Operators should give up on chasing size and scale

Nov 29, 2013

According to Bloomberg, Telecom Italia SpA (TIT - yes, hilarious) is paving the way for a sale of its wireless tower networks in both Brazil - where it currently owns a 7000 strong network through Tim Participacoes - and in Italy itself where it owns about 12,000. For Bloomberg this is just another juicy balance sheet engineering job. The Brazilian towers, it thinks, could raise about €700 million. The larger Italian job could be worth €1 billion.

But for the telecoms market, deals like this, which outsource functions or strip out assets like tower or copper networks to sell them to third parties who then run them more profitably than their original owners, may well be the coming thing, according to the CEO of analyst house, Northstream, Bengt Nordström.

Telecom Italia is not typical. It is currently deep in dept and was recently adjudged ‘junk’ by Moody’s and Standard & Poor’s - the potential tower sale is part of plan to trim its debt and revive its fortunes.

But if Nordström is right, other big telcos might be poised to take similar steps next year to become more agile to become, in turn, more competitive. This means focusing on strategic management and in some cases might mean stripping out ‘non core’ assets and activities to maintain that focus. These assets may be turned over to long term strategic partners or simply sold off and the money put to better use.

The underlying reason for the sudden discovery of ‘agility’ (in fact it’s been urged on telcos for at least the last couple of decdes) says Nordström, is that European telcos’ formerly preferred route to salvation - consolidation and scale - has turned out to be a blind alley.

So much so that he has announced the demise of the ‘Group Operator Concept’ in Northstream’s predictions for 2014. For the last 10 or 15 years, he says, Europe’s big operators have been talking and pursuing scale operations - buying each other up and partnering.

The problem is that it hasn’t been a huge success. Size just doesn’t give you the scale advantages (lower costs, better negotiation position with suppliers and so on) that the text books promise - not in this market; not any more.

The proof of this is all around and hardly needs a detailed study to unearth. In all the territories it is the smaller, more agile telcos which seem to operate at lower cost. The larger operators who, despite inevitably having higher prices and often captive customer bases, are turning in poorer economic performances year on year.

“Next year,” says Nordström, “operators with leaner organisations, and a strategic focus underpinned by efficient long-term partners, will be better equipped to compete. In 2014 it will not be about the large-scale operator out-manoeuvring the smaller player – but the fast-moving operator beating the slower carrier with lean and more strategic efficiency measures.”

“We did a study on this, looking at Opex and Capex ratios and so on," says Nordström, "and we found that there just wasn’t any advantqage to scale. The problem (for the big group operator) is that while they are pan European, the competition is local.”

That makes it even more expensive for the slow moving ‘group’ player since it requires re-thinking their 'offer' to compete in individual markets.

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