EA, EM and LM subscribers. We imagine these as the main categories in CL’s Take 5 segmentation. (There are in total 9 segments). EA consist of 4 of these, and are the first ones to adopt a new service. There are differences in attitudes and values, willingness to spend and behaviour between these segments. This is how we would like to segment in this presentation material as well, but there is not such data to be found. Nor is there any data presenting the same store growth, the increase usage and spending in a certain segment over time. So in the remaining parts of the presentation, you will here a lot about postpaid and prepaid, and here we know as a fact that many of the late entrants, or Late Majority segments like Traditionalists, chose prepaid. Also some of the EA, like some of the teens are, use prepaid subscriptions, and we therefor refer to them as ”low users” here.
    This concludes my part of the presentation, but I will be back after the break to talk about OPEX. Paul however, has more he wants to tell you about the revenues.
  • What happens with the existing voice business?
    Competition has forced the rpm in the US to come down much lower than most other markets. Usage is also much higher as a result of this. I will come back with some analysis of the profitabitity per sub. in Europe vs. US. The picture to the right shows the development RPM per minute in US vs Europe postpaid over the same time period 1999-2004. As you can see the changes have been much bigger in US compared to Europe. Of course other things than price also affects usage such as cultural differences, penetration, GDP etc.
    Further increased competition in Europe could increase usage.
  • There is a big difference in profit per minute depending on who you call.
    Traffic within the operators own NW generates a very high margin because there are no interconnect costs.
    Some operators use this (3) to offer FOC traffic within own NW. They do this knowing that only a small portion of the traffic goes within their own NW as their market share is low.
    All calls terminated in other mobile or fix operators is charged with a termination rate, lowering the margin.
    Calls from other operators terminating in our NW generates an interconnect income
    In average every additional traffic minute generates 75 % margin if there is available capacity.
    Margins on additional data traffic is even higher thanks to less developed interconnect system
    ~20% of traffic
    ~100% margin
    ~10% of traffic
    ~65% margin
    ~25% of traffic
    ~95% margin
    ~45% of traffic
    ~100% margin
  • The mobile operators have less costs than revenues associated with the IC. Also, an operator with large market share, has a relatively larger share of traffic terminated in its own network compared to a smaller operator and therefore has a higher margin.
    The bars to the right show that there is a margin on IC as it represents a higher revenue than cost for mobile operators. Of course as IC fees are lowered this difference will even out.
  • There is an increasing trend for datarevenues. However only a few players in the world generate both high portion of revenues from data and a lot of money in absolute numbers. Most operators perform more or less in a similar way when it comes to data with a few exceptions.
  • This is a description of how an operator who offers flat rate hope to see the development and this is also the view from some analysts.
  • Landline voice traffic volumes turned in 2002.
    Having posted a 3.5% increase in 2001, these fell by 2.5% in 2002.
    Overall landline traffic volumes still rose by 1.2% in 2002 as dial-up Internet volumes made up the balance, but these are already tailing off in many W. European markets as high-use dial-up customers migrate to broadband and total landline traffic volumes are expected to begin their decline in 2003.
    Example (2004): Young Germans pick cell phones over fixed lines: Around 25% of under-25 households have no landline.
    The third factor is FIXED TRAFFIC SUBSTITUTION.
    In average, the mobile networks generated 25% of all outgoing traffic in 2002. But it was 43% of the total revenues. In Sweden about 15-20% of the traffic is over mobile traffics. Finland seems to be the highest in Europe.
    As an example, if 10% of the fixed traffic suddenly would be moved over to the mobile networks, the mobile traffic would increase by 56%!
  • The first picture shows that penetration varies between age segments
    Youth penetration likely to grow
    Subscription will be kept for life, leading to higher penetration in older segments?
    Another reason for this is new handsets easy to use for children and elderly people
    The nomber of subscriptions will contiue to grow even if the number of subscribers is saturated
    more than one SIM card per person
    non active subscriptions
    separate datasubscriptions
  • The previous slide was from an external source. Here is our own breakdown, based on experience. This is a generic example, and we have tried to break down the categories a bit further. The split is activity based, with personnel cost divided on each category.
    As you can see OPEX vs. CAPEX depreciation is roughly an 80-%-20% relationship.
    Within business operations costs one major cost item is the Subscriber Acquisition Cost (SAC), which includes subsidizing terminals and commissions to dealers. We will therefore focus more on SAC later in the presentation.
