High inflation, energy costs may weaken telcos’ earnings from users

Come 2023, the twin challenges of economic difficulties and existing market pressures are expected to compound telecoms operatorational costs as the Average Revenue Per User (ARPU) is expected to come under serious pressure.
 

 
As such, operators across the globe, including Nigeria have been told to brace up for the possible impact of the ARPU pressure as they face tricky times next year. ARPU measures the earnings generated per user or unit.
  
According to Analysys Mason, a global management-consulting firm, which projected this, the biggest issue for telecoms operators in 2023 would be coping with inflation and particularly rising energy costs.
   
Analysys Mason said that after a decade of low inflation and low interest rates, telecom operators, like other businesses, face the problem of managing rising costs and uncertainty about how much they can increase their own prices to cope.
   
It noted that elected officials have largely left pricing issues up to regulators for the past decade. According to it, operators and regulators will be under pressure to moderate price increases, especially on consumer services. Operators will also be pushed to introduce, and publicise, ‘social’ tariffs for consumers in financial hardship, especially for fixed broadband services.
   
“We believe that operators will be able to raise retail prices, but it is possible that ARPU will not keep pace with inflation, meaning a cut in real terms. However, it is worth remembering that telecoms services are a relatively small part of any household budget and the yearly price increases will be far lower than those for other products and services, such as food and energy,” it observed.
   
Indeed, during his recent visit to Nigeria, MTN Group Chief Executive Officer, Ralph Mupita, while contributing to issues around increase in CAPEX expenses, said: “Operators globally are asking for honest price increase to enable them to continue to invest because without investments, the quality of the network will go down. I must say that the quality of the network here is pretty much nonexistent. We have some of the best broadband services in this part of the world, even better than AT&T. AT&T and Horizon would earn from a customer probably about $50 per month, which is the average revenue per user (ARPU).  But across our markets as MTN, we are doing between $3 and $5 and we all are buying the same equipment. So, you can see that the economies are quite different, especially in one that you need to constantly deploy CAPEX of about $2 billion, of which Nigeria does about $800 million.”   
    
Further, Analysys Mason said with telecoms sucking up a much smaller portion of a household budget than food, energy and so forth, the impact will be mitigated to an extent, but ARPU reduction is never good news for telecoms operators, most of whom are working hard to maintain these types of metric in the face of growing investment requirements.
    
Chief Analyst at Analysys Mason, Larry Goldman, said: “After a decade of low inflation and low interest rates, the telecoms sector faces the uncertainty of how it will be affected by these cost increases and the degree to which it can increase its own prices in response.  
  
“Combined with high investment costs and questions about potential returns, the market outlook is challenging as the telecoms industry tries to steer its path through price rises, rolling out network availability and launching new services.”
    
Nonetheless, the analyst firm believes that 5G investments will not be impacted by the downturn, despite the fact that the prospects for a short-term term return are not good. Essentially, they need to tap into revenue-growth opportunities, and this means having the ability to support higher-volume and low-latency services like cloud gaming, AR/VR and the metaverse, and digital businesses. As such they need to carry on investing in 5G and fibre.

“Operators will continue to depend on joint ventures to support their investments,” Analysys Mason said, presumably referring mainly to the fibre space, where JV announcements have been coming thick and fast in recent months. Rumours that T-Mobile US is working on a $4 billion fibre joint venture emerged earlier this month, for example, while AT&T is apparently on the same track. Meanwhile, European operators have already inked a raft of deals with investment partners.
    
Analysys Mason describes telcos as having been “relatively unscathed” by the COVID-19 pandemic, but points out that they will now need to reduce costs. It stressed that investments in automation in recent years will help with that, but there is also the thorny issue of cutting energy bills to address.
  
Other predictions from the analyst firm include a continued push on digital services from telecoms operators, as well as ongoing metaverse initiatives, although it expects the metaverse will not truly materialise until 2024.