European mobile operator growth: size or profitability?

Transcription

1 Trends paper European mobile operator growth: size or profitability? By Tim Hills (Associate) December 7 Growth as a business objective and proxy for profits has been almost a mantra of mobile telecoms operators since the inception of mass-market 2G cellular telephony in the early 199s. However, the financial rewards of growth may be becoming less obvious in recent years, as mobile revenue and customer numbers continue to increase. Competition, regulatory changes and the lack of compelling services with a higher value than basic voice and text messaging are putting pressure on many operators' ARPUs, while costs have increased as a result of, for example, investments in successive 2.5G and 3G network roll-outs and upgrades, high churn, and business models in which customer handsets are heavily subsidised. Therefore, the overall profitability gains of operator growth strategies may need some clarification. This paper examines the relationship between growth and profitability in mobile telecoms by analysing the performance of a small sample of European mobile operators in terms of their quarterly revenue, profitability, staff and customer trends from 4 to 6. These trends are examined to identify potential relationships with some key characteristics of the operators environments and strategies. Its aim is to look beyond the industry s infatuation with ARPU and EBITDA and to determine which factors may be influencing profits (or losses). Mobile operators have various approaches to growth A simple and common approach to growth is to increase market share. Many operators have determined that a single, home market is too limiting, and have established operations in several (in some cases, many) countries. More recently, some operators have focused their multi-country operations more closely on emerging markets, in which mobile use has increased dramatically. These considerations lead to the simple characterisation scheme used in Table 1, which presents the sample of mobile operators used in this paper. The operators are graded on their market-share position in their home country, whether they have multi-country operations and their degree of exposure to emerging markets as a result of these operations. These are informal qualitative rankings.

2 European mobile operator growth: size or profitability? 2 Table 1: Selected mobile operators characteristics [Source: Analysys Research, 7] Operator Home country Market share position in home country Multi country operations Exposure to emerging markets Telecom France Medium None Greece High High Finland High Medium Mobile Netherlands High None Belgium High None Poland Medium Medium Mobile Switzerland High None Telecomunicações Móveis Nacionais () Portugal High None Group United Kingdon High High Telecomunicazioni Italy Medium None Mobile operators exhibit different growth trends The most obvious measure of growth is the number of customers. Figure 1 shows that all of the sample operators have experienced growth in customer numbers, but a small group (comprising, and ) has achieved more substantial growth than the others, and another small group (comprising and ) has achieved very little growth. Unsurprisingly, the operators with high growth tend to be those with multicountry operations or exposure to emerging markets, while the operators with low growth have operations in a single, developed country. Figure 1: Normalised quarterly customer numbers for a sample of mobile operators, 1Q 4 4Q 6 [Source: Analysys Research, 7] 26 Normalised customer numbers

3 European mobile operator growth: size or profitability? 3 Figure 2 shows revenue growth, which qualitatively matches the trends shown in Figure 1 and features similar groupings of operators with high and low growth rates. This is to be expected given the direct relationship between customer numbers and revenue. Figure 2: Normalised quarterly revenue for a sample of mobile operators, 1Q 4 4Q 6 [Source: Analysys Research, 7] Normalised revenue The sample operators' ARPU has generally declined during the period examined, but Figure 3 shows that the operators that have performed the worst in terms of ARPU ( and ) are from the leading group in terms of customer and revenue growth. The best performers ( and ) are only medium rated in terms of customers and revenue and have no exposure to emerging markets. Figure 3: Normalised quarterly ARPUs for a sample of mobile operators, 1Q 4 4Q 6 [Source: Analysys Research, 7] 14 Normalised ARPU

4 European mobile operator growth: size or profitability? 4 This suggests that the operators in the sample that have achieved the most rapid growth are sacrificing some revenue in order to increase their customer market share. This might have also have the consequence of reducing their profits, but Figure 4 indicates that this is not the case, and that the dynamics are more complex. Figure 4: Normalised quarterly profits for a sample of mobile operators, 1Q 4 4Q 6 [Source: Analysys Research, 7] 6 Normalised profits Most of the sample operators' profits (or, in some cases, losses) are fairly static for the examined period, with some extreme deviations. If the latter are ignored as examples of exceptional financial circumstances and decisions, it is narrowly possible to separate out a leading group (comprising,, and ) and a trailing group (comprising,, and ). All three of the operators with the highest growth in terms of customer numbers and revenue are represented in the leading profit group; none of the leading operators in terms of profit performance exhibit low growth in customer numbers or revenue. In this sample, high profit performance is not always associated with high ARPU performance, which demonstrates one of the limitations of the industry s continuing infatuation with the ARPU metric. This, combined with the observation made in the previous paragraph, suggests that profit in mobile operations continues to be driven by growth such as by straightforward expansion in emerging markets or through ARPU in saturated markets and that the rewards of reducing costs may be limited. Figure 5, which shows the sample operators' staff numbers, also supports this contention. Operators frequently cite staff costs as a significant expense, but the sample operators do not appear to have achieved a reduction in costs by decreasing their staff numbers, which have remained largely static during the past two years. The small group that shows a large increase in staff numbers (comprising and ) is part of the group that achieved relatively high profit growth. Furthermore, two of the operators that show the lowest increase or largest decrease in staff numbers ( and ) are part of the group that exhibited relatively low profit growth. Only achieved relatively high profit growth with a low staff increase.