    As mentioned earlier in the presentation, maximising value of the customers, and reducing cost is important in the stage many European operators are in now. Examples are trying to lower subsidy leves, reducing churn in targeted segments and reducing the cost of operations. Outsourcing the network operation to a vendor has become a hot topic. If an operator outsources the network operation to a vendor, and the vendor is able to do this 20% more efficient, the operator would save appr. 4% of its cost (20%*20%). With the vendors margin, e.g. keeping 50% of the reduction, an operator would save 2% on the bottom line which is good news for the financial market and the shareholders.
  • Difficult to present average picture on network OPEX split, here is our estimate.
    Transmission may be CAPEX
    Power, labor costs, site rental very country specific. Affects the split!
    # sites drives network OPEX.
    Typically the main categories are:
    Transmission 30-40%
    O&M 20-30%
    Site rental and power 10-15%
  • The operators have a lot of information on their customers (call patterns and other behavior as well as preferences), but are not always able to use it. To maximise the value the retention budget must be spent in line with the preferences of the targeted segment.
    The lifetime value can be analysed like here, with a cash flow per subscriber analysis. The future cash in and out connected to a subscriber can be expressed in one simple value, the NPV. But then we must know how long the subscriber will stay. On contract subscriptions one must sign up for e.g. 12 or 18 months to get the subsidy. If the subscriber would stay shorter it would simply generate a negative value.
    This picture illustrates that due to the high SAC = investment in a new subscriber, it takes a long time before a subscriber is profitable.
    It usually takes 1 – 2 years in Europe for a sub to break even. In USA, longer. If not careful, the value of attractive high spending customers can be eroded by subsidies on contract extension. Those customers may be more loyal to handset vendors than operators.
    To consider: Dealer wants to sell subscription and quickly get rid of customer. Wrong business model?
    Invest in education for the sales force and dealer. Configure phones, personalize and show services. Increases SAC, but will generate higher revenues and possibly lower costs (customer care). E.g. MMS and GPRS SMS sent -> higher commission.
  • We have seen that a lot of money is invested in acquiring subscribers, and increasingly on retention efforts. It is very important to keep churn at a low level. This graph shows that (each dot is an operator) operators with high churn have lower EBITDA margins than those with low churn.
    To the right we see that the cost of churn for an operator with 10 million subs and 2% monthly churn (normal) is over 800 million USD per year in the US. Often the value of attractive end user services do not lie in the cash flow from the service itself, but in the improvement of relative churn in the market place.
    Price is an important churn factor, especially for consumers, and a handset can be the trigger. For business users capacity and coverage has high importance. Brand is important for the perception of quality.
  • Churn can be an indicator of increasing competition and we will therefor monitor this more closely. Churn has been overall stable at some 2% per month. However, there has been a sharp increase in some markets, e.g. Philippines (price war) and Indonesia. Japan and the US have had a slight decrease, which may be connected to the tariff plans.
  • CAPEX to SALES is one of the common quotes discussed in the operators business.
    The quote has to be analysed carefully to understand what the trend means.
    CAPEX is increasing 2004 but the quote is stable.
    CAPEX as % of sales has decreased also as a result of that building coverage has changed to building capacity.
  • The network equipment is usually the largest share of the CAPEX, but there are also other parts like cars, buildings and frequency licenses.
    Also note that services like installation and site establishment are included in the CAPEX (capitalized services).
    Deprecation rates varies between different CAPEX elements. Here are some common rates.
  • WE have the highest EBITDA margin.
    An explaination is slower subscriber growth, stable competitive situation, however the competitive situation is changing thank´s to some new green-fielders.
    US has the lowest EBITDA margins.
    An expaination is fierce competiotion leading to high subscriber aquisition costs.
    CE &APAC has not yet penetrated the lowest segments and also there is a limited number of players in each market.
  • Important for operators to invest in new revenue generating applications to maintain high gross margins.
    If operators decide to become a bitpipe and minimize investments they will see competition driving down margins to utility levels, because the service they offer the consumers will be to similar to the competitors. Without possibilities to differentiate, the churn and price pressure will be costly for the operators.
  • Looking again at the cash flow diagram, this picture describes the characteristics of being in different phases. In the early investment phase the expenditures are heavy, and risk is high. The operator may have a differentiation to competition and is looking for early adopters that may be attracted by its services. There may be a heavy dependence on a vendor for financing, turn key capabilities, integration of equipment and to keep timeplans for roll out.
    As business grows, the financial situation is stenghtened and the operator is looking to build brand and will become an interesting alternative for other market segments. The total revenues grow quickly and the operator is spending a lot of money on acquiring customers.
    In the so called consolidation phase, there is more focus on retaining attractive customers and maximising the value of the subscriber base. Reducing churn is important. There is also focus on reducing costs, both CAPEX and OPEX to maximise the return. The operator must have a clear and unique differentitation and value propostion and be best in class in order to survive. There is likely to be a shake out of under-performers and consolidation to achieve economies of scale and shareholder value.
