Insights

27 April 2023

Inflation’s toll: Can telcos survive the shake-up?

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Inflation is now higher than usual throughout the world. Although global inflation peaked in late 2022, rates in 2023 are expected to remain higher than usual in many parts of the world. Following the 8.8% global inflation rate in 2022, the IMF forecasts a 6.6% rate for 2023, which is still above pre-pandemic (2017–19) levels of about 3.5%.

The perfect storm – where geopolitical unrest, supply chain problems, shortages, pent-up demand from the COVID pandemic, and government stimulus programmes collide – is causing pricing distortions for consumers, resulting in higher-than-ever energy bills. Double-digit inflation rates are common in about half of all nations. The percentages soar even higher in some countries, with inflation signals reaching triple-digit territory. Globally, Zimbabwe (269%), Lebanon (162%), and Venezuela (156%) have the highest rates in the world.

Many customers have been impacted by the drop in purchasing power, which has forced them to reduce their spending to afford basic living essentials. The telecoms industry, which is highly dependent on consumers, is among several industries to be impacted as well.

Telcos feel the heat as inflation rises

For the telecommunications industry, high inflation prices have become a serious concern. It is affecting how frequently people use mobile phone services, which limits revenue development. Customers are compelled to use less data because of the rising cost of mobile services and smartphone pricing, which limit subscriber growth.

While telecoms as an essential service have historically remained resilient, excessive inflation is tightening its iron grip on the world of consumer demand, slowing growth to a grinding halt. Mobile service upgrades, a major factor in the expansion of the telecom sector’s income, are slowing down. These elements, taken together, prompted analysts to conclude that the revenue growth of the telecom business in 2023 is probably going to be lower.

Regrettably, cost-efficiency programmes alone are frequently insufficient to appropriately manage the fast-growing cost variables to sustain profitability levels, given the current economic and inflationary trends. Price increases are therefore required to maintain profitability.

For instance, to raise revenue and earnings growth in 2022, UK carriers BT and Virgin Media O2 boosted their prices by 9 and 12%, respectively. Customer relationships and loyalty, however, could deteriorate and contribute to more churn if price increases are too extreme or the customer experience degrades due to cost-cutting or labour shortages.

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Profitability or customer retention – a tough call for telcos

Telco customers are not accustomed to paying more for the same quantity and calibre of services. They are used to getting more for the same price. Introducing higher prices is particularly difficult in this situation. In fact, telco firms have begun to lose users, with some losing millions of subscribers, which they attribute to higher mobile rates and rising prices for entry-level phones.

Because telcos are unlikely to tolerate growing input costs brought on by high inflation for an extended period, operators have turned to tariff increases to enhance average revenue per user (ARPU) levels, even at the risk of losing more consumers and decreasing usage. As prices rise, telcos are more susceptible to customers switching to lower-margin products and services. Therefore, in current inflationary times, telco companies must choose between profitability and customer retention.

Inflation is expected to lower most telcos’ EBITDA margins by three to five percentage points over the next two years, according to predictions made by Bain & Company. According to the consultancy firm, the cost of staff, energy, leases, external service spending, and CAPEX, which together account for about 60% of most telcos’ spending, will be under pressure from inflation. An impending potential recession is making things worse.

Outlasting tough times with a future-forward, digital plan

Without compromising their long-term plan, telco businesses must adapt to rising inflation and cost pressure. To find their place in the future, they will need to change their value propositions, look for ways to expand, and identify new revenue streams.

For instance, Circles.Life Singapore expanded its non-telco offers with Jetpac, a travel roaming package. Launched in 2022 to provide greater convenience and experience to post-COVID travellers, Jetpac promises travel freedom for all with its fuss-free e-sim activation, unbeatable global roaming rates and travel perks. Within 4 months of launch, Jetpac achieved more than 10x growth in sign-ups, of which, more than 50% were new customers. This initiative not only earned Circles.Life the Travel Product of the Year Award from the recent Asian Telecoms Award, but also continues to help diversify the business, generate additional revenue, and pave the way forward to capture new opportunities.

Digital telco brands offer cost-effective and scalable communications solutions, enabling companies to maintain smooth operations and stay connected with their customers without breaking the bank. The implementation of a unified, simplified digital telco stack can significantly enhance operational efficiency and minimise expenses. Furthermore, digital telco providers often present flexible plans and advanced features, such as cloud-based services and remote working capabilities, allowing businesses to adapt quickly to changing market conditions.

By leveraging the efficiency and innovation of digital telco brands, businesses can mitigate the challenges posed by inflation and also continue to thrive in an increasingly competitive landscape.

This article was originally published by Marcel Benjamin Tabin on LinkedIn and published on TM Forum here. Like what you read? Follow us for more news and insights from Circles.

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