Telecom is a Utility!

By | May 28, 2018
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Telecom Valuation MultiplesIt’s official! Telecom is a utility! The admission comes from service providers themselves. Service providers struggled to monetize value added services to keep from being dumb pipes. Now, it seems that they have resigned themselves to being a utility and are happy to be the pipe. This admission came at the TMT M&A Merger Forum in London last week that I attended. While European service providers dominated event, the sentiment includes service providers all over the world, except for the US. In fact, the rest of the world is just content to watch developments in the US.

Telecom Valuation

Telecom valuation multiples are in the range between 6-8x EBITDA. The Sprint-T-Mobile merger validates this, as do other transactions. For context, I did a quick search and found that telecom valuation is higher than only coal and rubber!

EV/EBITDA Multiples

EV/EBITDA Multiples [Source: Damodaran Online, Xona Partners]

What is more interesting is that the service providers appear not to be interested in developing new business models and solutions that leverage new technologies. The sentiment is to stay away from novel ideas in favor of trust, security and reliability.

Other Highlights

  • No progress on 5G! More CFOs are questioning the soundness of the business model. Given the dominance of European service providers at the event, this represents a regional view.
  • Service providers are shedding data center assets as they struggle to succeed in this business line. This potentially jeopardizes the prospects of edge computing in wireless networks.
  • Service providers without fiber assets are content on going on as is. I think this is a major mistake as spectrum and fiber are the two strategic assets for any service provider. Having one is like limping on one foot!
  • Operators discussed both types of convergence: fixed/mobile and media/connectivity. One can clearly see the difference between financially strong operators who are aggressively pursuing acquisitions and weaker competitors who are just content on doing what they do.
  • There is a growing interest in the satellite sector, especially with a number of LEO constellations in planning. New technologies allow satellites to deliver unprecedented data rates and capacity. The challenge will be in finding the customer: maritime and airlines are sound markets, but how to tackle the enterprise sector among others?
  • The small-form-factor satellites are set to change the economics of launch and operation, and create a new use case for satellites in higher orbits. This is an area to watch as is the impact of capacity on pricing in the coming years. Microwave and other terrestrial sectors will see new competitors within the next few years.

A Concluding Note

There is much interest in shared networks – neutral hosts or other network sharing arrangements – as the cost of rolling out 5G infrastructure becomes a critical roadblock. Recently, the South Korean regulator announced that 3 service providers and one ISP in South Korea will build a shared 5G network to save around $938 million over 10 years. We at Xona Partners have been looking into neutral hosts and shared networks from financial, technical, operational and regulatory aspects. The type of frequency bands for 5G coupled deployment scenarios will lead to wider adoption. Countries that formulate the proper regulatory framework will stand to reap the benefits.