Mobile operators rein in costs to ride-out recession; prepare to ramp-up network investments - New study sees mobile capex on the rise as operators successfully emerge from global economic crisis

A major new study by GSMA Intelligence highlights how mobile operators were able to squeeze capital expenditure (capex) during the economic downturn in order to protect cash flows and maintain profits – but warns that network investments must increase if the industry is to fully exploit the potential of new technologies such as LTE.

The study found that total global mobile capex peaked at US$204 billion in 2008 – at the beginning of the financial crisis – accounting for 21 percent of total revenues. However, capex had fallen to US$197 billion (19 percent of revenue) by 2010, as operators reacted to the crisis. The reigning in of capex was initially evident in developed mobile markets, where operators reduced capex by 8 percent in 2008 and by 6 percent in 2009 – though capex in these markets increased in 2010 as many operators began investing in LTE. The trend occurred later in developing markets, where capex reductions were not recorded until 2009 (down 0.3 percent) and 2010 (down 8 percent).

The reductions in capex over the last few years saw operating free cash flow (OFCF) swell to US$200 billion (19 percent of revenue) by 2010, up from US$133 billion (11 percent of revenue) in 2007. This means that global operator cash flows are now roughly at the same level as capex. In 2011-12, the study predicts operator capex to remain stable at 16 percent of total revenue in developed markets and 23 percent in developing markets. OFCF will account for close to 20 percent of total revenues in both regions.

One key strategy for reducing capex has been network and tower sharing agreements, which have been a key feature of next-generation network deployments, particularly in developed markets. Many operators have also focused on investing in existing network platforms such as HSPA+ as an interim solution prior to deploying LTE. In contrast to developed markets (where capex levels bounced back in 2010), operator capex in the developing world is still falling. But the report warns that network investment in the region will need to increase to support new high-speed network deployments. It notes that two thirds of markets in the developing world have 3G networks – either WCDMA- or CDMA2000-based – yet 3G connections are forecast to account for only 16 percent of total mobile connections in the region by the end of this year.

Operators also reacted to the global economic crisis of 2008/2009 by implementing measures to reduce operating expenditure (opex) in order to boost operating profit (EBITDA). According to the study, between 2007 and 2008, total operator revenue grew by 8.4 percent to reach US$ 959 billion, while opex (as a percentage of revenue) declined from 65 percent to 61 percent. As a result, EBITDA jumped from 35 percent to 39 percent of total revenue over the same period.

However, opex has since inched up by a percentage point (to 62 percent of revenue) over the last two years with EBITDA stabilising at 38 percent of revenue. This increase in operating costs is most evident in developed markets, a result of the higher costs in acquiring, servicing and retaining smartphone customers. While rising smartphone penetration in developed markets has led to higher ARPU and increased mobile data revenue, in most cases opex has also increased, resulting in a contraction of EBITDA margins. This is partly due to the increased handset subsidy costs involved in acquiring new customers and retaining existing ones (in the latter case via smartphone upgrades).

Joss Gillet, Senior Analyst, GSMA Intelligence:

During the worst of the recession, mobile operators preserved healthy balance sheets as a cushion against the global financial turmoil. Overall, operators were well-placed to weather the recession, though it often exacerbated already existing difficult market conditions. In developed economies, operators' margins are under pressure from market saturation, regulatory measures (MTR and roaming cuts) and the high cost of network infrastructure management (fuelled by the explosion in data traffic). In many cases, such pressures triggered a wave of cost-saving initiatives, notably in areas such as outsourcing, network sharing and consolidation. However, in developed markets, cost reduction is often offset by stalling and declining revenue growth, which explains the increase in opex (as a percentage of revenue) in 2009 and 2010. The large operator groups (such as Vodafone and FT-Orange) are also starting to divest their interests in overseas operations that have so far failed to compensate for revenue declines in their domestic markets, in order to protect profits and dividends. Nevertheless, operators in developed economies upped their spending on network infrastructure last year - notably to deploy HSPA+ and LTE networks - whereas operators in the developing world have squeezed capex. In the latter case, this is partly due to the region's logical development cycle (operators have had to invest heavily in recent years in network infrastructure to capture initial growth) and the fact that investors are now seeking a return-on-investment from fast-growing, yet price-sensitive markets. Uplift in capex in the developing world therefore depends on more affordable spectrum and the proliferation of network sharing agreements in order to turn immature data opportunities in low-ARPU markets into profitable segments.

Global mobile operator capex (US$ billion)
Source: GSMA Intelligence