OPEX Reduction in Telecom Industry

Qarib Raza Kazmi

SP-2010/M.M/205

Telecom Business Management

Introduction The ability to “communicate” has enabled humans to make

a paradigm shift from tribal based communities to information based societies.

While comparing the novel means of communications, telecommunications would probably stand as the ‘pioneer technology’, giving birth to variety of communication means like PSTN, Mobile Telephony, Broadband networks, the Internet and so on.

The 16th largest economy of Asia and 2nd largest economy of South Asia; Pakistan.

The Plight of the Pakistan Telecom Industry

According to the Economic Survey of Pakistan 2011-12, total investments in the telecom sector stood around $495.8 million in fiscal 2010-11, as compared to $1,137.5 million in fiscal 2009-10. These statistics show that fiscal 2010-11, total investments in the telecom sector fell by 56.4%.

But Still total revenues generated by the telecom sector during fiscal 2010-11 were around Rs363 billion: an increase of 5.4% as compared to revenue generated in fiscal 2009-10, which was around Rs344 billion.

FDI Chart

Contribution to Exchequer

OPEX Reduction Strategies….

Manage the product Portfolio Carefully

Effective and efficient marketing strategies

Focus on productivity/efficiency and policies

Effective Asset management

Site Lease Pre-payments

Multi-dimensional Planning

OPEX Reduction Strategies….

Manage both labor and non-headcount costs

Keeping costs as variable as possible

Tower Sharing (Indian Industry research)

Compact BTS Technology

Solar Powered BTS

Manage the product Portfolio Carefully

Few industry executives would disagree that product proliferation is the prime enemy of cost management.

In a recent survey, 4 of 10 executives said that their company’s product portfolio grew by more than 50% in the previous five years.

For the telecom industry, this growth in products creates problems across functional areas – sales, marketing, customer care and billing – where the number of products is a key driver for complexity, and subsequently, cost.

Portfolio Management

One of them is that the companies have difficulty phasing out older products.

The difficulty stems from a fear of churn,

lack of incentives to eliminate products

lack of pruning culture among the telecom industry in general.

In addition, they sometimes launch products without a true understanding of customer needs. (Using market research companies before product launch can be an area of interest here)

Portfolio Management

Effective and efficient marketing strategies

Tough economic times lead to increased scrutiny and cuts to marketing spend. Although research suggests that brands should maintain or increase marketing spend during recessions.

The first task is to understand the effectiveness and efficiency of marketing spend across all channels, products, geographies, marketing objectives.

The impact of spend can be quantified through careful analytic modeling using available data, such as spend across various levers, and relevant outcome metrics such as sales, new customers added, share of wallet, and brand equity.

Profit improvements of at least 5% through a combination of tactics: squeezing more sales out of the same overall spend by reallocating spend, cutting spend, and/or increasing spend for certain levers.

Focus on productivity/efficiency and policies

Any good cost reduction program cannot ignore the tried and true productivity levers, and a good starting point is the demand side.

For example, rather than trying to cut the cost of a customer service call, managers should do tier best to prevent the call in the first place.

A case in point is the Ufone call center. They have a daily call load of around 250,000 of which they are only able to answer around 175,000.

Reducing the time of the call is a fine strategy. But why not eliminate the call in the first place?

Productivity/Efficiency

Preventing the call might be as easy as simplifying or streamlining the instructions that customers receive when they purchase their phone SIMS.

Most successful telecoms automate calls where it makes sense. The automation must match the customer service demands. Otherwise the company risks frustratingcustomers and in the end driving up the call volume.

For instance some complex technical questions are difficult to answer via interactive voice responses, but can be easily answered in videos that can be made available on the handset or the internet.

Effective Asset Monitoring

Cell site is one of the most expensive physical assets of a mobile operator considering the CAPEX that goes in every site.

Around 5% of sites needs re-work and another 5% would need special maintenance due to poor implementation.

If an operator have an effective asset monitoring platform such as ADaM (Amanzi Data Management) then it is possible to achieve around 10% savings in OPEX.

Site Lease pre-payments

Site leases are the second highest cost for any network operator next to payroll.

Site leases don't reduce over time, they actually increase based on factors such as inflation, raising value of property, etc. The challenge is how do you reduce this cost?

The answer is simpler than you think it’s pre-payment of site leases.

Site lease pre-payment can reduce the cost of leasing sites from 20% to 40% considering industry standard site lease escalators.

Multi-dimensional planning

Good planning is always essential to the success of any operations.

It is more a strategy for revenue assurance than OPEX reduction, how big is its effect to the overall picture?

Consider a network with 5 million subscribers having a monthly ARPU Rs 300 of which has a churn rate of 5%, now with an optimized network the churn rate can be reduced to 2.5% thus ensuring annual revenue of Rs 37.5 million.

Manage both labor and non-headcount costs

A headcount reduction can be one of the most painful events in the life of an organization.

Most Companies ignore the fact that the bulk of expenses in some departments – marketing, for example – is non-labor in nature.

Advertising production is an area where the costs can be very high.

A rule of thumb here for telecom industry is that media buying costs should be about 75% of advertising costs. If you are too far off this bench mark then you should focus on ad production cut and not too much on media buying.

