Telcos Face Quandary: How to Raise Revenue and Reduce Costs

KPMG and Cisco plan to offer outsource services to stem costs of obtaining third-generation licenses.
Author:
Publish date:

LONDON -- It's not a new problem for the industry in general, but one greeting the telecommunications industry today: how to increase revenue while reducing costs.

Cisco Systems

(CSCO) - Get Report

and its strategic partner, U.K.-based consultant firm

KPMG

, believe they have an answer.

Last week's precipitous fall in

telecom stocks was sparked by comments from Kurt Hellstrom, president of

Ericsson

(ERICY)

, suggesting that the enormous cost of obtaining third-generation mobile-phone licenses threatens to undermine the growth of the industry. The licenses will allow operators to offer a range of voice and data services.

Although a spokesman for Ericsson later claimed the published comments were "inaccurate," the price that operators are having to pay for these licenses has been a constant worry for investors ever since the five licenses on offer from the U.K. went for a staggering $30 billion.

"The operators will have to lay out billions of dollars, but they are under increasing pressure from Wall Street and the city to cut costs and increase revenue," says Martin Heath, the mobile-phone analyst at KPMG. "To satisfy its shareholders,

Vodafone

(VOD) - Get Report

must increase earnings by $1.5 billion per year for the foreseeable future, and that's earnings, not revenue."

So what's the answer from Cisco and KPMG to this seemingly intractable problem? Outsourcing -- and lots of it.

Virtually Mobile

Thursday, on the outskirts of London, KPMG opened its $20-million

Service Provider Solutions Center

, which is part of a $1-billion deal between Cisco and KPMG last year. This facility will be one of six such centers to be opened around the world as KPMG, with Cisco's help, seeks to expand its core business of providing professional services into offering Internet protocol solutions and network integration to service providers.

KPMG will offer off-the-shelf solutions for wireless, wireline and cable businesses, using Cisco technology as the bedrock and tailoring it to suit a particular company's needs. In essence, KPMG and Cisco will take the technology risk off operators' hands, allowing them to focus on what they know best: managing the customer.

"These companies understand the customer and the markets they are in, not necessarily the technology," argues KPMG's Heath. He adds as proof of this trend that for the first time in

British Telecom's

(BTY)

history, it does not have an engineer on its main board.

If Heath is right, in the mobile-telecom industry, there will be a new breed of service providers called virtual mobile-network operators, or VMNOs, like Richard Branson's

Virgin Mobile

.

Virgin Mobile is the world's first -- but presumably not its last as supermarket chain

Tesco

is intent on offering mobile services -- VMNO, which KPMG took from an idea to market in only five months. Virgin Mobile has no network, no call center, no warehouse and makes no deliveries of phones; all that is taken care of by KPMG. Virgin merely owns the customer relationship.

And if it works for Virgin, then why not others? "The question is: how long will

Orange

remain running and owning all the network?" Heath asks rhetorically.

KPMG has high hopes for, and a lot riding on, this new part of its business. As well as the $100 million it is putting into the business, KPMG also filed with the

Securities and Exchange Commission

last month to issue an

initial public offering of shares.

Cisco also believes KPMG is onto something. Along with the $1 billion Cisco has invested in the venture with KPMG, Cisco has also put $850 million into management consultant concern

Cap Gemini Ernst & Young

. And there will be more.

"Alliances are key to our success over the next three to four years," says Joseph Golden, Cisco's managing director of business development and alliances in Europe, the Middle East and Africa. "We intend to create a series of these deep alliances, backed by considerable investment, but no more than three or four of them."

Cisco's CEO John Chambers has publicly stated that he wants Cisco to become the first company with $50 billion in revenue per year by the year 2004. And any slowdown in the growth of the telecom market would threaten this ambition, something the fiercely competitive Chambers is not prepared to see happen. It is these alliances, Golden argues, that will help keep the industry growing.

"These alliances are not about growing our share of the pie, they are about growing the whole pie," Golden told

TheStreet.com

. "The faster the market drives toward IP networks the better. This will force everyone to run fast, but we believe we can run faster than everyone else."

While the KPMG venture and others like it may indeed help drive down costs and increase revenue for the service providers, there remains the question of whether they will do so sufficiently to prevent the slowdown in the growth of the market that Ericsson's Hellstrom was supposedly warning about last week.

Furthermore, although bringing Virgin Mobile to market in a mere five months is impressive, there is no evidence as yet that the enterprise will be a success. Virgin Mobile did not return

TSC

phone calls.

And if these VMNOs and other service providers can't make money, then they won't be able to pay the likes of KPMG and Cisco for their help, something that would not only threaten Chamber's grand vision, but many involved in the telecom industry, like KPMG.