Energy consumption should be a decent proxy for telco operating cost trends. Before the war in Ukraine, it accounted for only about 5% of total expenses at an average telco, which spends far more on its staff (representing about a quarter of costs). But even the most economically phrased text message needs electricity to leap from sender to receiver, and a data tsunami is crashing through networks, the industry is regularly told. If networks are being fortified with extra equipment of the "active" variety, energy use and costs are presumably rising like floodwater.

Right? Wrong, as it often turns out. An examination of figures for energy consumption in the annual reports of Europe's biggest operators turned up some counterintuitive results. Three of the companies that operate both fixed and mobile networks – BT, Orange and Telefónica – consumed less energy last year than they did in 2016. Vodafone's annual usage is up, but only by 3% between 2018 and 2021. Only Deutsche Telekom, the region's largest telco, reported a big increase during this period, but that was probably due to its US takeover of Sprint in 2020, when energy use spiked.

Figure 1: Equipment vendors like Ericsson are promoting more energy-efficient gear.
(Source: Ericsson)

Divestments could explain a substantial drop at Telefónica, whose annual energy consumption measured in gigawatt hours fell by 11% between 2016 and 2021. Various assets have been spun off during this period by the Spanish telecom incumbent, including operating companies in Central America and Europe. Orange has also changed shape, although less dramatically. Its methodology for calculating energy usage is different, too – which is partly why it fell by 6% between 2020 and 2021.

Even so, the trend is totally at odds with the inexorable surge in data traffic. Of the companies analyzed, Telefónica is the only one prepared to expose the full details to the public. Back in 2016, it reveals, about 26,700 petabytes flowed through its networks over the course of the year (Telefónica's description is "total petabytes managed"). By 2021, the annual quantity had grown to a deluge of more than 113,500 petabytes.

Telefónica then goes one step further, putting energy consumption over traffic and working out the number of megawatt hours per petabyte, a measure of its energy efficiency. In 2016, each petabyte gobbled through 268 megawatt hours. Last year, however, the figure had fallen to just 54 (see graph below).

Vodafone did a similar thing last year in a presentation to investors. Without disclosing the numbers, Johan Wibergh, Vodafone's departing chief technology officer, claimed its cost per gigabyte had dropped by 70% between 2017 and 2021. That rate of decline exceeded the increase in traffic Vodafone saw over this period, he said.

These are surprising admissions by the companies. Top executives are fond of portraying them as the victims of a data flood triggered by the Internet giants, struggling to remain afloat under waves of video traffic. Showing that power consumption has been relatively stable or dropping as they crest these waves does not help the victimhood cause. Nor does it neatly align with the remark in Ericsson's latest mobility report, out today, that operators need "to break the trend of increasing energy usage in mobile networks" (by spending money on Ericsson's energy-efficient radios, naturally).

Figure 2: Energy use at Telefonica (Source: Telefónica)

Fatter pipes and faster lanes

Telco sympathizers would point out that energy efficiency has come at a significant cost already. To support all that traffic, operators routinely upgrade their networks, building fatter pipes and faster lanes. These investments show up in capital expenditure and charges for depreciation, and they explain why telecom is more capital-intensive than most other industries (capital intensity is capital expenditure as a percentage of revenues). Google's capital intensity last year was about 9.5%, for instance. BT's, even ignoring what it pays the government for spectrum licenses, was about 23%.

Yet most European operators have not seen a big increase in capital intensity since 2016 despite a 5G and fiber investment boom. Moody's, a ratings agency, reckons capital intensity across the entire European telco sector rose just one percentage point between 2017 and 2021, to about 18%. Excluding spectrum licenses – a tax that varies massively from one country to another – Deutsche Telekom's capital intensity grew from 16% to 16.5% over this period, while Orange's increased from 17.6% to 18%.

BT, the glaring exception, has seen its capital intensity rise by 8.6 percentage points since 2016. Arguably, however, it had previously underinvested while its regional peers were constructing all-fiber networks. Now fully engaged in that mission, it is trying to build a nationwide network at lightning speed and beat rivals to British doorsteps. This costly civil-engineering job is not routine but a once-in-a-century upgrade to succeed the copper lines in place since the late 1800s. Telefónica's capital intensity is markedly lower than BT's, falling from 16.5% in 2016 to 14.2% last year, partly because its own fiber rollout in Spain is largely complete.

Operators do not look badly off based on their preferred profitability measures, either. For years, the favorite one has been earnings before interest, tax, depreciation and amortization (EBITDA). At BT, which still uses this metric, the EBITDA margin rose from around 32% in 2016 to roughly 36% last year. More recently, companies have substituted "EBITDA after leases" (accounting, as the label implies, for the costs of leasing equipment or property). Here, Orange has reported a margin of about 30% for three years running.

Far better would be earnings before interest and tax or just plain operating income. BT's operating margin dropped by 2.5 percentage points between 2016 and 2021, to 15.2%, but this was still better than the 13.7% reported by Ericsson, one of its biggest suppliers. Vodafone, for all its grumbling about returns, had an operating margin of 12.4% last year, up from 8.7% in 2016.

Failure to innovate

None of this means telcos look irresistible to investors. Far from it, in fact, with Vodafone's share price down by 61% in the last five years, Telefónica's by 56%, BT's by 54% and Orange's by 32%. Only Deutsche Telekom has seen growth, rising by 32% over this period, thanks to its fast-growing business in the less vigorously contested US market.

In fiercely competitive Europe, big operators have shrunk even as their margins have remained stable. They have sold assets to pay down long-standing debts, failed to innovate and made a hash of growth opportunities. The advance of Internet companies into their space is seemingly unstoppable.

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No doubt, investment returns would be much healthier if regulators were less opposed to in-country consolidation: Market revenues could be divided among fewer operators while the cost of building a nationwide network would hardly change. But more automated networks in a future of ubiquitous fiber might have a completely different cost profile from today's batch, especially if older platforms have been euthanized by then.

Nor is there a cast-iron guarantee that future generations of network technology will necessitate the same overhaul as earlier ones. Maria Cuevas, BT's networks research director, is keen to avoid "a full replacement cycle" with the rollout of 6G or subsequent mobile standards – an awkward demand for traditional equipment vendors.

For all the sector's various ailments, there is scant evidence of any cost crisis. Next year will be tough for many European operators after energy prices have risen on fuel shortages and employees' calls for higher wages have grown louder. Just this week, BT announced a settlement with trade unions, agreeing to pay its striking workers more than it had originally offered. It's a good thing most operators are still in half-decent shape.

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— Iain Morris, International Editor, Light Reading