Manage both labor and non-headcount costs

There are other areas, too, where non-headcount spend should be closely watched. Like for instance, dealer commission and handset subsidies.

An effective way of reducing handset subsidies is to join a purchasing consortium and saving up to 10%.

Manage both labor and non-headcount costs

Keeping costs as variable as possible

Outsourcing is one way to achieve variability, though it can be tricky to execute. Moreover if it is not managed properly, outsourcing can result in costly re-work that overshadows savings.

Areas where outsourcing has traditionally been effective include information technology, customer care, and billing.

Keeping costs as variable as possible

Tower Sharing (Indian Industry research)

The Indian wireless industry, with a 32% penetration, is only second after China in terms of sub-scribers at 325 million.

Most of this growth has come from urban India Where penetration is close to 60%, but in rural market it’s less then 15%.And it’s here that the industry sees the largest opportunity for growth.

The challenges, though, for Indian telecom operators is the average per user (ARPU), which, at less than $7,is one of the lowest I the world.This figure drops significantly when one moves into rural and semi-urban areas, and is estimated to be as$2.

Tower Sharing (Indian Industry research)

According to an E&Y report titled 'Wireless Infrastructure Sharing in India', "CAPEX (capital expenditure) savings across the industry are expected to range between $7-12 billion over the next four years, till 2012

Ongoing OPEX (operational expenditure) savings are estimated at $1 billion a year.

Tower Sharing (Indian Industry research)

Tower Sharing (Indian Industry research)

The growth in the domestic telecom industry has largely been concentrated in the Metros and Class A circles in the past decade, with coverage reaching around 90% and 35%, respectively.

However, coverage in the Class B and Class C cities is still low at 15-25%.

Moreover, within these circles growth has largely been concentrated in the urban areas while penetration in the rural areas remains lower. Thus future growth is likely to come largely from Class B and C circles and rural areas.

City wise Mobile Panatration

Compact BTS Technology Compact base transceiver stations (BTSs) are the

latest base station design to be introduced in the market. They bring WiMAX operators flexibility and cost savings while retaining the performance of macro BTSs.

Compact BTSs can be installed in single-sector or multiple-sector configurations as alternatives to distributed BTSs with remote radio heads (RRHs).

Unlike traditional macro BTSs, compact BTSs do not require ground shelters and cooling equipment. Yet they support high-performance features such as multiple antennas per sector with multiple input, multiple output (MIMO), and beam forming.

With a smaller footprint, lighter weight and lower power consumption, compact BTSs cost less to install and to operate. Our analysis shows that operators can save 38% to 47% in CAPEX and OPEX over a five-year period.

Compact BTS Configurations

Compact BTS CAPEX Comparison

CAPEX Year 1

OPEX Year 1

Solar Powered BTS

The IFSP solutions offer up to 60 percent or more in operating expenditure related power savings.

Alternative power solutions are not commonly used in telecommunications systems today, but are being actively evaluated for difficult locations and limited deployments have been made.

Target Configuration

World Solar Radiation Map

BTS Power Consumption

On average, a fully loaded GS/3G BTS using traditional PAs is estimated to need 3 kW of power at peak draw.

Hence our targeted configuration will be for the worst case scenario in terms of energy consumption i.e. the 3.0kW peak power draw BTS.

Studies have also shown that this BTS will consume an average of 12,500kWh of electricity in a year.

The Solution

An IFSP designed solar-powered system, which consists of solar panel modules, deep cycle battery arrays and charger controller.

The battery array will have a backup capability of 2 days, while the solar modules are designed in such a way that it only needs 4-5 hours of sunlight to recharge the batteries.

Economic Payback

The cost estimate for the fully functional IFSP designed solar powered system, which consists of solar panel modules, deep cycle battery arrays and charger controller for a fully loaded 3kW BTS is $30,550.

In comparison, a fullyloaded BTS is typical powered by twin 15 kilo volt ampere (KVA)or more diesel generators which consumes over 2.5 litres of diesel every hour up to 20 hours daily will cost about $12,026.00 in diesel fuel per year(assume 0.66cents/litre)

Comparative price on 10 year basis for 10,000 BTS

A typical telecom operator with about 10,000 BTS would have spent well over $1.2 billion on diesel fuel and generator within a ten year period.

while the solar option is estimated to cost $306.50 million over the same period.

Global Telecom Deals

Etisalat outlines major CAPEX and OPEX reduction initiatives

Already undertaken a number of major CAPEX and OPEX reduction initiatives such as co-location and hybrid power and was actively considering others like transmission sharing and sales and leaseback of towers.

Identified tower sale and leaseback as an excellent way of releasing capital to invest in core activities such as customer acquisition, management and retention as well as increasing the number of significant tower deals by African tower companies.

Recommendations: Compelling case for 3G

Due to an increase in revenue generation this year, the telecom sector contributes Rs117 billion in taxes to the national exchequer – the highest ever.

Pakistan is among the few countries which have yet to adopt the 3G/4G technology. Even countries like Nepal, Sri Lanka and India have already adopted these technologies.

Experts in the telecom sector believe that increasing broadband penetration leads to economic gains: a 10% increase in broadband penetration contributes by a percentage in GDP growth, while around 80 new jobs are created for every 1,000 new broadband connections.

Pakistan must now join the 159 countries that have already adopted 3G/4G technologies