Capex and Opex Strategies: Navigating Telco Financial Realities

Telecom executives recognise that Capex (Capital Expenditure) and Opex (Operating Expense) are not mere financial terms; they reflect the tangible investment choices telcos make in infrastructure, technology, and people to drive innovation, enhance customer experiences, and sustain competitiveness.

This is why understanding the evolution of Capex and Opex is critical to appreciate the evolving nature of the industry, where traditional telecommunication services intersect with the ever-evolving technological landscape from GenAI, to 5G, cloud and edge computing, and the Internet of Things (IoT). Navigating this dynamic environment requires a careful balancing act between the need for strategic investments in infrastructure and technological upgrades with the imperative to optimise operational efficiencies and contain costs.

1. The Telco Capex and Opex Evolution

For the past 15 years, global telco Capex and Opex have maintained relative stability. The Capex-to-revenue ratio, known as capital intensity, has followed predictable trends. From 2003 to 2014, both fixed and mobile Capex/revenue remained in the 14–18% range. While mobile Capex/revenue spiked in 2014, levels have since declined. On the other hand, fixed capital intensity has steadily risen to 18.0%.

?Several factors contribute to the fluctuations in capital intensity observed within the industry. Regulatory changes, such as the allocation of new spectrum or licensing requirements, often necessitate significant capital investments by telecom operators to comply with evolving legal frameworks. Likewise, technological innovations, such as the deployment of 5G networks or the expansion of fiber-optic infrastructure, can drive fluctuations in Capex as companies seek to modernise and enhance their network capabilities.

Furthermore, waves of M&A activity within the sector (as we are currently experiencing in Europe) can significantly impact capital intensity. Consolidation efforts among industry players can lead to fluctuations in Capex as companies seek to integrate networks, streamline operations, and realise synergies from combined infrastructures.

Finally, market expansion initiatives, whether through geographic diversification or the introduction of new services, can influence investment priorities and capital allocation strategies.

2. Capex and Opex Strategies Unveiled

It’s important to understand that there's no one-size-fits-all approach to Capex and Opex management. We have conducted an analysis of approximately 40 telcos’ Capex and Opex performance, based on data from Omdia (Telecoms & Hyperscale Platforms Financial Benchmark – 3Q23, December 2023).

We plotted these telcos against two dimensions:

1. on the X-axis we show their Opex Intensity’s SLOPE coefficient* for the past five years, from high (right) to low (left)
2. on the Y-axis we provide their Capex Intensity’s SLOPE coefficient over the past five years, from low to high
3. we split the dataset in two groups (Winners and Losers**) to identify those telcos with a positive 5-year revenue SLOPE coefficient from those with a negative 5-year year SLOPE coefficient (i.e. winners' revenues have been trending up for the past 5 years, whilst losers have been experiencing a negative revenue trend for the same period).

* Slope Coefficient: The slope represents the rate of change in Capex and Opex intensity per year. It helps us understand whether over five years a telcos has been relatively increasing or decreasing (i.e. trending higher or lower) their Capex (or Opex) intensity.?

** Labelling these telcos as winners and losers may appear unfair. The distinction merely aims to differentiate between those telcos that have experienced revenue growth over the past five years and those that haven't. It's crucial to note that this outcome could be influenced by market conditions rather than specific business strategies. For instance, large Chinese telcos or African groups have all shown positive revenue trends. Additionally, a telco may have recently reversed its revenue decline, yet this improvement might not be reflected in its slope coefficient. Despite the somewhat provocative nature of the labels "winners" and "losers," they have been chosen for their evocative impact.

?It is important to note that, out of the 40 telcos analysed 16 (or 40%) belong to the winner group, with the remaining 24 belonging to the losers group. These are:

• Winners (in decreasing order of revenue slope coefficient, from higher to lower): China Mobile, Deutsche Telekom, China Telecom, Comcast, China Unicom, Charter Comms, Bharti Airtel, Verizon, STC, MTN, Vodacom, Zain, Telekom Austria, Swisscom, Etisalat, MTS.
• Losers (in the same order as above): Tele2, Axiata, KT Corp, Telia, Orange, Turkcell, KPN, Millicom, Vodafone, Singtel, Ooredoo, SK Telecom, Telstra, CK Hutchison, TIM, BT, VEON, Telenor, KDDI Corp, America Movil, Telefonica, NTT Group, SoftBank, AT&T

In our analysis, we identify four distinct groups of telcos:

• BIG SPENDERS: Telcos in this group, like AT&T, Singtel and Zain, have increased both Capex and Opex intensity. This strategy could reflect their focus on expansion, network modernisation, competitive positioning, market expansion, diversification, and regulatory compliance. Only one Winner (Zain) falls within this group.
• CANNY BUILDERS: TIM (Telecom Italia), STC and the big Chinese telcos and African Groups belong to this group, which increases Capex while reducing Opex. These telcos prioritise infrastructure development, long-term growth, cost efficiency, quality enhancements, and potential revenue growth. Eight (50%) of Winners fall within this group.
• BIG SAVERS: Bharti Airtel, Deutsche Telekom and Softbank fall under this category, reducing both Capex and Opex. These telcos emphasise cost optimisation, efficiency improvement, maximising utilisation, shifting business models, and industry maturity. Three Winners fall within this group
• COST SHIFTERS: Telcos like American Movil, BT and KPN are increasing Opex while reducing Capex. Their focus is on powering operations, liquidity, outsourcing, service-oriented approaches, and evolving business models. Four (25%) Winners fall within this group

The figure below provides a detailed description of the typical strategies adopted by each group.

