Business Transformation

Nolle: In 2017, Cost Per Bit Exceeds Revenues

This is the year when most telecom network operators will see their revenue-per-bit fall below their cost-per-bit, says a veteran industry analyst, and that financial reality is going to reverberate through the industry for at least the next two years, prompting further consolidation and cuts by network gear makers, as operator capex budgets shrink.

CIMI Corp. CEO Tom Nolle, noted for his candor, states this pretty matter-of-factly in an interview with Light Reading, and in this January blog post. Nolle has been tracking these numbers since 2013, having been prompted by a conversation with then-Verizon Communications Inc. (NYSE: VZ) exec Stu Elby -- now with Infinera Corp. (Nasdaq: INFN) -- to question the 47 operators he regularly surveys on their cost-revenue convergence numbers.

"Everybody came back with a surprising amount of convergence, nearly all of them crossed over at some point in 2017, one or two in 2016 and another couple in 2018," Nolle says. "It's clear running through the numbers that all of that crossover pressure is pretty universal -- it is somewhat affected by regulatory positions and the mobile-wireline balance, and things like that. But it seems pretty universal across all of the operators in all of the service geographies."

Companies such as AT&T Inc. (NYSE: T) have been very open in saying the revenue-cost crossover drives their aggressive transformation efforts, because they recognize it is impossible to meet bandwidth requirements of the future doing things the way they've been done in the past.

But Nolle also points out that such transformation effort, focused on adopting SDN and NFV, are not moving nearly fast enough to get out ahead of the revenue-cost convergence. So operators are having to cut back on spending instead.

"With operators facing this kind of cost-revenue convergence, the first and easiest answer is to spend less on infrastructure, because no one is going to hemorrhage money, what they are going to do is they are going to spend less," he says.

That will mean continued price pressure on equipment vendors, Nolle maintains. He points to declining revenues, quarter over quarter, for companies such as Cisco Systems Inc. (Nasdaq: CSCO), and to the fact that Huawei Technologies Co. Ltd. is alone among vendors in growing its revenues because it is a price leader in many categories. The analyst expects 2017 and 2018, at minimum, to be pretty bleak years for the telecom equipment space.

On a potentially brighter note, Nolle does expect the "remedial efforts" in the NFV/SDN realm will take hold after that and prevent service deterioration in the long run. In the meantime, he believes more operators will seek to expand operations outside their existing footprint -- he points to Telefonica's moves in Latin America as an example -- and they will push harder to make automation a key part of their transformation efforts, as many have started to do already.

Nolle had much more to say about why he thinks the NFV-SDN transformation has been mismanaged, and we'll be sharing some of those insights going forward, along with industry reaction.

— Carol Wilson, Editor-at-Large, Light Reading

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mcande 1/9/2017 | 5:10:44 PM
usage based billing Why can't the industry make the transition to usage based billing. If consumers pay for what they actually use, the revenues grow organically as the usage goes up.
SVPCloud29186 1/9/2017 | 2:51:39 PM
Re: Profits The study referred to at Verizon was looking at the backbone costs of transport, not the access, and certainly not 4G and beyond.  The way I think about it is that now the access services (broadband, video, advertising) must subsidize the transport network.  Profits are still generated, but there is incerasing drag on them. 
Carol Wilson 1/9/2017 | 2:48:00 PM
Re: Profits The issue is that operators haven't been able to increase the prices consumers pay on a per-bit basis so as consumption goes up but, relatively speaking, prices don't keep pace. Every major operator I know has been discussing this for a while now, it's what fuels the whole SDN-NFV push.

And it gets worse as traffic continues to ramp. Traditional ways of building networks don't allow for the massive scaling needed to handle the growing bandwidth demand. That's why operators want to adopt the same kinds of technology that FB and Google are using - commodity hardware controlled by intelligent software - but they can't do it fast enough. 

So operators are cutting back on capital expenses to preserve their profit margins, and will do so until they have a way to ramp up capacity that is less costly than today's methods. 
iainmorris 1/9/2017 | 2:40:46 PM
Profits So the implication is that operators are losing money in selling mobile data services (if costs are higher than revenues, you are making a loss). And I don't quite get that as the majority seem to be very profitable companies (even if their revenues and profits are in decline).

I also don't really get the economics. We are led to believe there is soaring demand for mobile data services and always being told about a capacity crunch on networks, which is spurring the need for new technologies and access to spectrum (itself a finite resource). There has been some consolidation in the market, too - even if there is regulatory resistance to M&A activity in Europe. 
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