Squeezed by rising prices and ever tightening budgets operators are looking to the bottom line. Jim Chalmers takes a look at capex and opex.

There’s a symbiotic relationship in any business between investment and running costs argues Jim Chalmers. Capital expenditure (capex), and operational expenditure (opex) are two sides of the same high-denomination coin. There are industry jokes aplenty suggesting that ‘the best way to reduce opex is to increase capex’ and vice versa.

When commercial pressures or an economic downturn are in play – the wireless business is currently coping with both – opex/capex dilemmas become the victim of an odd form of management-speak. To restrict additional capex, companies ‘sweat the assets’. To limit ongoing opex, they seek ‘bang for the buck’.

Three-line whip
Jargon aside, a glance at the industry through the rudimentary prism of three-line accounting – revenue minus expenditure equals profit (or loss), – shows just how severe today’s challenge has become.

Rewind a few years and revenues were on a satisfyingly upward (and sometimes exponential), growth curve. After initial roll-out, investments were incremental – expanding capacity or coverage, bolting on new services – and predicated on a guaranteed return. Any increase in capex or opex was effectively a gilt-edged investment.

Things look different now. Revenues are static at best and under downward pressure. New services and networks, relied upon to bolster revenue, require commitments in expenditure that are more speculative and not cheap.

It is important to understand here that the current ‘credit crunch’ and related recessionary pressures are not fully to blame for this state of affairs. To a degree it would have been inevitable anyway, although a more buoyant financial situation might have made it easier to massage and manage the peaks and troughs on the balance sheet.

The current onerous economic climate has kicked in across two key areas however. Ready access to fresh sources of capital is tougher and more expensive making the consolidation route of maintaining growth by artificial means trickier and more arduous.

Secondly, rising energy prices are denting the ability of operators to control opex. So pervasive is the impact of energy costs on so many aspects of day-to-day business that other strategies to reduce opex may result in a company running as fast as it can, just to stand still.

Dynamic reassignment
This all adds up to a new dynamic for a cellular industry nurtured and grown up on relentless growth. In a more mature era, when it still must think about adopting new technologies, this might bite into its collective psyche.

“Operators need to ask where they are going to get their revenues from”, says Ricky Watts, Director of Strategy & Innovation, Aircom International (aircominternational.com). “With so much competition and a lot of regulation – just think of roaming charges – in the industry, the idea of unlimited revenue streams is petering out.” He cites the example of wireless internet services and the trend towards ‘all you can eat’ tariff packages which limit the potential for generating revenues from basic service offerings.

Watts comments that: “everything we hear today is about reducing the costs of the network.” This, he notes, is something new: “everything used to be driven by engineering excellence; now it’s about what makes the most sense from a purely commercial point of view, which is then tempered by a degree of engineering excellence.”

A recurring sub-theme within the opex space relates to human costs. There is a basic cycle of planning, deployment, optimisation and re-tuning, plus ongoing maintenance. Human intervention currently represents a significant proportion of the costs involved - that may not last.

“Operators want so see a lot more intelligence and flexibility within the equipment and in the way these things are put in. This will be an essential requirement for 4G networks.” At the same time, Watts says, “operators are pushing us very hard to simplify all of the processes involved.” This may reflect a squeeze on the amount spent by operators on engineering-grade staff, who once commanded premium salaries.

Man vs. machine
The notion that controlling human costs within the overall opex spend is common enough. It may not yet be a brave new world, but it is a bold one.

“Our more autonomic systems are engineered at deep levels but they manage, adjust and run themselves”, says Kurt Silverman, VP of Billing Service Solutions and CTO of specialists Comverse (comverse.com); “this level of engineering is ‘rocket science’ in a way: if you have to wait for a human to fix it, you’re done for.

“All of the operators around the world have renewed interest in reducing opex”, adds Silverman saying it is also about cutting the implementation costs which affect opex. Citing the need for fewer opex systems, with less people to manage them, he notes “some operators have not made the right fundamental shifts needed to structurally reduce opex: by ‘structurally’, I mean ‘for ever’.”