5 European mobile operator growth: size or profitability? 5 Figure 5: Normalised quarterly staff numbers for a sample of mobile operators, 1Q 4 4Q 6 [Source: Analysys Research, 7] 4 Normalised staff numbers Mobile operators profitability continues to be relatively flat Most of the sample operators (other than ) have not improved their profitability (profits divided by revenue) during the study period (see Figure 6). Two of the operators from the leading profit group ( and ) also have the highest profitability, while two of the trailing group in terms of profits ( and ) also have the lowest profitability. Figure 6: Normalised quarterly profitability for a sample of mobile operators, 1Q 4 4Q 6 [Source: Analysys Research, 7] 9 8 Normalised profitability

6 European mobile operator growth: size or profitability? 6 The two operators with the lowest profitability performance also exhibit both low profit growth and medium growth in terms of revenue and customer numbers, which suggests that they are attempting to increase their market shares at the expense of profitability. By contrast, the two operators with the highest profitability have high profit growth levels and high or medium growth in terms of revenue and customer numbers, which suggests that they have a more effective business model for capturing value from customers. Conclusions The sample of mobile operators considered is too small to support formal correlations between the various aspects of their performance, but a simple tabulation of the qualitative assessments made in discussing Figures 1 to 6, when combined with the operator characteristics of Table 1, suggests some issues of broader import (see Table 2). Table 2: Ranking of growth characteristics for selected mobile operators [Source: Analysys Research, 7] Operator Customer numbers Growth category 1 Revenue ARPU Profit Staff numbers Profitability Bougyues Telecom Medium Medium High High Medium High High High Low High High Medium High High Low High Low High Mobile Medium Medium High Low Medium Low Medium Medium Medium Medium Medium Medium High High Medium High High Medium Mobile Low Low Medium Medium Medium Medium Telecomunicações Móveis Nacionais () Low Low Medium Low Medium Medium Group Medium Medium Low Low Low Medium Telecomunicazioni Medium Medium Medium Low Low Low 1 'High', 'medium' and 'low' are only descriptive rankings used to compare the selected operators in terms of each growth characteristic. They are not intended to convey the quasi-absolute meaning that they might have in a company financial report. The results from this sample suggest that: there is no clear link between profitability performance and other primary growth characteristics, such a revenue, customer numbers of ARPU. Instead, the results are mixed: some operators' profitability remained unchanged during the past two years, irrespective of growth in other categories. However, it does appear that a high ranking in other growth categories helps operators to obtain profitability growth there is no clear link between profitability growth and the operators' characteristics, such as their market share position in their home country or their exposure to emerging markets there are clearer links between profit growth and multi-country operations and exposure to emerging markets. This is plausible because absolute profits require absolute revenue, and more, or emerging, markets provide potentially more customers and more revenue. However, the results from this sample demonstrate that it is possible to increase revenue from a single country.

7 European mobile operator growth: size or profitability? 7 Overall, it appears that mobile operators are largely right in pursuing a raw growth strategy (that is, attempting to increase customer numbers and revenue in some suitable combination) to produce absolute returns, but that there are inherent limits to their profitability as businesses. This is not surprising, given the cyclical nature of large investments in infrastructure and operations that are required, and also the intense competition and, increasingly in Europe, regulatory scrutiny to which they are exposed. Annex The metrics used in this paper are derived solely from publicly available data, which are frequently patchy and reported in varying and opaque forms that are difficult to reconcile with an exact scheme. Estimates have been used where necessary, and all the metrics should be viewed very much as approximations or indications only what is of interest are the broad trends. Only a small sample of mobile operators has been used, determined largely by the completeness and availability of data. Because the number of companies is very small, there are obvious company-specific effects displayed in some of the trends; some of these are noted in the discussion. The difficult metric for this paper is net profit (giving profitability as net-profit/revenue), because many of the small, privately held operators do not report this figure, while larger, publicly held fixed-and-mobile operators tend to report it only at the consolidated group level, and hence include non-mobile businesses as well. In the latter case, it is sometimes possible to arrive at a rough, but plausible, estimate of net profit to attribute to the mobile business alone by taking a fraction of the consolidated group net profit by some multiplier such as mobile business EBIT divided by consolidated group EBIT. This assumes that the financial charges of interest and taxation (and hence the impact of debt) are shared equally over all the business activities. It will not be true in general, but, given that the large fixed-and-mobile operators are (and have been) making large investments in both fixed and mobile operations in recent years, it should be adequate for the purposes of this paper.