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More from MWC2013: metrics transformation in telecommunications – thoughts from Ernst & Young

March 26th, 2013 |  Published in Mobile World Congress 2013

MWC metrics

 

26 March 2013 – Think of telecommunications as the world’s biggest machine. Strung together by complex networks, telephones, mobile phones and internet-linked computers, the global system touches nearly all of us. It allows us to speak, share thoughts and do business with nearly anyone, regardless of where in the world they might be. Telecom operating companies make all this happen.

And while telecommunications operators are mastering the demands of technological and regulatory changes while illustrating transparency, customer innovation and bringing new services to the market, Ernst & Young is there analyzing and helping its telecom industry clients adjusting their business models or boost their market share.

Given their major footprint in the telecom industry, Ernst & Young always has a major presence at MWC and this year was no different. As Olivier Lemaire of the Ernst & Young team told us “the telecom industry is transforming before our very eyes. And in many instances, there are no hard set rules for the new digital platforms, tools and lifecycle in which they live. In this industry more than any other, therefore, embracing a strategic, forward-looking business model is critical to survival — and success. The transformation that has gripped the landscape presents you with challenges, risks and opportunities as never before.”

Bingo.  With continued pressure from new players entering the market, operators must continually find ways to stay ahead of the game. Strategies include investment in next-generation technologies and alternative network sourcing arrangements.

And one of the things this fast-changing, technological, competitive and customer environment is calling for is a renewed look at the metrics operators use to measure and report their financial performance.

Ernst & Young sees operators’ profitability under significant pressure, driven by:

  • Rising customer sophistication and demand
  • Ongoing price pressures, exacerbated by intensifying competition from over-the-top (OTT) providers
  • Regulatory pressures on core service areas

As traditional markets become saturated, the business case for investment by operators is no longer driven by net additions and rising penetration. Many markets are now hyper-penetrated, while churn remains low despite intense pricing pressure. Yet long-term capex requirements remain high. Future growth opportunities increasingly involve new types of customers, connectivity, use cases and profitability profiles. Shareholders and analysts increasingly look for new sector growth stories in the wake of infrastructure upgrades.

Operators themselves are squaring up to the challenge of improving their business intelligence capabilities as a catalyst for better decision-making. This requires a more robust set of internal metrics that capitalizes on the wealth of product and customer data they have at their disposal. Let me summarize where Ernst & Young come out on all this:

New metrics for a new environment

Robust and relevant operational and financial metrics are critical to:

  • Support informed decision-making across the industry
  • Maintain the credibility and relevance of operators’ reporting and forecasts
  • Sustain investors’ confidence

It is vital that the metrics used by the industry keep pace with changing market conditions, business models and service offerings.

It is also important to maintain global consistency in these new and evolving metrics as operators widen their service propositions and investors and regulators demand new insights into addressable markets and end users.

There are a host of factors challenging legacy metrics …

1. External factors:

  • Disruptive competition — OTT and other technology, media and telecommunications (TMT) players are increasingly competing for the same share of the same customer wallet while using different business models and metrics to do so.
  • Regulation — Regulation of legacy services puts pressure on incumbents’ revenue and profits, while the separation between net companies and service companies is fueling the creation of new types of telco.
  • Customer needs — Web services and ongoing device innovation are driving up customers’ expectations around price, convenience and value-add.
  • Technology evolution — New technology rollouts are vital to support and enhance the customer experience — and long-term national coverage targets are already in place in many markets.

2. Strategic considerations:

  • New business models — Business models for core services are changing, with a growing need to communicate new customer usage, revenue and cost considerations as the shift to data continues.
  • New services — New service opportunities tend to score poorly when evaluated under legacy financial metrics such as EBITDA. Operators are already restructuring their operations to capture these growth opportunities and have put long-term growth targets in place.
  • New stakeholders — Telecoms operators and their networks are now seen by a range of policy-makers, including government, as an engine of productivity growth and national competitiveness.

As such, metrics relating to service and network reach are no longer an indication of competitiveness but a measure of socioeconomic progress.

Key questions for management as they migrate to new metrics

While the industry metrics applied and tracked by operators and investors should ideally be consistent across the world, this does not imply that every operator should use exactly the same ones. Depending on where and how value is created and the business models used, the choice of metrics will vary for each operator. As operators and investors evaluate which metrics are most appropriate in each case, telcos’ management teams face a number of questions, such as:

  • Which metrics should be used to evaluate profitability in these times of falling EBITDA margins?
  • How strong are operators’ financial reporting systems?
  • Can the systems deal with the additional measurement and reporting needs created by new business models and services?
  • How are operators managing the expectations of the analyst communities and financial markets around revenue and margin erosion, while also outlining new growth agendas?
  • In planning and budgeting, should traditional one-year horizons be replaced by two- or three-year horizons?

 

To download a copy of “Metrics transformation in telecommunications” which Ernst & Young presented at MWC click here.

For our full Mobile World Congress 2013 coverage click here.

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