It is easy to predict that mobile service providers will be looking for ways to cut their capital investment and operating expense requirements over the coming decade. Desire to maintain profit margins will be the key driver.
Globally, service provider revenue will likely be close to flat over the next several years, with revenue growth in emerging markets offset by flat to falling revenue in some developed markets.
Vodafone’s gross profit margin is 32 percent, but has been decreasing every year since 2006. Revenue growth has also slowed. Since 2007 (the company made a loss in 2006) revenue growth has averaged eight percent a year. However, revenue growth has been just 1.1 percent in 2012 and 3.2 percent in 2011.
France Telecom has issues as well. France Telecom earned half of its 2012 sales within France. And it is an issue because of new competition from Iliad’s Free Mobile, which has succeeded in disrupting the telecom industry in France, primarily by causing a price war that has lead to lower profits for the existing companies.
But competition from cable operators is a growing issue as well, in part because cable operators are leveraging their triple play offers by adding mobile services to create quadruple plays that are hard for a mobile-only provider to match.
Since January 2012, when Free Mobile launched, average revenue per mobile user has fallen 10 percent and Free Mobile has gotten 6.4 percent market share.
Lower profit margins also are seen as a global problem. In fact, many leading tier-one service providers might not even be earning back their cost of capital.
Wireline networks have the weakest returns on invested capital with a 1.5 percent gain over the last decade, argues Bernstein Capital analyst Craig Moffett.
Wireless networks had a meager return of 0.3 percent. Cable garnered a 2.5 percent return.
Satellite networks had the best return on invested capital at 5.5 percent. Others, including AT&T, Comcast, Dish,Sprint and Verizon, have negative returns, Moffett argues.
The point is that it is growing more difficult for a major telecom services supplier to earn a profit, given current cost structures, competitive markets and changing end user behaviors. That means growing pressure to cut costs.