Increased levels of investments in network quality and performance create sustainable competitive advantages and improved financial returns for network operators, according to a new study commissioned by Ericsson, Swedish telecommunications equipment manufacturer.
The study however demonstrates that investments in network quality do translate into better financial returns for mobile operators, not only from a cost savings perspective but in terms of increased revenue.
According to the recent report, network investments generate 5.5 percent increase in service revenues and a 6.4 percent improvement of EBITDA (Earning Before Income Tax Depreciation and Amortisation) margin in a case of a 10 percent increase in capital expenditure for an operator in Brazil, decrease of 1 percentage point in overall churn leads to a 6.86 percent increase in service revenues.
This study is particularly heart-warming considering that the Nigerian Communications Commission (NCC), telecommunications regulator has, in recent times, urged mobile operators to make greater investments in network expansion initiatives to address the issue of poor quality of service (QoS).
Mobile operators have however complained about Nigeria’s harsh operating environment. Issues relating to multiple taxation and regulation, vandalism of telecoms equipment, delays in site approvals, and inordinate right of way (RoW) charges have continued to negate investments in network deployment.
The study, carried out by Raul Katz, president of Telecom Advisory Services, and director of business strategy research, Columbia Business School, explored the relationship between capital investments in telecom networks and the technical, commercial and financial performance of operators.
Katz performed extensive statistical analysis, across a large set of metrics, on three years of quarterly data from three different markets — Brazil, Mexico and the United States. A simulation model was constructed to estimate the effects of increased capital expenditure on mobile operators’ free cash flows, allowing mobile operators to assess the commercial and financial gains attributable to the increased investments.
The study however found that a 10 percent increase in capital expenditure for a Brazilian operator resulted in increased market share, a significant boost to ARPU (Average Revenue Per User) and reduced churn. Given this enhanced commercial performance, telecoms operator should experience a 5.5 percent increase in service revenues, a 6.4 percentage point improvement in EBITDA margin, and a 6.7 percent increase in free cash flow from operations.
The analysis of Mexico and the US shows the same robust relationships between investments, performance and finances as in Brazil, but Katz also found differences exist in the way the causality works under different market conditions.
Johan Haeger, head of tactical marketing, business unit networks at Ericsson said; “The results from the quantitative study clearly demonstrate what our ‘gut feeling’ and discussions with leading operators has told us for quite some time: that appropriately targeted capital expenditure leads to improved network performance.” This, he further added translates into better market performance which is shown to boost financial returns.
“Previous extensive Consumer Lab research has found that network performance is the principal driver of subscriber loyalty. Combining these results clearly demonstrates the link between targeted capital expenditure, leading to improved network performance, which drives subscriber loyalty that translates into better market performance and financial returns”, he added.
As an example, a decrease of 1 percentage point in overall churn for a Brazilian operator led to a 6.86 percent increase in service revenues two quarters later. Improved financial returns are derived not only from cost savings, but also from increased revenue. The statistical results described in the study can be applied in scenario analysis on individual operators.
