{"id":3517,"date":"2022-04-23T04:41:55","date_gmt":"2022-04-23T04:41:55","guid":{"rendered":"https:\/\/researchictsolutions.com\/home\/?p=3517"},"modified":"2022-04-23T04:41:55","modified_gmt":"2022-04-23T04:41:55","slug":"otts_vs_telcos","status":"publish","type":"post","link":"https:\/\/researchictsolutions.com\/home\/otts_vs_telcos\/","title":{"rendered":"OTTs vs. Telco\u2019s: competition and investment"},"content":{"rendered":"

The past few months have seen several telco CEO\u2019s make the claim that OTTs are making their investments unviable. But is this the case? Are OTTs the cause of telco\u2019s 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.<\/p>\n\n\n\n\n\t\n\n\t\n\t\n\t
Statement<\/th>Telecom company<\/th>\n<\/tr>\n<\/thead>\n
Consequently, we cannot make a viable return on our very significant investments<\/td>4 major European Telco CEO\u2019s: Deutsche Telekom, Vodafone, Telefonica, Orange <\/a><\/td>\n<\/tr>\n
Most telcos' returns on invested capital are already below their cost of capital.\u00a0<\/td>Telstra CEO (Australia)<\/a><\/td>\n<\/tr>\n
Unless the economics, therefore, in the industry are allowed to improve, the consequences will be lower investment in the future<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n

If we look at the data, telco\u2019s 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\u2019t support the CEO\u2019s contentions.\u00a0<\/span><\/p>\n\n\n\n\n\t\n\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t
Segment<\/th>Sectors<\/th>EBITDA margin<\/th>Return on Equity<\/th>Cost of Capital<\/th>\n<\/tr>\n<\/thead>\n
Content Rights<\/td>Broadcasting<\/td>19.5%<\/td>13.4%<\/td>5.5%<\/td>\n<\/tr>\n
<\/td>Entertainment<\/td>12.8%<\/td>4.8%<\/td>6.9%<\/td>\n<\/tr>\n
Online Services<\/td>Advertising<\/td>7.4%<\/td>5.6%<\/td>7%<\/td>\n<\/tr>\n
<\/td>Information Services<\/td>23.8%<\/td>15.9%<\/td>7.7%<\/td>\n<\/tr>\n
<\/td>Retail (Online)<\/td>7.4%<\/td>26.7%<\/td>8.6%<\/td>\n<\/tr>\n
<\/td>Software (Entertainment)<\/td>24.4%<\/td>32%<\/td>8.1%<\/td>\n<\/tr>\n
Enabling Technologies<\/td>Telecom. Equipment<\/td>14.2%<\/td>11.4%<\/td>7.2%<\/td>\n<\/tr>\n
<\/td>Software (Internet)<\/td>7.9%<\/td>4.3%<\/td>7.2%<\/td>\n<\/tr>\n
Connectivity<\/td>Telecom (Wireless)<\/td>29.3%<\/td>14%<\/td>4.7%<\/td>\n<\/tr>\n
<\/td>Telecom. Services<\/td>30.6%<\/td>12.9%<\/td>5.2%<\/td>\n<\/tr>\n
User Interface<\/td>Electronics (Consumer & Office)<\/td>8.4%<\/td>14.6%<\/td>7.1%<\/td>\n<\/tr>\n
<\/td>Software (System & Application)<\/td>25.1%<\/td>20.5%<\/td>7.6%<\/td>\n<\/tr>\n
Average across 94 sectors<\/td><\/td>12%<\/td>13.2%<\/td>5.7%<\/td>\n<\/tr>\n
Source:<\/td>Aswath Damodaran, adamodar@stern.nyu.edu, updated 2022\/01\/05<\/td><\/td><\/td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n

So, what is happening? It looks like telco CEO\u2019s 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\u2019s margins and provides poor quality of service. South Korea has gone to another extreme and telco\u2019s 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.\u00a0<\/span><\/p>\n

To take the CEO\u2019s claims seriously, telco\u2019s 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.\u00a0<\/span><\/p>\n

Other news from around Africa\u00a0<\/span><\/b><\/h5>\n