?As we already mentioned, there are the nuanced complexities inherent in managing telecom Capex and Opex. Each telco operates within a unique ecosystem shaped by diverse market dynamics, regulatory frameworks, technological landscapes, and strategic imperatives. Consequently, it’s important to understand that a rigid, one-size-fits-all approach to Capex and Opex management would overlook these intricacies and fail to address the specific needs and challenges faced by each operator.

We now turn to look at what are the drivers of Opex and Capex intensity and how these are shaping telcos’ strategies going forward.

3. The Holy Grail of Opex Reduction?

With inflation running at levels not seen since the 1980s, Telcos struggle to cushion its impact by passing on the costs to subscribers.

The recent increase in inflationary pressures presents a formidable challenge for telcos, exerting upward pressure on operational costs and squeezing profit margins. In this environment, containing Opex becomes not just advantageous but imperative for sustainable growth and profitability.

To effectively reduce Opex and navigate the challenges posed by inflation, telcos must embrace a multi-faceted approach that leverages a combination of innovative strategies and technologies. AI, Automation and the increased focus on raising autonomy of systems hold immense potential for streamlining manual processes, optimizing resource allocation, and enhancing operational efficiency across various functions.

IT simplification initiatives, such as the migration to cloud-based platforms and the consolidation of redundant systems, can yield significant cost savings while improving agility and scalability. By modernising their IT infrastructure and embracing cloud-native solutions, telcos can reduce maintenance overheads, eliminate capital expenditures, and unlock new opportunities for innovation and growth.

A recent survey by Omdia reveal a significant shift towards adoption of SaaS models among telcos, with an overwhelming majority—78%—of respondents anticipating that over 20% of their IT infrastructure will be consumed on a SaaS basis within the next five years. This trend reflects a strategic pivot towards more agile, scalable, and cost-effective solutions that can adapt to the evolving needs of the telecom industry.

4. Optimising Capex

Telcos are notoriously Capex-intensive businesses. With technology cycles demanding frequent Capex updates, such as the significant transition to 5G and all-IP networks, efficiency in addressing these challenges has been questioned within the industry.

Telcos can strategically optimise their Capex by adopting a "more for less" approach, which aims to minimise spending on infrastructure such as network equipment and IT systems while maximising the value derived from existing investments. This approach encompasses three key strategies:

1. Maximising the usability of existing assets: Telcos can prolong the lifespan and utility of their current infrastructure by implementing smarter maintenance practices and enhancing asset utilisation. By leveraging digital twins and advanced maintenance technologies, predictive analytics, and IoT sensors, telcos can identify and address potential equipment issues proactively, reducing downtime and extending the operational life of assets. Additionally, optimising asset utilisation through effective capacity management and resource allocation ensures that existing equipment is fully utilised, minimising the need for costly upgrades or replacements.
2. Reducing the dependency on assets ownership: Embracing cloud-based solutions, such as IaaS, PaaS and SaaS, enables telcos to reduce the overall need for owning and maintaining physical equipment or Capex-carrying licenses. By migrating IT infrastructure and applications to the cloud, telcos can eliminate the upfront capital costs associated with hardware purchases, as well as the ongoing expenses related to maintenance, upgrades, and space requirements. Cloud-based services offer scalability, flexibility, and cost-effectiveness, allowing telcos to access advanced technologies and resources without the burden of infrastructure ownership.
3. Utilising intelligent decision-making tools: Telcos can leverage advanced analytics, artificial intelligence (AI), and machine learning (ML) tools to make informed and data-driven decisions about where to allocate Capex investments. By analysing vast amounts of data, including customer insights, market trends, and performance metrics, telcos can identify opportunities for optimisation and prioritise investments in areas with the highest potential for ROI. AI and analytics solutions provide predictive capabilities, scenario modelling, and real-time insights, empowering telcos to optimise Capex allocation, mitigate risks, and drive business growth.

Conclusions

There are many lessons to be learned from how Capex and Opex shape and reflect a telco's strategy. Balancing strategic investments in infrastructure with the need to optimise operational efficiencies is key to success in the telecom industry. As telcos adapt to these challenges, embracing innovative strategies and technologies to reduce Opex and optimise Capex will be vital for sustainable growth and competitiveness in this dynamic landscape.?

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