• The Nordic telcos seem to be on a roll
• Netflix’s strategy appears to be paying off
• The Open RAN market is suffering from operator dithering

In today’s industry news roundup: The telcos in the Nordic region are setting a positive business strategy example; Netflix breathes a sigh of relief as its paid password sharing move leads to an increase in subscribers and sales; the analyst team at Dell’Oro has a rethink about Open RAN; and more!

Telcos the world over are having a challenging time, trying to figure out how to stay in business, let alone grow, as they deal with an increasingly competitive sector and customers that need to find ways to spend less. If operators are looking for inspiration from their peers they might want to take a look at the Nordics, where the telcos appear to be performing rather well. Earlier this week Tele2, which has operations in Sweden, Lithuania, Estonia and Latvia, announced a 3% year-on-year increase in second-quarter revenues to SEK7.15bn (US$696m) and a 9% increase in operating profit to SEK1.24bn ($121m). Now Norway’s national operator Telenor has reported a 3% year-on-year increase in like-for-like second-quarter revenues to NOK20.2bn ($2bn) and a 4% increase in earnings before taxes and other expenses to NOK8.77bn ($878m). “Quality connectivity for customers and attractive security offerings continue to drive growth,” noted its president and CEO Sigve Brekke in this earnings announcement. And Telia, which is the main operator in Sweden and Finland, and has operations in Norway, Denmark, Lithuania and Estonia, has reported a 2.2% increase in like-for-like second-quarter revenues to SEK23.3bn ($2.27bn), though its operating profit fell by nearly 21% to SEK2.25bn ($219m). The operator says its telecom services operations are performing well, but its TV and media lines of business had “another challenging quarter”, adding that that part of the company is undergoing a restructuring process to allow Telia to focus on its telco operations, which have been “achieving the highest growth rates [in service revenues and earnings]... for many years, despite the more cautious consumer environment.” And finally, there is competitive Finnish service provider DNA, which has reported a 6% increase in revenues for the first half of this year to €513m and a 3% increase in earnings before taxes and other costs to €189m. “Our long-term success is based on an excellent customer experience in high-quality networks and uncomplicated service at all stages of the customer relationship,” noted CEO Jussi Tolvanen. Is that the answer? Excellent customer experience? Maybe more telcos should give that a go…   

Maybe the financial performance of the Nordic operators should be the norm because, according to technology research giant Gartner, spending on communications services by enterprises worldwide is on the up. Gartner’s latest worldwide IT spending report found that enterprises will increase their outlay on communications services by 2.7% this year to US$1.46bn, and increase that spending again in 2024 by a further 3.8% to US$1.52bn. Read more.

People genuinely like Netflix. How do we know? Because when asked to pay to have shared accounts (rather than just sharing their log-in details with family and friends as they pleased) they’ve coughed up, according to stats from the streaming video giant. In its latest financial report, the company noted that it introduced paid sharing tariffs in more than 100 countries (representing more than 80% of its revenue base) in May, and that revenue “in each region is now higher than pre-launch, with sign-ups already exceeding cancellations.” It added 5.89 million paying subscribers during the second quarter of this year, taking its total user base to 238.39 million, and increased its revenues by 2.7% year on year to $8.19bn. It now plans to roll out its paid sharing scheme to “almost all” of the remaining countries in which it’s active and expects its third-quarter revenues to leap to $8.52bn for the three-month period ending in September. “Now that we’ve launched paid sharing broadly, we have increased confidence in our financial outlook,” the company noted in its quarterly letter to shareholders. “We expect revenue growth will accelerate in the second half of 2023 as monetisation grows from our most recent paid sharing launch and we expand our initiative across nearly all remaining countries plus the continued steady growth in our ad-supported plan,” it added. PP Foresight analyst Paolo Pescatore, who has been tracking the streaming media sector for years, noted that the results are a “strong endorsement” of the company’s strategy to “diversify its business model into advertising and crack down on password sharing.” But, added the analyst, “cracking down on passwords is a short-term measure… [Netflix] needs to consider its pricing strategy for the mid-to-long term. During this transition there will be ongoing challenges – expect to see spikes in churn, net adds and ARM [average revenue per membership] with the rollout of new features and services, such as advertising.” Netflix noted that its ARM dipped by 3% during the second quarter, in part due to “limited price increases over the past 12 months (leading up to the launch of paid sharing.” Pescatore added: “Every other streamer is now increasing prices while Netflix is now extremely competitive with its ad tier. It is putting all the building blocks in place for future revenue growth. The company is still in a far stronger position compared to rivals and remains the benchmark.” 

