Approaching the endgame?

With operators, vendors and even OTTs suffering from poor results, who can win?
Roger Field is Editor of CommsMEA.
Roger Field is Editor of CommsMEA.

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For telecom operators that view over-the-top players as a malign force generating huge profits at the telcos’ expense, the downward trajectory of Facebook’s stock price was surely an eye-opener.

Indeed, operators around the globe have become accustomed to lambasting the “OTTs”, a combined entity that is generally assumed to consist of Google, Apple, Facebook, Skype and newer players such as WhatsApp.

While there is no doubt that online services that allow instant messaging and video calls erode operators’ profits that were traditionally founded on voice calls and SMS, the notion that the OTTs somehow have an easy ride at the expense of the telcos increasingly looks like a flawed argument.

Facebook’s second quarter results and disastrous IPO certainly look set to change perceptions on that score. At the time of writing, the social network’s stock was trading at below $20, a far cry from the initial IPO price of $38. In its Q2 results, Facebook’s revenues rose 32% to $1.18 billion, but the company posted a loss of $157 million compared to a profit of $240m in the same quarter last year. While Facebook would have made a tidy profit of $295m in Q2 had it not been for hefty stock option payments to its staff, the company’s slowing revenue growth and failure to tap mobile advertising has caused concern among investors and analysts.

Skype is a more long-term thorn-in-the-side of operators, and the IP telephony giant’s service remains officially blocked in some countries in the Middle East. Yet it would be naïve to think that Skype has an easy time. The company was acquired in mid-2011 by Microsoft for $8.5 billion, but there has been little indication of exactly how the software giant intends to extract value from its purchase.

Skype may make a tidy profit, but it was not enough to keep its parent company out of the red in the second quarter of the year, when Microsoft posted its first ever loss. Its total losses for the quarter reached $492 million, compared to $5.9 billion in net income in the same period in 2011.

Sure, Google performed well in the second quarter of the year, with net income up 11% at $2.79 billion, but Facebook and Microsoft should serve to erode the operators’ OTT angst.

But the region’s telcos also felt some pain in the second quarter, with most experiencing a decline in profits. Qtel, Telecom Egypt and Paltel all experienced a drop in profits in the quarter, although Du, Orascom, Omantel and Zain managed to post profit growth.

The vendors also struggled. Ericsson, the world’s biggest telecoms vendor, experienced a 63% drop in net profits in Q2, while France-based Alcatel-Lucent posted an operating loss of EUR31 million in the second quarter. The Chinese vendors, Huawei and ZTE, also struggled. Huawei’s operating profit was down 22% in the first half of 2012, while ZTE’s pre-tax profit declined by 48.5% in the first half of the year.

With operators, vendors and even the OTT’s apparently struggling, it may be time to question the overall health of the industry. While most players are still making a tidy profit, most are experiencing declines in growth. It is obviously a trend that cannot continue indefinitely, and so eventually, something will have to give.

In some cases, new business models could help operators make major capex and opex savings. Qatar’s National Broadband Network is one example (see p32) of how infrastructure sharing can occur without compromising competition. The region’s operators may need to look more closely at mobile tower sharing to reduce costs, and there are no doubt further savings to be made through improved procurement and outsourcing. Further consolidation is a possibility, but appears to be some way off.

But quite what will happen when this arsenal has been exploited is open to debate. Operators may have to put the cost of their services to end users under the spotlight. Any increase in prices for the consumer would force operators to compete more in other areas, particularly customer service. And in many countries in the region, this is an area where there remains some room for improvement.

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