ultralow-cost mobile a new operating model for network
TRANSCRIPT
Ultralow-Cost Mobile
A New Operating Model for Network Operators
Perspective Roman Friedrich
George Appling
Ashish Sharma
Hadi Raad
Booz & Company
Contact Information
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Ashish Sharma
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Partner
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Roman Friedrich
Partner
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Dr. Edward Tse
Senior Partner
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George Appling
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Ashish Bhatia, Neha Grover, Kabir Iqbal, Aditya Paranjpye, Pierre Péladeau, Karim Sabbagh, Aishwarya Sridhar, and Peter Weichsel
contributed significantly to this Perspective.
1Booz & Company
EXECUTIVE
SUMMARY
Faced with evolving technology, vast opportunity, and, it
must be said, falling per-user revenue in most global markets,
mobile network operators (MNOs) are considering ways to
reduce their expenses to maximize profits and efficiency. But cutting costs cannot be—as it traditionally has been—a one-
off, across-the-board exercise. An indiscriminate paring down of costs will leave the company worse off than when it started.
All MNOs must instead learn to nurture and bolster their most strategic strengths and capabilities, even when cutting
costs. An ultralow-cost mobile (ULCM) operating model can enhance both efficiency and effectiveness. For some, it may even be at the heart of their strategy.
Using this holistic approach—which involves evaluating not just where to cut costs, but where to focus resources—enables
telecom companies to better understand their markets and
how their strategy fits. Whether your company operates primarily in rich markets or poor—or across both—ULCM offers you the opportunity to change the way your company
operates, save money, and increase revenue.
This Perspective explains how mobile players can migrate
to a ULCM model, taking into account every aspect of the mobile value chain—network operations; marketing, sales,
and distribution; and outsourcing. It presents the holistic cost-cutting approach to operational efficiency and shows how to optimize infrastructure, delivery, and marketing expenses
while strengthening your ability to compete.
2 Booz & Company
In the global telecommunications
industry, cost leadership has emerged
as one core strategy toward gain-
ing competitive advantage. Mobile
telephony, in particular, is a rapidly
growing sector where average revenue
per user (ARPU) is nevertheless
dropping over time in most markets.
Thus, mobile network operators have
an opportunity to gain competitive
advantage by using the appropri-
ate method of cutting costs to grow
stronger.
Traditional cost-cutting programs
typically cut expenses across the
board, trying to spread the pain more
or less equally. This often results in
indiscriminate cost reduction, based
on industry templates and market-
place benchmarks, rather than a holis-
tic approach that takes into account
the company’s context in the market.
If you are a leading mobile telecom
executive approaching costs this
way, you are, in effect, basing your
company’s decisions on what your
competitors and other companies are
doing, not on your particular strategic
direction. It may reduce expenses in
the very short term, but it fuels inco-
herence and loss of market advantage
over the long term.
An effective cost-cutting exercise
should recognize that many expenses
are discretionary and should be
treated as potentially expendable.
Some costs will be necessary to “keep
the lights on” (investing only to the
minimum extent required) or as “table
stakes” (investment that you and your
competitors must all make to play
in the market). But these expenses
should be optimized to the maximum.
Other costs are pertinent to your
strategy; these represent distinctive
market-winning capabilities that
enable your company to stand out
from competitors. Though it is helpful
to review costs and bolster productiv-
ity, you should continuously support
and strengthen these capabilities,
regardless of the current economic
climate. In telecom companies, a stra-
tegic focus on cost will generally lead
to a new focus on maximizing yield
management and utilization, because
these factors have a significant impact in building a distinctive telecom
service.
The result of this cost-cutting exercise
should be an ultralow-cost mobile
transformation program that can
increase profitability in all markets, including the subscriber-dense cities
of the developing world, and more
developed markets with high ARPU
such as the U.S. and western Europe.
The transition to ULCM involves a
conscious and comprehensive effort to
improve cost efficiencies and yield by 15 to 20 percent in each cost category.
