For many telecommunications operators, the good times are gone, but the challenges, it seems, aren’t going anywhere. Revenues are on the wane, competition is on the rise, and burgeoning data traffic requires costly network upgrades just when cash flow is under pressure. Little wonder, then, that more and more telcos are getting the message: a changing market calls for changes to the business model.
To be sure, telcos are taking some sound, battle-tested steps. They are embracing network sharing, for example, and striving to reduce complexity—a significant source of costs—in their offers. But the most successful transformations—those in which telcos don’t just keep pace with competitors but step out ahead—require pulling unproven levers, too.
One such lever is cross-border synergies—an approach that has been tried before and has been disappointing before but still warrants a fresh look. Even in their earlier failures, telcos were onto something: the need to boost scale.
Many network-technology costs are largely independent of operator size: the more subscribers a telco has, the more it can spread costs around. To get the optimal scale dividend, however, telcos need a lot of subscribers. Our analysis of the sweet spot for realizing cost benefits puts the number at roughly 20 million to 30 million subscribers. (See Exhibit 1.) However, most national markets—particularly those in Europe, the Middle East, and Africa—are just too small to support such numbers. Indeed, in many countries, even the market leader has fewer than 5 million subscribers. Yet for a telco with an international footprint, 20 million to 30 million is a subscriber level that might be attainable once the telco looks beyond its national borders.
Why is now the time to pursue international synergies? For one thing, there are lessons in those previous disappointments. What’s more, technology has changed. Recent advances have made it easier to centralize networks and IT platforms. But it is just as important that cross-border consolidation can provide a valuable assist to overall transformation efforts. It fosters more standardization and less customization, helping to reduce complexity. And it can play a central role in lowering the cost base.
Building on the lessons of the past and the technologies of today, we have developed a fresh approach to cross-border synergies, one that can bring telecom operators annual capital-expenditure, or capex, savings of 3 percent or more—and a 15 percent improvement in free cash flow after five years. Indeed, the benefits—increased scale, reduced complexity, consolidated platforms, and elimination of duplicate functions—are almost equally distributed across operating-expense and capex domains. (See Exhibit 2.) A cross-border platform can even boost shareholder value by increasing profitability at the group level.
These benefits are especially compelling because of the one thing that isn’t going to change anytime soon: the need for operators to reinvent—and reinvigorate—the way they do business.