Emerging Vs mature market operators – who is being hit hardest by the downturn?

Tuesday, 19 January 2010 11:11  |  Gordon Rawling

Research has shown that the recession is affecting emerging and mature telecoms markets alike. Over the years many executives have highlighted that operators in emerging markets have succeeded as a result of ‘right- first-time’ technologies. These ‘right-first-time’ technologies have enabled them to install infrastructures capable of seamlessly integrating and connecting systems from the outset, making it possible to profitably grow their businesses despite the predominance of  low ARPU users inherent in their markets. Therefore, given their ability to thrive on relatively low levels of consumer spending there is a question of whether they are being affected by the recession as deeply as operators in more mature markets who rely on high ARPU levels to remain profitable. This article will investigate whether these ‘right-first-time’ technologies are helping operators in emerging markets to weather the storm of recession more effectively.

Development of operator infrastructures in emerging markets has differed from those in established markets. Operators in developed markets have grown through a patchwork of customised infrastructures, acquisition and tactical technology deployments. Operators in emerging markets have often had the luxury of seeing where the now established operators went wrong and used this knowledge to implement ‘right-first-time’ technologies, i.e. technologies capable of seamlessly integrating infrastructures, inter-connecting systems and ensuring they avoid many of the pitfalls and inefficiencies experienced by operators in established markets.

Historically operators have focused on increasing ARPU (Average Revenue per User) levels. Undoubtedly, ARPU is important to operators as it provides a true picture of how services are being consumed as well as illustrates the potential to generate cash from a business.

However, through better understanding of their networks, operators have realised that high ARPU levels do not give as accurate an understanding of network profitability as previously thought. Operators have seen that inefficient systems impact profit and ARPU, no matter how high, cannot give a true account of network profitability. The focus is now shifting to also encompass AMPU (Average Margin per User).

Where ARPU measures how much revenue users are generating, AMPU looks at the amount of actual profit generated by users. It looks not only at how much users are spending but also at the cost to the operator of delivering the services. The difference is the real profit.

As a result operators have started dealing in terms of AMPU as it provides a true account of business profitability. The current economic climate in particular, has brought this into sharp focus for operators looking to reduce the amount of money lost through system inefficiencies.

Key to success

Over the last few years, the mobile market has grown significantly in the developed and developing world. Despite the recession, this is still the case, although admittedly growth is at a slower rate.  According to Strategy Analytics, Global mobile revenue growth fell to just 3% in the first quarter of 2009, from 8% a year ago.

Looking at each type of market there are a number of different factors which need to be taken into account when assessing the economic impact of the 2009 recession. First and foremost is ARPU. Understanding how much revenue users are spending is a good indicator of how healthy the market is; higher ARPU means more consumption of services.  The second is the type of services being consumed. For example, are the services high or low value and to what extent are they being consumed? And the third is how much margin the operator is making on each consumable, which is largely impacted by the types of systems in place at the telco. The more streamlined and integrated the infrastructure, the less the revenue leakage and the better the AMPU levels.

Mature market operators

Developed market operators would seem the most likely candidates to suffer as a result of the recession, as they have more to lose in terms of high spending customers seeking to cut costs. However, although there has been a dip in ARPU levels operators are still growing, albeit at lower rate, and so are still profiting.  Despite uptake of mobile services by new users slowing, the existing customer base is still consuming standard services.

In addition, the level of handset sophistication has reached a point where even average users now have access to higher end services. Previously, the average user would have had a low to medium end handset without access to higher value services. Therefore, despite having a fairly high disposable income, they would not have been able to use them. The fact that the majority of handsets are now smart phones means the average user is now able to access higher-value services, even if only occasionally. This is significant for operators as it also means they benefit from new revenue streams, previously not available, which are helping to keep profit high enough to ensure growth.

Another important factor is that despite operators evolving through a mish-mash of customer built systems, new technology has become available which reduces network inefficiencies without the need for expensive rip and replace strategies. Creation of open standards software has made it possible for operators to seamlessly integrate legacy systems and previously isolated or incompatible technologies with each other and enhance information flow around the business.

In addition, these software-based, open standards technologies are capable of providing faster service delivery capabilities, faster delivery time to market of services and the ability to streamline billing and revenue operations. Furthermore, they can also provide powerful analytical capabilities. This can prove a significant revenue generator as analytics can enable telcos to identify profitable areas and increase offerings on services, while reducing activity in less profitable areas.

Emerging markets operators

Emerging markets operate on a different basis. Given the level of network development and the overall spend capacity of customers, they favour lower value services rather than high-end services which require larger amounts of data transfer and bandwidth. Only providing lower cost services might be seen as a handicap in terms of revenue generation; however larger consumer bases, for example, in India and Asia mean they benefit from being able to sell lower value services on a very large scale.

Furthermore, the threat of customers changing networks in search of high-end service is less, although a rapidly evolving factor in these markets. Operators are all on par in terms of delivery capability so there isn’t any one operator providing services that others are not. In addition, the percentage of consumers able to afford high-end services is so small that upgrading networks to cater for this small consumer base is not seen as profitable in terms of the return on investment.

The right first time infrastructures that are in place however, do mean that when the time comes, new services will be available to these high-end users. The more important and immediate benefit though, is that they ensure that despite low ARPU levels, AMPU is enough to profit and grow. Without these ‘right-first-time’ technologies they would find it harder to leverage the economies of scale and survive.

Economies of scale play a role in other areas of the business too. In western European countries there are many regulatory and geographical constrains that minimise the ability for telcos to leverage scale. However, in emerging economies, regulatory frameworks are different, sheer population size  and saturation levels offer a very different proposition. Operators are increasingly building single, coherent platforms from which they service their entire customer base. In western Europe, this is problematic which means that emerging market telcos have a significant advantage over them in terms of ability to reduced infrastructure costs through scale.

Another issue is that increasingly in emerging markets network sharing at the passive and active levels is permitted, which is not always the case in more mature markets because of regulation. This is significant because this means that operators can split the costs of cell sites, further reducing overall infrastructure costs. However, there are potential downsides in terms of the breadth of service impact should shared infrastructure fail.

Conclusion

Operators in both mature and emerging markets have been affected by the 2009 recession, but are not suffering as badly as might have been expected. Both are still growing, albeit at a slower rate, and the ways in which they have been affected differ because they started from a different place.

In a number of emerging markets where growth has slowed, the ‘right-first-time’ technologies and economies of scale working in their favour have allowed operators to continue to drive margin into low ARPU customers. This has enabled them to survive on lower level transactions due to the large scale of the customer base.

Conversely, in the mature markets operators have benefitted from open standards technologies capable of enhancing efficiency and delivering better revenue generating capabilities. Superior functionality handsets have also enabled a larger proportion of customers to take advantage of high-value services, which they would not normally have had access to.

Certainly, if the emerging markets did not have the benefit of learning from the mistakes of operators in the developed markets, then it would be a much harder task for them to survive let alone grow. Additionally, mature markets have also benefitted from new open standards technology which has helped them gloss over the infrastructure mish-mash of the past and increase efficiency within the business.

With the worst of the recession seemingly over, these right first time and open standards technologies have helped operators in both markets to survive and continue to prosper where other industries have struggled to. It will be very interesting to see how their revenues start to change as we enter a brighter economic period.