Structural separation of network infrastructure

So what has changed?

Over the past five years, CSPs have underperformed the wider European market by approximately 40 percent. Increased capital intensity, highly-leveraged balance sheets and low asset returns from significant investments in network modernization have depressed shareholder returns, while low growth in consumer businesses has exacerbated CSPs’ financial strain. Network companies, on the other hand, are achieving four times the shareholder returns that CSPs are generating – enabled by a streamlined risk profile, consistent demand, and stable asset returns.

Total shareholder return - Telco vs Market vs NetCo (% rebased 100 = Jan 2016)

Source: S&P Global Capital IQ, S&P Global Market Intelligence, Accenture Analysis

The result is that the enterprise values of CSPs are now less than the sum of their individual parts. Finding new ways to unlock value is imperative. And while the financial drivers forcing CSPs to contemplate some form of structural separation are powerful, they are not the only reason. There are also strategic considerations that make separation a viable play. For example, the emergence of 5G and new network innovations call for a “connected industry orchestrator” that can serve as a platform and exchange for others to innovate new services such as edge compute or security. Today, that’s a role that integrated CSPs simply don’t have the management capacity or focus to bring about.

A conversation that would have been infrequent just a few years ago is now very much a live dialogue in the industry. Structural separation into a network company and customer-facing services business offers an opportunity to create value for the communications industry. It also creates a new asset class for institutional investors – one that can deliver consistent returns.

Maximizing success

However, buying into the possibilities for network separation should not mask the fact that separation is a highly complex undertaking. It’s a disruptive and difficult change to make. Doing so successfully requires focused and disciplined execution. Those that can make the pivot, however, can reap substantial benefits.

To maximize the chances of success, CSPs must consider three questions:

The way ahead

CSPs face the dual challenge of reversing the decline in growth and return on invested capital as well as freeing-up capital to make investments in fiber and 5G. For fixed networks, the business case for providing a single FTTP network in a given area is clear, but the execution very complex. For mobile, potential value comes from increased market share enabled by wholesaling to gain volume that will be reflected in spectrum purchases and network build.

With the recent acceleration in CSP hybrid cloud adoption, the network edge becomes a critical control point and as such this also becomes a critical factor to consider whilst evaluating the case for structural separation. In either case, network separation executed carefully can realize incremental value for CSPs looking to invest in long-term growth opportunities. Now is the time to act.