OTTs vs. Telco’s: competition and investment

The past few months have seen several telco CEO’s make the claim that OTTs are making their investments unviable. But is this the case? Are OTTs the cause of telco’s returns below their cost of capital? In the table below is a short summary of some of the CEO statements that have been in the media over the past year.

StatementTelecom company
Consequently, we cannot make a viable return on our very significant investments4 major European Telco CEO’s: Deutsche Telekom, Vodafone, Telefonica, Orange
Most telcos' returns on invested capital are already below their cost of capital. Telstra CEO (Australia)
Unless the economics, therefore, in the industry are allowed to improve, the consequences will be lower investment in the future

If we look at the data, telco’s have healthy EBITDA margins, ranging from 29.3% to 30.6%, way above the average across 94 sectors of 12%. Return on Equity (ROE) is reasonable. The cost of capital is the lowest compared to the other sectors in the value chain. The data doesn’t support the CEO’s contentions. 

SegmentSectorsEBITDA marginReturn on EquityCost of Capital
Content RightsBroadcasting19.5%13.4%5.5%
Online ServicesAdvertising7.4%5.6%7%
Information Services23.8%15.9%7.7%
Retail (Online)7.4%26.7%8.6%
Software (Entertainment)24.4%32%8.1%
Enabling TechnologiesTelecom. Equipment14.2%11.4%7.2%
Software (Internet)7.9%4.3%7.2%
ConnectivityTelecom (Wireless)29.3%14%4.7%
Telecom. Services30.6%12.9%5.2%
User InterfaceElectronics (Consumer & Office)8.4%14.6%7.1%
Software (System & Application)25.1%20.5%7.6%
Average across 94 sectors12%13.2%5.7%
Source:Aswath Damodaran,, updated 2022/01/05

So, what is happening? It looks like telco CEO’s have latched onto OTTs, like streaming services, as a convenient scapegoat. This allows them to deflect attention away from more challenging issues around competition and the role of regulation. For example, in Australia, government now owns over 93% of the wholesale sector and has imposed a complex and outdated wholesale pricing regime that squeezes telco’s margins and provides poor quality of service. South Korea has gone to another extreme and telco’s have managed to persuade the state to intervene and impose an entirely new regulatory regime for Internet peering called Sending Party Network Pays (SPNP). This has resulted in high latency and higher prices for the Korean consumer. 

To take the CEO’s claims seriously, telco’s need to be more transparent and rigorous in their claims. They need to use data to support their claims and to show a link between the role of OTTs and lower profitability leading to unviable investments. 

Other news from around Africa 
  • Universal Service targets: The ITU has released its aspirational targets for 2030. One of the targets is 100% of fixed broadband subscriptions are 10 Mbps or faster. 
  • Mobile money taxation in Malawi: The Malawian government says it is planning to revise taxes imposed on telecommunication companies. Malawi currently charges 16.5% VAT on internet services, 10% excise duty on mobile phone text messages and internet data and a 0.5% levy on the import of any ICT equipment. 
  • SIM registration in Kenya: The SIM card registration deadline has been extended until October 2022. Nigeria’s SIM card deadline has been extended more than 6 times. Is Kenya going the same way? 
  • New licenses in Namibia: The Communications Regulatory Authority of Namibia (CRAN) says it will temporarily suspend the awarding of new telecommunications and broadcasting service licences from 1 October 2022 until 30 September 2023 in order to conduct an assessment of competition in the market. 
  • Data expiry rules in South Africa: ICASA has released draft regulations requiring all data products to have a minimum 6 month validity. ICASA says that the aim of this regulation is to “strengthen the provision of quality of service for electronic communication services” but it’s not clear how these regulations would achieve this, nor has ICASA (as per usual) offered any evidence in support of the idea that data expiry rules are the cause of poor quality of service.