Triple Play Will Not Save Declining Margins, But Telcos Still Have to Do It

By: Guy Zibi, Director, CMT Research, Pyramid Research
(Business News & Technology News, 31 Aug 2007)

The necessity of multi-play bundles is increasingly imposing itself on service providers, all the more because of intense competition. Multi-play appears to have become indispensable. But how much of a difference does multi-play truly make to the bottom line? Given the overall cost of assembling the constituent offerings (either through acquisitions, partnerships, or network upgrades), the answer to this question is hardly straightforward. Evidently, each multi-play initiative needs to be evaluated on its own merit through a net present value analysis. For the purposes of this report, Pyramid Research has reviewed the impact of multi-play on a range of players. For incumbent telcos, for example, we argue that multi-play is not likely to revert the decline in fixed-line margins, but it is still worth doing.

• For fixed-line incumbent telcos, bundled services do not slow the deterioration of fixed margins, and perhaps even exacerbate it. It is still relatively early to draw a full picture of the bottom-line impact of multi-plays for incumbents. Telcos have been busy deploying IPTV, and in most cases have been offering IPTV-driven bundled packages for less than two years. However, data from a few players with more than six quarters of triple-play performance provides an initial glimpse of the triple-play impact.

• A look at Belgacom and France Telecom, for example, suggests that while tripleplay has a positive revenue effect, that is balanced by the continuous decline in access line revenue, either from disconnections or price pressures. Further, the addition of a TV offering increases operating expenses and capital expenditures, leading to a decline in margins. Belgacom saw its fixed-line business EBITDA margin decline by eight percentage points in 2006, despite a relatively successful IPTV offering; indeed, the fixed-line business is bringing down the profit margin of the company¡¯s consolidated operations. While France Telecom does not report detailed results for its French fixed operation, the data suggests a similar pattern: flat revenue because of disconnections and price pressure, increased Opex and Capex tied to video services, and margins that are flat at best.

• The question ultimately becomes whether this performance would have been better without the addition of a video offering to create bundles: it is difficult to answer, but we doubt this would be the case. We should also mention that the content models of Belgacom and France Telecom in some respects put more weight on spending to acquire unique content than other telcos do, perhaps suggesting that a lighter, more partnership-oriented approach may carry some upside for margins.

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