Capital investment improves network performance, returns

A new study commissioned by Ericsson shows that increased level of investments in network quality and performance create sustainable competitive advantages and improved financial returns for network operators.

The study, carried out by Dr. Raul Katz, President of Telecom Advisory Services, and Director of Business Strategy Research, Columbia Business School, explored the relationship between capital investments in mobile telecom networks and the technical, commercial and financial performance of operators.

Dr. Katz performed extensive statistical analysis, across a large set of metrics, on three years of quarterly data from three different markets -- Brazil, Mexico and the United States.

A simulation model was constructed to estimate the effects of increased capital expenditure on mobile operators’ free cash flows, allowing operators to assess the commercial and financial gains attributable to the increased investments.

The study found that a 10 percent increase in capital expenditure for a Brazilian operator resulted in increased market share, a significant boost to ARPU and reduced churn. Given this enhanced commercial performance, the operator should experience a 5.5 percent increase in service revenues, a 6.4 percentage point improvement in EBITDA margin, and a 6.7 percent increase in free cash flow from operations.

The analysis of Mexico and the US shows the same robust relationships between investments, performance and finances as in Brazil, but Dr. Katz also found differences exist in the way the causality works under different market conditions.

Johan Haeger, Head of Tactical Marketing, Business Unit Networks at Ericsson says; “The results from the quantitative study clearly demonstrate what our ‘gut feeling’ and discussions with leading operators has told us for quite some time: that appropriately targeted capital expenditure leads to improved network performance. This translates into better market performance which is shown to boost financial returns.

“Previous extensive Consumer Lab research has found that network performance is the principal driver of subscriber loyalty. Combining these results clearly demonstrates the link between targeted capital expenditure, leading to improved network performance, which drives subscriber loyalty that translates into better market performance and financial returns.”

As an example, a decrease of 1 percentage point in overall churn for a Brazilian operator led to a 6.86 percent increase in service revenues two quarters later. Improved financial returns are derived not only from cost savings, but also from increased revenue.

The statistical results described in the study can be applied in scenario analysis on individual operators. Such simulations reveal that an investment-driven market strategy results in significant financial returns, and also show that the approach provides sustainable competitive advantages such as lower churn, higher market share and increased ARPU. These benefits are largely created before the competition has time to respond.


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