More than 10 years after Managed Services / Outsourcing and Sharing started in telecoms, we have reasons to believe that the industry has now reached its ‘plateau of maturity’. Sharing is once again a hot topic, this time in the context of 4G network build-outs. So we see it as opportune to take a fresh view on the financial benefits of Managed Services and Infrastructure Sharing, and re-visit, with the benefit of hindsight, whether and how they can help CSPs reverse the trend of falling profit margins. In addition, we discuss the additional benefits of vendor financing and leasing, both finance lease and operating lease (e.g. Sale & Leaseback of Towers), which are also important topics in the context of large managed services and infrastructure-sharing deals.
Read our latest White Paper and learn more about the following topics:
- Managed Services / Outsourcing
- Infrastructure Sharing (Passive, Active) / TowerCo business
- Vendor financing, Leasing (Finance lease, Operating lease), Sale & Leaseback
- Financial Simulation, Top-Down Modelling
- Telecom Economics, OPEX reduction, CAPEX reduction, Value creation
Communications service providers (CSPs) in developed markets are facing considerable challenges. While voice markets are saturated in most countries, 3G/4G network rollouts require large investments, which are not always commensurately compensated by increases in revenues; data traffic is exploding but revenue per Mbyte is often decreasing faster than cost per Mbyte. The overall impact is that both EBIDTA and EBIT margins are decreasing.
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In short, the economics of telcos, whether mobile or fixed, are getting less and less favourable, and this has been reflected on European stock markets with CSP share prices that have been taking a beating for most of the last 10 years.
There is no easy solution to these problems. When the potential to increase revenues is limited in the short term, the easiest approach is to reduce costs. There has been considerable interest in Managed Services / Outsourcing, as well as in Infrastructure Sharing since the 2000–2002 dot-com crisis. Both have in common the idea of sharing, whether this includes network operations only or assets (passive, active) as well, with a view to improve efficiency and reduce costs. Another characteristic that Managed Services and Infrastructure Sharing have in common is that in most cases, though not all, they will require working with a third party, so that success will also depend on the quality of the operational model and partnering agreement that CSPs put in place.
As per the ‘Hype cycle’ concept coined by Gartner: following the initial excitement encouraged by equipment suppliers, many markets have seen a peak of interest in Managed Services in the years 2006-2008, followed by some disillusionment. In practice, few large-scale projects have been implemented in a manner that turned out to be successful for all parties. Suppliers have often struggled to make a profit out of network operations outsourcing projects, leading some of them to terminate unprofitable managed services contracts at the earliest opportunity. In addition, infrastructure sharing – whether passive only or including active equipment – has been full of operational traps and regulatory barriers.
In developing countries, the drivers for managed services and network sharing have been somewhat different. A (relatively small) number of countries, including India, Nigeria, Ghana and Tanzania, have implemented infrastructure sharing in grand style, under the driver of operators such as Bharti Airtel, Millicom and Vodafone, to name a few. Managed services also made sense in the context of newly-licensed operators needing to build networks and launch operations quickly: the lack of skills to operate complex multi-technology networks (2G, 3G), and the scale disadvantage that they faced against incumbent players, has often made managed services an attractive proposition. Typically these projects have been more profitable to infrastructure suppliers, the issue being less about cutting costs compared to a non-existent mode of operations at the CSP, and more about getting started as fast as possible and catching up with incumbents, leading to a usually higher pricing power for suppliers.
This white paper is not purely qualitative. After an initial discussion and review of Managed Services and Infrastructure Sharing, we present a top-down financial simulation model that we have developed to analyse and quantify the benefits of alternative options available to CSPs. The model has been calibrated on the basis of our own experience with both Managed Services and Infrastructure Sharing, and presents a realistic view of what is achievable. We conclude by presenting key numerical results and a couple of lessons learned, for our readers to brood upon.