    The business of the average European operator in this presentation material reflects an operator in the later stages (late growth – consolidation) of this technology cycle, rather than a green-fielder e.g. 3 which has been plotted in the late investment phase here.
  • The growth of revenues 2004 was 5.4%, lower than in 2003, for the whole market. Some operators have slowed down a lot, e.g. Vodafone and DoCoMo simply by not being exposed to wireless high growth markets anymore.
    The margins are fluctuating over time, recently somewhat down, but has been stable at around 35%. The majority of operators seemed to have improving margins, but the effect of big players in US and Japan has slightly pressured margins.
    Growth markets, e.g. China, with higher market concentration and less competition, typically generate higher margins. However, reaching lower end segments in the market, even Chinese operators seemed concerned with decreasing margins and slower growth and have started to lower handset subsidies which could affect the growth in the market.
    Growth is poorer in US and Japan than for those who also are exposed to Europe. Margins are also somewhat lower.
    Telecom Italia: Performing well. TIM has high single digit revenue growth and comparably high EBITDA margin. Very high in Italy, lower in Brazil.
    Telefonica: Revenues boosted from overtaking BS Latin American operations.
    Vodafone: Well positioned to utilize economies of scale, but not exposed to growth markets. US, WE and Japan mainly. May look to acquire in Asia and brand to US. Is underperforming in Japan.
    Verizon: Best performance on revenues and margin development of the US operators in 2004.
  • Now when we have seen the importance of growth I will go into what happens in different areas where operators seek growth.
    This is a model to try to structure different ways of growing for the operators. X-axis we show organic vs. M&A and y-axis we show old vs. new business concept.
    Many things are happening in the first corner and it is not only about growing a business it is also about defending a high margin business and market shares against competition from alternative players. If operators see growth stagnating they will of course try to reach growth in alternative ways.
    It is of course a matter of definition if triple play and mobile TV as considered as new concepts or not.
    Many operators see M&A as a part of their core strategy to find growth. We have also seen activity in this are.
    When it comes to cross industry M&A we have not seen so much activity with some exceptions.
    I will now go into some more details in some of these areas.
  • This is the split of OPEX (786 BUSD) globally. The share of OPEX spent on network operation has increase for many operators due to running both 2G and 3G networks as well as legacy networks and NGN IP networks.
    About 80% of the OPEX is spent on business related expenses, e.g. the cost of call termination and roaming and the handling of subscribers. Operators are spending a large share of OPEX on acquisition and the more competition is intesified, the higher price of acquiring customers. Maximising customer value is the focus area when growth stagnates and competition intensifies.
    To the right there are areas of business development and cost/operational excellence for operators to respond to stagnation and competition.
  • .Low Total Cost of OwnershipHow does Ericsson’s Solution help the operator to control and/or reduce their cost of ownership. This should consider all life cycle costs from installation to operation to expansion and on to evolution such as equipment, transmission, operation and maintanance, service costs.
    How can Ericsson reduce the cost of owning an Ericsson solution with factors such as these (and others) in mind?
  • Revenue GenerationWhat new or expanded revenue generating opportunities are made possible with this solution? Can the solution address a new end user segment? Can it increase minutes of use? Can it enable new applications?
  • Fast Time to Market (TTM) (as seen from the operator´s perspective)Time is money and the ability to launch a solution quickly means increased opportunity for revenue. How does our solution help an operator get to market fast? Does it come pre-packaged and pre-tested? What are our production capabilities? What about services and support resources needed to install the system? What has been done to increase the speed of upgrades of new releases? What about expanding the solution to deal with new capacity needs?
    What contributes to getting an Ericsson solution up and running fast? Or faster than usual? This could be speed in an RBS delivery, easier O&M, or new services needed, now, and can be installed in secornds.. It could be Ericsson customer services that are packaged for cost-effective speed in installation or in building on to a network.
  • Excellent Quality How does the Ericsson solution address the quality concerns of our customers? Does this solution improve the voice or end user quality? Reduce drop calls? What about the In-Service-Performance of this solution? Individual component MTBF? What about system redundancies
    How does this Ericsson solution gurantee network excellent network quality. (Ericsson´s image, which could be linked to quality.)
  • .Reduced Risk (The security of the Vendor)What does Ericsson do to reduce the risks that an operator faces? Risk-revenue pricing? Leading the standards development? A past history of ability in a related solutions? Large R&D commitments? Do we share any of the risks? Future-proof product/solution, track record, local support etc
    How will this Ericsson solution help the operator to reduce their business risk?What makes Ericsson´s solution a safer investment?