Focussing on billing solutions, Comverse is helping operators wishing to pull billing systems back in house and combine pre- and post-paid billing activity. “In some cases, operators have handed responsibility for opex to their vendors. It’s not pretty, but it’s what happens in this industry”, says Silverman. “All of a sudden, they don’t have a big IT department running post-paid and a big network department running a pre-paid system.”

Backhaul backlog
Opex discussions seem always to return to backhaul cost and technology issues. Any changes seem to advance in the market, at best, tiptoe by tiptoe.

“Even while the wireless industry is conducting an end-to-end evaluation of every aspect of network efficiency”, says Lance Hiley, VP of Market Strategy at Cambridge Broadband Networks, (cambridgebroadband.com), “backhaul is one of the few areas that doesn’t seem to be getting the attention that is needed to simplify the network.”

“Because we are able to connect so many terminals within a single point-to-multipoint sector, we are aiming for operators with fairly dense networks or those who are having to densify their networks to support new wireless services”, Hiley says. “We reduce the amount of hardware that needs to be deployed by almost 50% compared to conventional point-to-point systems. Not only does this reduce the capex but it brings down site leasing charges, backhaul spectrum fees and planning costs as well. The result is overall opex savings of at least 50 percent, if not significantly more.”

Up close and personal
If the backbone needs stiffening, the technological front end of the cellular business needs to be honed, too. “All of the results we’re seeing from mobile operators point to more and more revenue from data services as opposed to voice”, says Sanjeev Verma, co-founder, VP of femtocell business/corporate development at Airvana (airvana.com). “Femtocells make sure the momentum that exists for increased data revenues is allowed to continue. Femtocells give operators the ability to deliver virtually unlimited capacity to users.”

Therein lies the key in terms of the triple play of limiting opex, optimising capex and maximising data revenue. A major driver of wireless data usage, too easily overlooked, is the quality of users’ experience. If customer expectations are not met or exceeded, the service’s potential will be hard to maintain or drive.

“Traditionally”, notes Verma, “the more usage you have, the more equipment and capacity you have to put in your network.” Not only do femtocells offer optimal performance to those using them; they also simultaneously release public cellular network capacity for other users.

Green, black or red
While the cost squeeze facing the cellular industry is not specifically a result of the squeamish economy in which it must find its way, there’s one area that stands out. Energy.... the lack or the price of it.

Wholesale energy prices are on an upward spiral led by underlying oil prices which have doubled globally in just over a year. A period of stability offers little comfort to cellular operators who know that they cannot control demand, supply or cost. If oil should surge back in the direction of US$180 per barrel, this is opex gone mad.

A recent ABI Research (abiresearch.com), report, ‘Mobile Networks Go Green’ highlights how green issues give sway to opex fundamentals. It suggests that ‘the growing cost of bulk diesel fuel, coupled with wholesale electricity price increases, are likely to offset significant gains in cellular base station power efficiency.’

ABI Research vice president Stuart Carlaw says: “although reducing power consumption provides good ecological credentials for carriers and vendors alike, the real driver for improving power consumption is financial. It is imperative that carriers do everything possible to negate rising energy costs in an environment where network traffic and ARPUs are diverging.”

Endgame
Adding concern over energy prices is yet another worry for an industry striving to slash opex and constrain capex as revenues face heat that may melt traditional levels of profitability.

“We are facing some pretty big inflection points”, says Silverman at Comverse. “You’re either really scared; or you’re about to go out of business; or you’ve just bought three other companies and you to need to consolidate.” For a wireless industry wedded to marketing and promotion spend, subscriber acquisition cost subsidies and a firm belief in the eternally youthful fountain of increased revenue, these might be tough pills to swallow.

Running the business efficiently at its network core, today and tomorrow, may be the key.

Jim Chalmers is a freelance telecoms journalist