Rising costs, inflation threaten telcos' viability

By Staff reporter | 13 Jun 2020 at 20:28hrs
Rising costs as a result of high inflation and a depreciating local currency, are threatening the viability of telecommunication companies (telcos) as margins continue to be squeezed, the regulator - Postal and Telecommunications Regulatory Authority of Zimbabwe revealed in its 2020 first quarter sector's report.

The Potraz report, which was released this week, showed that operating costs are increasing at a much faster pace than revenue for mobile network operators (MNOs), while Internet Access Providers (IAPs) are now just managing to break even.

Revenue generated by the MNOs for the 2020 first quarter grew by 26,2 percent to $2,1 billion but a 46,1 percent growth in costs to $1,4 billion, from $988,2 million recorded in the previous quarter, meant profit margins are under threat.

Total revenue by IAPs grew by 51,4 percent, whereas operating costs grew by 81,4 percent in the first quarter of 2020. The trend of growing operating costs has continued into 2020 with IAPs generating $763 million in revenue while costs amounted to $755 million.

Inflation, which reached 765,57 percent in April and a falling exchange rate that is now approximately 70 to the US dollar, remain the biggest cost drivers.

Telcos are thus faced with a double whammy as static tariffs are not keeping up with the rising cost of doing business while at the same time revenues generated continue to lose value in real terms, making access to foreign currency difficult and expensive.

Already, the foreign currency challenges have affected network deployment and maintenance as spare and replacement parts, equipment and vendor support fees all require foreign currency. A huge proportion of IAPs operating costs consists of bandwidth costs, which are paid in foreign currency.

Potraz, the regulator that is supposed to make timely tariff adjustment in line with the operating environment, is aware of the untenable situation the telcos find themselves in. In the 2020 first quarter sector report, Potraz says growth of operating costs poses a threat to operator viability.

"Given the current inflationary pressures in the economy, operating cost containment will be even more crucial for operators to maintain profitability as the growth of operating costs poses a threat to operator viability," reads part of the report.

Market watchers say if the situation remains unchecked, MNOs might not only start to record losses but will struggle to maintain their networks and keep up with ever changing technologies.

In a special trading update released at the end of May, the country's biggest MNO, Econet Wireless Zimbabwe, said the hyper inflationary environment and currency depreciation have depressed real tariffs and significantly impacted operating costs and increased foreign exchange losses.

"The regulatory tariff increases continue to lag behind inflation and have not yet factored the full impact of the exchange rate depreciation and hyperinflation.

"The telecommunications regulator has adopted the Telecommunications Pricing Index (TPI) as the tool for setting tariffs. However, the frequency and responsiveness to rapid market changes has been slow resulting in our real tariffs being severely undermined.

"This means that we are not able to pay our vendors for software licences and certain upgrades required to increase our capacity and maintain the quality of service that our customers have come to expect from us," Econet said in the trading update.

Experts say failure to upgrade and invest in new capacity and technology could derail increasing network capacity at a time connectivity is now even more critical than ever before to how businesses and individuals operate and communicate.

The social distancing measures introduced to avoid the risk of exposure and spreading Covid-19 will see an increased usage of telco services and ICTs as people avoid physical contact and resort to conducting business online.



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