Telcos must cut expenses

A recent study from RHK, a San Francisco-based telecom consultancy, predicts North American carriers will have to reduce their operating expenses per bit by 32 per cent to compensate for expected revenue declines.

Lowering operating expenses is often associated with poorer customer service, but that doesn’t have to be the case, said Shing Yin, a senior analyst with RHK.

“A 32 per cent decline in opex (operating expenses) per bit doesn’t necessarily mean carriers would have to cut absolute opex by 32 per cent,” he explained. “We’re certainly not expecting them to cut by that much.”

Carriers will have to cut their operating expenses, because revenue per bit is declining faster than capital expenditures per bit.

“With the same amount of traffic as they have today, service providers would be getting less revenue in the future,” Yin said.

Dean Frey, director of the Red Deer Public Library in Alberta, said he’d be concerned that further carrier operating expense cuts would hurt customer service. One problem with cuts, he said, is continuity.

“It’s hard when you’re not dealing with the same sales or technical reps,” he said.

Frey added, however, that carrier customer service probably can’t decline too much. “It’s not as if it’s ever been especially good,” he notes.

Instead of cutting back on customer service, carriers could reduce their expenses as the telecom industry continues to consolidate, Yin believes.

“Currently there are too many players in the market and those players have multiple sales and marketing teams dedicated to the same account,” he said. Many of those sales and marketing teams will be eliminated as service providers merge, improving the economics of the telecom industry, he said.

Carriers could avoid cutting operating expenses altogether if overall network traffic increased dramatically. But it would have to grow more rapidly than it has in the past to make up for the expected revenue declines, Ying explained.

Rather than paring back their operating expenses, Canadian carriers might want to consider bumping up their prices, said Iain Grant, managing director of telecom consultancy Seaboard Group in Montreal.

Seaboard is close to completing a study on high-end Canadian residential users that shows they produce about 50 per cent less revenue than comparable users south of the border. Grant suspects the trend holds true for small business and enterprise customers even if the revenue shortfall isn’t as dramatic.

“If the prices in Canada are lower than they are in the U.S., no matter what you do with opex, you’re going to be poorer,” he said.

Grant suspects that Canadian carriers will continue to focus on cutting expenses, rather than hiking prices, because of the potential fallout from angry customers.

One potential method of slicing operating expenses would be to reorganize. For example, Grant said, Bell Canada is rumoured to be looking at organizing its business by customer groups, such as consumer, small business and enterprise, rather than by technology and geography.

Ultimately though, Grant believes Canadian carriers would be better served by boosting their prices.

“I still think the benefits of opex cuts would be less that doing a proper pricing exercise,” he said.