28 February 2017

Don’t Hang Up on Customers: Capital Key to Remaining Competitive

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Don’t Hang Up on Customers: Capital Key to Remaining Competitive

Telecommunications pylons by chuttersnap, Unsplash

Australia’s telecommunications sector is no stranger to hurdles. Declining revenues, rising costs and rapid technological change have all hit the sector over recent years. In addition, the industry is among the most capital-intensive in Australia, spending 95 cents on capex for every dollar paid in wages, meaning funds must be used wisely to ensure ongoing growth and profitability is achieved.

Challenges for operators

The trend away from landline services and towards mobile offerings has forced market players to adapt, yet wireless services are significantly less profitable than their fixed-line predecessors. IBISWorld’s latest study shows the sector suffered negative revenue growth of -0.2 per cent over the past five years, with sluggish 0.9 per cent annual revenue growth tipped through 2021.

The low growth environment has been compounded by Australia’s first decline in mobile telecommunications density. This issue is expected to worsen in coming years because consumer ownership of mobile devices, such as smartphones and tablets, is now saturated. In addition, demand for wireless data cards and USB modems in rural areas is declining due to improved fixed-line connectivity and increased familiarity with tethering. These trends are expected to result in a decline in density of 0.6 per cent through 2021.

These improvements in rural fixed-line connectivity have arisen through the NBN rollout, which is presenting a different challenge in metropolitan areas. The NBN will further reduce demand for costly landline phone packages, pushing consumers towards VoIP services such as Skype, with a similarly disruptive effect on television service providers.

With nearly a quarter of telecommunications revenue derived from wired services, this presents a significant challenge to operating models, but also an opportunity to firms that best adapt.

Further, the NBN rollout will reverse a trend that has seen low-skilled employees replaced by automation and offshoring, since it has necessitated the hiring of skilled communications systems engineers. The increased wages bill that will come with the NBN could be considered bad news for a sector that is among the most capital-intensive in Australia. Outlays on network infrastructure, IT systems, wire, cabling and inventory, such as smartphones and tablets are unavoidable. These are becoming increasingly costly given the price war being waged between the major providers, which has led to the bundling of more features.

The constant evolution of technology necessitates regular spending on replacement capex. A good example is the billions of dollars spent maximising the efficiencies of 3G networks and then upgrading to 4G. The next major infrastructure spend is already on the horizon in the form of 5G, forecast to arrive by 2020, in addition to NBN-related upgrades.

Given the frequency of technological developments, and the critical importance of speedy adoption, companies in the telecommunications sector will inevitably incur burdensome depreciation costs. IBISWorld reports these costs are trending upwards, particularly in the mobile segment. But, these costs are unavoidable as providers need to maintain cutting-edge technology. Price, speed, coverage and reliability are key criteria for consumers, and they are all linked to a company’s early adoption and investment capex.

With nearly a quarter of telecommunications revenue derived from wired services, this presents a significant challenge to operating models, but also an opportunity to firms that best adapt.

What next for the Telecommunications Industry?

Confidence drives capex spending – this is true across a wide range of industries. Our own research derived from the Equipment Demand Index (the Index) has revealed that the telecommunications sector is the most heavily influenced by this factor when determining capex budgets. This comes as no surprise given the industry’s inherently capital-intensive operations and the impact of evolving consumer preferences on the sector’s business model.

Non-bank capital solutions can be a cost effective option for businesses with a substantial level of capital tied up, or for those looking to grow but struggling to gain access to finance via traditional funders.

For the telecommunications sector, adopting innovative capital solutions that free up capex for growth are essential. Without them, providers will struggle to overcome the challenges facing the industry and they’ll be forced to hang up on customers.

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