COST CUTTING
AS A HOLISTIC
ENDEAVOR
A strategic focus on cost will generally
lead to a new focus on maximizing
yield management and utilization.
3Booz & Company
Exhibit 1 ARPU Has Limited Correlation with EBITDA
Source: Merrill Lynch Matrix, 2009; company annual reports; Booz & Company analysis
0 5 10 15 20 25 30 35 40 45 50 55 60 65
EBITDA Margin (%)
ARPU (US$)
VimpelCom
MTSGlobe
Kyivstar
UMC DiGi
Maxis
Smart
Vodafone Spain
Telefónica
MTN
VodacomO2 U.K.
Orange U.K.Vodafone U.K.
T-Mobile
AT&TVerizon
TIM BrazilClaro Brazil
Vivo BrazilOptus
Telstra KDDI
NTT DoCoMoChina Mobile
Idea
Bharti Airtel
Reliance Communications
R2 = 0.012
MOBILE EBITDA (ACROSS DEVELOPED AND DEVELOPING MARKETS)
Mature Markets
Developing Markets
0
15
30
45
60
75
To successfully move toward ULCM,
operators must first develop a basis for judging expenses: a metric that
indicates the strategic value of
investments. Though ARPU has
traditionally been considered a key
driver and indicator of profitability for MNOs, the link between ARPU
and earnings (in the form of EBITDA)
is tenuous at best. MNOs in emerging
markets, with ARPUs of less than
US$5, often have higher EBITDA
margins than their counterparts in
higher ARPU markets (see Exhibit 1).
The cellphone tower, or base
transceiver station (BTS), is a more
precise indicator of profitability than ARPU or even subscriber
base. By increasing efficiency
THE ULTRALOW-
COST APPROACH
4 Booz & Company
and simultaneously enhancing
effectiveness at every BTS, operators
may achieve improved EBITDA and
enhanced overall profitability.
With its focus on the BTS, ULCM
has some similarities with what many
MNOs call the “minutes factory”
approach, which is commonly applied
in India and is expanding into other
developing markets. This approach
is characterized by a combination
of low costs and extremely high
network utilization, which results in
relatively higher yield per BTS despite
marginal ARPUs. ULCM goes a step
further by aggressively working to
optimize efficiency by lowering costs throughout the entire mobile value
chain, not just at the BTS.
The ULCM approach increases
efficiency by lowering costs. The total cost of ownership (TCO) per BTS
varies widely from market to market
(see Exhibit 2), but there is room
for improvement in even the most
efficient Indian markets. TCO per BTS generally correlates significantly higher with EBITDA than with
ARPU. This suggests that EBITDA
Exhibit 2 There Is a Wide Variation in Costs per Base Transceiver Station Globally
Notes: TCO calculated on operating expenses plus 10% opportunity cost of capital (on net block); end-of-year subscriber numbers used in the metric; average exchange rate for the
period: ¤1 = US$1.3. Operating expenses include network, customer servicing, IUC, license, personnel, and SG&A expense (excludes annual depreciation). Source: Annual reports; analyst reports; news articles; company websites; Merrill Lynch European Telecom Wireless and Broadband Matrix, Q1 2010; TeleGeography;
Booz & Company analysis
15,374.7
TCO/BTS (US$ per month)
Western Europe 2
Developed Asia 1
Western Europe 1
Africa 1
MENA 2
ASEAN 5
ASEAN 4
Eastern Europe
MENA 3
ASEAN 2
ASEAN 1
Filipino 1
China
India 3
India 2
India 1 3,076
3,398
5,153
5,761
5,969
8,730
9,047
9,119
12,520
13,556
14,779
17,230
18,373
23,745
33,256
62,503
COST BENCHMARKING: TCO PER BTS, 2009
5Booz & Company
is related not to the cost of capacity
that is actually used in service, but to
the total cost of capacity, whether it is
used or not.
