Tier-One Telcos Do Not Recover Their Cost of Capital

source: PwC

There is a very good reason why tier-one service providers are working so hard to drive down their capital investment and operating costs: they must do so.

In fact, at least one analysis suggests tier-one service providers have not been recovering their cost of borrowed capital for a decade and a half or more.

Researchers at PwC studied the financial performance of 78 fixed-line, mobile and cable operators with a collective annual capex of some $200 billion, nearly 66 percent of the industry’s total spend.

The research found that, over the past decade, the average long-term return on investment (ROI) has been just six percent.

That is three percentage points less than the cost of the capital itself. In other words, operating revenue is not covering the cost of capital.

Capital investments by telcos globally are growing slightly, according to researchers at Ovum. And that might not be a good thing, as much as investment underpins creation of next-generation networks.

The problem is that service provider revenues are not keeping pace with investment levels. That is one reason why Facebook and Google efforts to create lower-cost access network platforms are important: ISP cost needs to decline. If all facilities-based service providers can use the new platforms, they win.

On a global basis, telecom service provider revenues grew about one percent in the second quarter of 2016, year over year.

That growth is the first for service providers since the third quarter of 2014.

Industry capex over the last 12 months was roughly $340 billion, flat versus the prior two years.

Revenues have been falling, with the result that service capex levels are historically high, at about 20 percent of revenues.