We get asked the “i” word by clients a lot these days. No, its not the i-phone, but inflation. With inflation rates in North America and Europe hovering in the 3% - 5% range, there is a general concern that higher prices will need to be passed on to the consumer, and will likely result in lower demand for various telecom services. Inflation in emerging markets is even higher with economies such as China and India reporting inflation levels in the 8% - 15% range, levels not seen in over a generation in many emerging markets. So what impact will general inflation have on telecom operators worldwide?
Putting things in context a bit, readers will appreciate that telecoms are generally not the most vulnerable industry when it comes to inflation. At the same time, they are not immune from inflationary pressures. In developed markets, for example, Telecoms are only a small part of the typical consumption basket. According to Eurostat, Telecom services make up only 3.3% of a typical consumer’s consumption basket in Europe.
Little revenue impact of inflation: For telecom incumbents, inflation has little fixed-line revenue impact. The big picture is that, in general, regulations worldwide do not provide a supportive environment for passing on price increases (or reductions) to consumers. Wireline operators and wireless operators in competitive markets have the additional issue of a lack of pricing power to push price increases on to consumers.
Taking Europe as an example, with the exception of a few countries (e.g. Belgium) there is little direct inflation linking of retail prices. Regulators worldwide are increasingly focused on wholesale pricing and the latest EU overhaul of the regulatory framework eliminates almost all retail price regulation. We think that the absence of regulations at the retail level actually reduces the ability of operators to pass on inflation-linked pricing to consumers, primarily because of a lack of pricing power and the increased level of competition.
Looking line-by-line at incumbent fixed-line revenues in Europe, we reach some interesting conclusions:
•When it comes to ADSL, voice, and leased-line tariffs, once again, we think that most operators (wireless or wireline) are constrained by the level of competition and regulation in the telecoms sectors in most global markets.
•When it comes to wholesale tariffs (including interconnects), our analysis shows that these tariffs are mostly cost-based, so there is a pass on effect. However, most fixed-line operators are only able to pass on increases in costs after they have been incurred, creating a lagged effect on the top line of past inflation. Also, in countries where future assessments of price increases are used, equipment costs need to be depreciated and netted out before cost increases are passed on to wholesale customers.
•The only inflationary revenue stream tends to be line rentals, but recent increases have been limited to only a few incumbents in Europe (British Telecom, France Telecom, Telefonica, and Belgacom have raised line rentals in 2007). There may be several reasons for this inability or unwillingness to pass on price increases to consumers. We think that operators may be wanting to avoid accelerating migration to mobile or ULL.
For mobile operators, the story on the revenue impact of inflation is pretty much the same. Using IEMR’s Global Mobile Forecast model, we show that for the 2002 – 2007 periods, average ARPU growth among 200+ mobile operators in 50 markets is generally not related to consumer price inflation in these markets. In the figure below, we plot Inflation against ARPU growth, and find that the relationship is weak at best.