It also increases effectiveness by
improving the yield (revenue) per BTS,
which is also much more strongly
correlated to EBITDA than is ARPU.
Maximizing minutes of use per
customer will produce better
distribution of your installed fixed cost base. Given that the fixed cost incurred in creating and operating
a network typically accounts for 65
to 70 percent of the total cost, high
usage per customer is critical to
the overall profitability of telecom companies. There is significant room for improvement on this front—for
instance, India, which has among the
highest minutes of use per customer
globally, clocks only about 13
minutes per customer per day, or 394
minutes per month. And only seven
countries have such high levels of
utilization. This suggests significant room to increase usage per customer
in both developed and developing
markets. Meanwhile, operators in
developing economies—notably China
and India—have a simultaneous
opportunity to substantially increase
average revenue per minute (ARPM)
per BTS (see Exhibit 3).
Exhibit 3 Depending on Market Maturity, MNOs Can Create Additional Value by Either Stimulating Usage or Enhancing Yield per BTS
Note: Figures for all western European nations and Korea are for 2008.
Source: Merrill Lynch Wireless Matrix, Q3 2009; Global Insight; Informa; Booz & Company analysis
Stimulate usage
0
0.04
0.08
0.12
0.16
0.20
0.24
5004504003503002502001501000
Venezuela
Ukraine
Turkey
Spain
Sweden
Russia
Poland
Peru
Portugal
ARPM (US$)
Average Minutes of Use Per Customer Per Month
Pakistan
New Zealand
Netherlands
Morocco
Mexico
Korea
Japan
Italy
IsraelHungary
Germany
France
Egypt
Denmark
Colombia
China
Brazil
Belgium
AustriaUkraine
Australia
Argentina
Singapore
Laos
Sri Lanka
Malaysia
ThailandVietnam
Philippines
Bangladesh
Indonesia
India
Maintain Enhance yield
6 Booz & Company
From a network perspective, higher
usage per BTS is a direct result of a
higher customer usage market strategy
in general. It also encompasses non-
voice usage such as short message
service (SMS), an offering that MNOs
in the Philippines have used to their
advantage. Further, it incorporates
higher spectral efficiency. MNOs in the 900 MHz band typically need
fewer base stations to cover the same
area, all other factors being equal,
and thus enjoy higher utilization than
those operating in, say, the 1800
MHz band in voice (data networks
may have additional considerations).
In addition, while encouraging usage,
it is critical to combine it with better
ARPM to maximize overall yield. An
indiscriminate offering of “all you can
eat” plans is perhaps not the best way
to embark on this strategy; ideally,
such plans should be offered only
after an appropriate analysis of the
calling patterns of various customer
segments.
Contrary to the conventional wisdom
in the industry, operators in low
ARPU markets such as India do
not have a cost structure that is
very different from those in more
industrialized parts of the world.
A quick scan of the cost baskets
in any given TCO model reveals
that all elements contribute more
or less uniformly to the overall
cost base irrespective of geography,
although the absolute cost base
differs significantly. From largest to smallest with respect to both
their contribution to the cost base
and the size of the difference across
geographies, these cost components
include the following:
Technology (network and IT)•
Marketing (sales, distribution, • subscriber acquisition, and
customer service)
General and administrative (G&A; • includes regulation-related costs)
While encouraging usage, it is
critical to combine it with better
ARPM to maximize overall yield.
7Booz & Company
Technology expenses are common
to all geographies, and they can
be broken down generally into
four categories: passive network
infrastructure, active network
infrastructure, data delivery, and
maintenance.
For the purposes of cutting costs
meaningfully, it is important
to consider passive and active
infrastructure separately.
Network costs typically account for
the single largest component of TCO,
irrespective of geography. That is
why the network is an obvious first choice for any cost-cutting exercise,
and why periodic network evaluations
are one key to containing expenses.