It’s increasingly evident that if the market for Open RAN-enabled technology is going to take off at scale, it’s not going to happen in the near future. That was one of the clear takeaways from a few discussions at TelecomTV’s most recent Open RAN Show, and it’s now also the view of research house Dell’Oro Group, which has been tracking the Open RAN sector for a couple of years as part of its broader analysis of the mobile networks sector. The research house still believes the Open RAN sector will grow and comprise 15% to 20% of global RAN market sales by 2027 (which would be roughly $6bn to $8bn), compared with the mid-single digit share it currently commands (worth somewhere in the region of $2bn per year), but that hesitancy by the broader operator community will hold back the Open RAN sector, and it has now revised its forecast for the next five years by between to be 5% to 10%. “We can think of this revision more as a near-term calibration than a change in the long-term growth trajectory,” noted Dell’Oro Group vice president Stefan Pongratz. “This journey of ‘re-shaping’ the RAN was never expected to be smooth and many challenges remain. Even so, our long-term position has not changed. We continue to believe that Open RAN is here to stay, and the growing support by the incumbent suppliers bolsters this thesis,” he added, referring to the increasing involvement of Nokia and Ericsson in Open RAN developments. While it’s good news for the Open RAN sector that Pongratz believes open, disaggregated radio access network systems will play a role in future mobile network architectures, a revised forecast and references to operator “hesitancy” in the Dell’Oro market commentary are not likely to inspire greater involvement of the broader industry or near-term commitments, which is what Open RAN system vendors are increasingly desperate for. Read more.   

This week, the UK parliament passed a Flexible Working Bill which, if it has the impact its supporters hope, could give a modest boost to broadband-enabled home working and perhaps even a welcome uplift to telcos’ access network revenues as a result. During Covid, many Brits got their first taste of home working and now, with an employee shortage hitting hard,  the government is desperate to entice ex-workers, such as retirees, stay-at-home mothers and carers, back into at least part-time or remote employment. The hope is that by granting employees the right to request flexible working at any time – instead of having to wait 26 weeks as before – the current employment logjam might be eased. The employer may still say “nah”, but must show that it has explored all available options before bringing down the shutters.

According to the latest profit warnings report from EY-Parthenon, Ernst & Young's global strategy consulting arm (they rival Elgin for knowing their marbles), profit warnings from UK-listed companies are mounting. They have been on the rise, year on year, for seven consecutive quarters and, in the three months to 30 June 2023, 66 individual warnings were issued, the highest Q2 total in three years. It’s also the longest run of consecutive quarterly increases since the 2007-08 global financial crisis, which was the most serious since the Great Depression of the 1930s that, in turn, was the direct consequence of the Wall Street Crash of 1929. Although the most warnings were issued by the FTSE Industrial Support Services, the FTSE Construction and Materials sector, FTSE Retailers and FTSE Pharmaceuticals & Biotechnology sectors, the TMT (technology, media and telecom) sector is by no means immune to prevailing global headwinds and squalls, as four companies listed in the telecom sector issued warnings during the first half of this year. Furthermore, during the same six-month period, 62% of warnings issued across the TMT sector as a whole blamed them on delayed or cancelled contracts as customers postponed or cancelled spending. Commenting on the warnings, Will Fisher, EY UK strategy and transactions TMT leader said, “The challenging economic climate and tighter lending environment continues to cause disruption and uncertainty for companies within the TMT sector as businesses re-evaluate their purchasing decisions and cut back on non-essential spending.” He added, “To mitigate these headwinds, it’s imperative that TMT companies prioritise their own spending decisions and adapt to their customers’ needs. This includes reviewing pricing models, minimising supply chain vulnerabilities and focusing on talent retention to ensure they are on the front foot and able to capitalise on opportunities once the recovery begins.” Meanwhile, the FTSE Software & Computer Services sector recorded 13 profit warnings in the first half of 2023, the highest FH total since 2020. The warning issued in Q2 cited persistent inflation, rising interest rates and more expensive borrowing as being the most significant causes of the downturn. Another major factor was falling sales, which were cited by 59% of the enterprises making warnings, while issues relating to contracts or delayed payments were referenced in 23% of warnings issued. Also specified were constantly rising costs. Jo Robinson, EY-Parthenon partner and UK&I turnaround and restructuring strategy leader, said, “The sustained rise in profit warnings over the last two years reflects the extraordinary mix of challenges faced by UK businesses over that timeframe. It’s now clear that the effects of these low-growth conditions are spreading to nearly all corners of the UK economy, and this quarter we’ve seen earnings pressure extend up the value chain into the mid-market. She added, “Rising interest rates have significantly changed credit conditions for companies that need to refinance, and businesses have started to feel the effect of a more expensive borrowing environment, especially in sectors where credit availability has been a key driver of activity. The number of businesses that had previously locked in low interest rates has postponed some of the challenges, but not indefinitely. We’ll likely see credit cost and availability play an increasingly significant role in restructuring activity as more businesses encounter a markedly different refinancing landscape.”

- The staff, TelecomTV