In Business Model, Internet Access, Mobile

Marginal cost pricing is now, and has been, a huge business model problem for capital-intensive communications infrastructure providers. Marginal cost pricing involves selling incremental units at incremental cost to produce those units, not including the amortization of the actual network build.

The hope is that the seller eventually can recoup sunk costs eventually. Whether that actually works is increasingly the issue for communications infrastructure. In fact, an argument can be made that marginal cost pricing is a major risk in the global telecom industry, affecting mobile and fixed network suppliers. In fact, the tendency of telecom prices to fall towards zero shows how great a danger marginal cost pricing really has become, industrywide. 

Indeed, some already argue that tier-one telcos do not recover their cost of capital, perhaps an indication that marginal cost pricing is dangerous to the long term health of the industry.

That is an issue, according to Eric Handa APT Telecom CEO.  As a rule, suppliers hope to recover their capital investments in three years. That hardly ever happens, says Handa. In other words, cash flow is the key business requirement, as most subsea–and possibly many other access networks–will never recover capital investment amounts.

Suppliers “need to recognize that loss and sell to cover future opex,” says Handa. That is why, these days, one sees the use of “earnings before interest, taxes, depreciation and amortization,” a measure of cash flow, and not a measure of “profit” in a “generally accepted accounting practices” sense.

That should provide a warning for regulators: modern communications networks are expensive and might no longer be “profitable.” Policies that make harder the task of sustaining cash flow (not even profits) will burden suppliers that already are not “profitable” in the old sense.

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