Moreover, during the next few
years, the network cost component
is likely to increase further because
of projected growth in demand for
mobile broadband.
Passive Network Infrastructure
In the passive network, towers, leases,
and rentals contribute the bulk of
expenses, followed by energy costs.
MNOs employ several measures to
contain these costs. Sharing passive
facilities is the most widely known
tactic; it has been standard practice
in western European countries and
India, and is fast finding acceptance among MNOs in Africa as well. Two
recent examples, both announced in
December 2010, are the Millicom deal
with Helios Towers in the Democratic
Republic of Congo, and MTN and
American Tower’s joint venture in
Ghana.
Divestiture is another option. An
increasing number of operators
have begun to spin off their tower
businesses as separate entities or
sell passive assets to specialist tower
companies. Enhanced tenancy, arising
from such tower sharing deals, can
result in 5 to 7 percent lower network
operating expenses.
After tower costs, the second most
significant cost savings often comes from reducing the energy costs of
a tower setup. The current energy
system in most developing nations
in Asia and Africa presents a double
whammy for telecom players. First,
inadequate grid power results in
ballooning energy costs; second, the
typically unpredictable power supply
requires backup generators. Battery
backup is sufficient for most power outages, but generators are needed to
run the air-conditioning that keeps
the batteries cool. In developing
nations with poor socioeconomic
conditions, fuel theft may add to the
cost. Thus, something that is not
actually required to run the network
ends up adding significant cost.
There are several ways of reducing
expenses related to passive
infrastructure. Start with a thorough
root cause analysis of the energy setup
as well as the overall tower design.
This should ideally be done before
a service is built and rolled out. For
example, negotiate tower tenancy
deals so that energy expenses are
paid by the tower company rather
than passed through to the operator;
otherwise, you will bear the cost but
have a limited operational role for
making improvements. Next, look
for energy-efficient shelter equipment; recent advances in materials
technology help eliminate the need for
local generators, reducing both capital
OPTIMIZING
TECHNOLOGY
INVESTMENT
8 Booz & Company
costs in generator purchase and
operational expenditure. Also explore
green sourcing of electricity, shifting
consumption to renewable energy
and reducing your company’s carbon
footprint; this can allow you to take
advantage of government incentives
and subsidies, while fulfilling social objectives. If you are already in
business, these measures are still
appropriate, but redeployment costs
may diminish or even entirely erode
your gains.
Active Network Infrastructure
These network costs are driven by the
geographic dispersion of customers
and their usage patterns for voice
versus data. These factors determine
the number of BTS sites needed, the
required capacity per BTS, and the
attendant backhaul costs.
To optimize all these factors, look at
your active infrastructure expenses
from several angles: technology used,
backhaul costs, and maintenance
costs. One mobile telecom provider
mapped its current usage levels across
an entire BTS network to optimally
allocate planned investments (see
Exhibit 4). Network planners found
that highly utilized sites, and those
with increased traffic, are prime
candidates for additional BTSs and/
or for the rollout of enhanced 3G
or 4G technologies. This can ensure
a continued high-quality consumer
experience and proactively protect
the flow of revenue. To manage high growth on moderately utilized sites,
MNOs can design targeted offerings
to customers to evenly spread usage
throughout the day and balance
traffic growth. MNOs in Africa and India are, with varying degrees of
success, experimenting with BTS-level
dynamic tariff plans. Such initiatives
should be carefully introduced to
temper the excitement around the
offers, with adequate transparency
Exhibit 4 Base Transceiver Station Assessment for Cost Optimization
Source: Booz & Company analysis
A
C
B
Medium (30%-60%)Low (<30%) High (>60%)
BTS Utilization (%)
Medium (0%-10%)
MonthlyTraffic Growth
Low (<0%)
High (>10%)
BTS UTILIZATION GRID
(% OF TOTAL BTSs)
Targeted 3G rollout
Backhaul optimization
Dynamic pricing
Relocation/active sharing