In Business Model, Internet Access, Mobile, News, Spectrum, Spectrum Futures Conference

Mobile operators in India pay fees for use of spectrum. For spectrum acquired in the upcoming 2016 auctions, the spectrum usage charge will be three percent of of service provider adjusted gross revenue (AGR) on spectrum acquired in forthcoming auction in 700, 800, 900, 1800, 2100, 2300 and 2500 MHz band.

Bharti Airtel, India’s largest telecom operator will pay 3.8 percent. Reliance Jio Infocomm will pay about 3.05 percent.

Those charges might be seen as a small part of a much larger problem: high capital investment and regulatory risk that makes the business model unsustainable.

And at least some now question whether there is truly enough potential revenue in at least some emerging markets to sustain robust investment in traditional mobile network bandwidth. An open question: whether a dramatic reduction in access network costs is feasible.

By the same token, one might question whether there is enough demand to support gigabit Internet access in many countries without key subsidies from government.

Nearly 40 percent of South Korea’s broadband network build between 2005-2014 was provided by the government, for example.

Few countries are able to support–or even consider–that level of support to create high-performing Internet access facilities for their citizens.

It gets worse.

To a large extent, one might argue, access providers are capturing a smaller share of overall ecosystem value. Bluntly, one might say, access providers really are becoming commodity dumb pipe providers while value and revenue shift to app providers, device suppliers and others.

“Even after accounting for Wi-Fi and new technologies and alternate business models, there will be still significant global wireless data demand that is not economically possible to serve,” says James Sullivan, J.P. Morgan head of Asia equity research. .

Declining value capture is paired with a significant, and ongoing, increase in capital intensity. In at least some cases, that will mean possible nationalizing of networks. In other cases, competitors might be forced to consider sharing network facilities, to stave off such intervention.

That would overturn nearly a half century of moves to privatize assets and introduce competition.

“Emerging market telcos have no choice but to fundamentally change the structure of industry assets through the unification of networks via nationalization, centralization under a

regulated return utility, or more aggressive commercial network sharing,” argues James Sullivan, J.P.  Morgan Chase Head of Asia Equity Research.

Simply, between now and 2024, telco capital investment and operating expense will climb, while revenue growth lags. But there also is regulatory risk. India,  the Philippines, Thailand, Malaysia, Indonesia and Turkey are countries where capex pressures are the big problem.

Regulatory risks exist in Indonesia, Brazil, South Africa and Malaysia, he argues.

Markets with the potential for the most extreme margin compression include the Philippines, India and South Africa; while more defensive margin markets are Nigeria and China, says Sullivan.

Bringing stakeholders together to understand changing supply and demand issues, and the business model for Internet access, is a key focus of the Spectrum Futures conference. Here’s a  fact sheet and Spectrum Futures schedule. Sullivan will be sharing his perspective at the event.

Start typing and press Enter to search