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Cable Technology Feature Article

April 08, 2013

Service Providers Waste 20 Percent of Their Capex

By Gary Kim, Contributing Editor

If global telecom service providers are not even earning the cost of the capital they invest in their networks, can failure be far behind? That’s a deliberately provocative question, but a realistic question, if in fact at least half of Tier 1 service providers are, in fact, borrowing money to invest in networks, and earning less return than the cost of that capital.

Global capex levels in the telecommunications industry have grown from $50 billion to $325 billion, in real terms, over the last thirty years, an analysis by PricewaterhouseCoopers (News - Alert) (PwC) has found.

After studying the financial performance of 78 fixed-line, mobile and cable telecom operators with a collective annual capex of some $200 billion, nearly two-thirds of the industry’s total spend in 2011, PwC analysts suggest that, over the past decade, the average long-term return on investment (ROI) has been just six percent—three percentage points less than the cost of the capital itself.

Many of the survey respondents admitted that they are aware of their capex problem and collectively could be wasting as much as $65 billion every year, assuming perhaps 20 percent of all tier-one service provider capital investment is being wasted.

That doesn’t mean incremental capital investment generates “zero” return. What’s more likely is that about 70 percent of investments cover their cost of capital. The problem is that about 30 percent of investment generates very poor returns, one surveyed executive argues.

So assume executives get it right about 70 percent of the time. The whole problem is the 30 percent of cases where they waste capital and lose money.

When any company, not to mention much of an entire industry, actually cannot make enough profit even to repay money it is borrowing, failure is inevitable, at some point. That doesn’t necessarily mean complete failure.

But it might mean that half of the world’s tier-one service providers will eventually be absorbed by other firms that have learned to master the capital investment process.

The good news is that the misallocation of capital is an internal, governance-related problem, not a “structural” problem with markets and customers (though some would argue service providers face new challenges in those areas as well). Service providers need only to change the ways they measure success, and cut through some of the “silo” problems endemic in any very large organization.

Edited by Rachel Ramsey

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