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THE NEW ERA FOR FIXED OPERATORS IN EMERGING MARKETS: 'THE RENAISSANCE'

 

September 2012

 

Authors    Joao Sousa - Partner
  Beltran Simo - Associate Partner      
 

Wiktor Barcicki - Senior Associate

 

Maia McCarron - Associate

 

 

 

 

 

 

 

KEY HIGHLIGHTS

 

  • The data revolution is a renewed opportunity for transformed fixed operators • to re-establish the foundation of future growth. The emerging opportunities include the deployment of super-fast fixed broadband, offloading of mobile traffic, fibre-based enterprise data products and reliable transmission for LTE provision
  • Fixed operators need to transform radically to capture the opportunity before fixedthe LTE presence reaches critical mass
  • Transformation of fixed operators requires a significant technological revamp (e.g. fibre access, IP technologies, convergent core) to support higher bandwidth applications and mission critical physical infrastructure (e.g. managed services, data-centers)
  • Technology revamp alone will not be sufficient – fixed operators need to act in parallel on other transformational levers such as customer experience, operational re-dimensioning and up-skilling. More importantly, a radical change in mindset, culture and organization will be expected
  • The financial requirements to transform a fixed operator could imply additional CapEx of 4-8% of revenue during a period of 4 to 6 years
  • The material impact of a transformation is significant - transformed operators stand to achieve EBITD

 

 

Overview

 

The word Renaissance (Rinascimento in Italian) means ‘rebirth’ and denominates an era following ‘The Dark Ages’ known for the renewed interest in the culture of classical antiquity.

 

In contrast to developed markets where fixed operators have managed to remain competitive, during the first decade of the 21st century fixed operators in emerging markets have faced their own ‘Dark Ages’ - a period of stagnation and pressure on traditional business caused by the unprecedented take-off of mobile driven by voice services. During this period, mobile worldwide subscribers grew by more than 4 billion, while only by ~200 million in the fixed segment.

 

Recent trends support LTE’s expected data dominance in the coming years: 1) The advent of super-fast mobile broadband technologies; 2) the fast growth of portable smart-devices adoption coupled with OS maturity (Android and iOS); and 3) the emergence of over-the-top (OTT) ecosystems driving consumer and business mobile and fixed connectivity services. Will fixed operators face a darker future than ever?

 

We believe in the contrary as these trends paradoxically will create the conditions for fixed operators to return to a path of sustainable growth. A significant EBITDA and Free Cash Flow uplift will be achieved, thanks to a combination of more efficient technologies, leaner operations and a re-focus on value products and geographies.

 

Ironically, the more mobile evolves the more it will need to rely on fixed technologies (FTTH / GPON, FTTB, xDSL, etc.) to cope with the significant challenges of delivering the expected customer experience given the significant spectrum and technology constraints mobile faces. This reality will allow fixed operators to capture material value through key opportunities such as offering super-fast fixed broadband, the offloading of mobile traffic and the provision of reliable transmission to enable the LTE play. Let’s keep in mind that while the predicted mobile traffic is expected to grow at an unprecedented rate, by 2016, 90% of the total IP traffic will still be originated in fixed networks.

 

In preparation for this scenario, most fixed operators in developed markets have already adapted their technology, product offering, operating model and staff skills/dimensioning to this new reality and are well positioned to capture the opportunity.

 

However, in emerging markets with minimal meaningful fixed penetration (~15-20% of households) and scale, the story is rather different. With traditional voice revenues at risk, mobile operators driving mass broadband adoption and ‘alternative’ fixed players expanding their infrastructure, the future seemed rather challenged for incumbent fixed operators, until now.

 

The Renaissance for fixed operators is a challenging path: it requires a radical and often painful holistic transformation, stretching from the networks, IT systems, commercial approach and processes, to more important elements such as culture, organization structure and skillsets.

 

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