Investment Decision Making in Telecommunication Industry

Introduction

What is investment?

Investment according to wordweb.com is “The act of investing; laying out money or capital in an enterprise with the expectation of profit”. This simply means that investment happens only when one expects to make profits.

Profit here can be in any form, it can be in cash, social status etc. investment can only be measure over a period of time. These profits help nations to solve economic problems like lack of infrastructure, poverty, poor education etc. Economics and technology interact and they are the determining factors in the design of the telecommunications network.

Optimal bandwidth capacity is determined depending on market conditions and managers’ desire to have the flexibility in the decision making in response to changing market, regulatory and technology conditions. When these real options are exercised the management deploys the new systems and adopts a pricing strategy for the company under regulatory and market constraints.

Telecommunications managers need to make strategic decisions in an increasingly volatile environment where permanent investment in new technologies has become crucial for growth and satisfaction of customer demand. The factors which determine presently the investment decision process in the telecommunications industry are entirely different from the ones the industry was used to consider during the early days of regulation and/or state control.

What is telecommunication?

Telecommunication according to wordweb.com are “systems used in transmitting messages over a distance electronically”. This include radio transmission media, etc.

What is an industry?

Industry according to wordweb.com is “the organized action of making goods and services for sale”. Industry in this context means the combination of many companies dealing on a particular niche of products or services. In this report we will be dealing mainly on the telecommunication industry.

This aim of this report is to ascertain the investment value of telecommunication companies as a whole in order to decide the appropriate path to take in investing in them.

Issuses Or Hindrances Faced By The Telecom Industry

1. Performance Measures:

For quality investment decisions to be made in any chosen field, accurate and timely performance measures should be made available, and made available to the right people, e.g. potential investors. Performance is the ability of an organization to gain and manage resources in several ways to develop competitive advantage.

The performance measures should be an accurate measure of the performance of the industry at a given time range. These measures are then used as a tool for indicating the trends or success/failure patterns, which would aid in making financial decisions.

2. Availability of Power:

The operators’ cost structure is equally unfavorable and a major drawback in the quest to increase capital expenditure in the country. A key component of telecoms infrastructure is the Base Transceiver Station (BTS), which essentially connects mobile phones to the network.

However, it is important for the government to show its commitment to the blueprint of achieving significant growth in the generation and distribution of electricity across the country.

True commitment and observed improvements in the power sector should serve as stimulus for increased investments in the Nigerian economy.

Among those who think that it would be difficult for operators to make more investments without a more conducive environment than obtainable at the moment expensive than in other African markets due to fuel costs. It is estimated that Nigerian operators spend about N10bn a year to power their base stations. Arguably, there is no sector in Nigeria that is not suffering from an epileptic power supply.

The issue has been reoccurring for years and it seems we are not making any headway. Without power, there is little or no advancement that can happen in the telecom sector. Power generation must be created to add to the existing power we have. Telecom strive on power and until there is a solution to power we might never have quality service. This is an area the new board can work on by creating new channels of power generation for telecoms.

The envisaged cost savings should be reallocated to improvement and deployment of infrastructure for more efficient service delivery to the customers.

About 15% of all BTS in the country are connected to the power-grid, which leaves operators dependent on fuel-powered sites. Fuel costs associated to operating BTS in the country account for about 60% of operators’ network costs. To put it in perspective, network costs in Nigeria are about two to three times more

3. Vandalism of Telecom Facilities:

Apart from the financial difficulties, the current state of security for telecom infrastructure is not encouraging for any potential investor. Every savvy rational investor considers the safety of its assets when making an investment decision.

Vandalism on Telecom infrastructure occasionally occurs in error during excavation, but for the most part is perpetrated through acts of sabotage and theft of equipment. These acts of vandalism are common in rural areas of the country, which are characterized by high poverty and unemployment rates. The low standard of living and lack of opportunity leads youth to revert to such actions to extort telecom operators.

In 2013, the Nigerian Communications Commission (NCC) noted that it had recorded about 1200 fiber cuts in just a few months.

Unknown to most Nigerians, vandalism of telecoms infrastructure is a major problem. About 2% to 3% of Nigeria’s BTS are shut down at any point in time due to vandalism, resulting in a loss of about $50m to $100m every year.

On the other hand, telecommunication firms have high investment value than banks because telecommunication is not a deposit organization and as such is not required to maintain high liquidity, which means that if bank want to maintain optimum profitability, they will invest all their funds in long-Term assets. The actions of vandals create significant expenses for operators in terms of repair and replacement costs, lost revenue, and also “appeasement” fees

In conclusion, It depicts that the more fluid an organization is the less it’s profitability. So, telecommunication has more return on investment, only the investor who is liquidity conscious will invest in bank. Based on the result from the analysis, the researcher made the following recommendations.

4. LACK OF GOVERNMENT SUPPORT:

In recent times, telecom operators have been attacked by regulators or government through fines and unregulated tax charges. This does not provide the incentivizing platform needed for investors to commit more funds to capital expenditure.

The story of the telecoms sector will mirror that of the Nigerian petroleum industry if a proper regulatory and fiscal structure is not designed and enforced by relevant stakeholders. Telecom companies like MTN in previous times have been subjected to some harsh government policies and regulations that has in one way or the other hindered their activities.

If such issues aren’t addressed in the future, we might find ourselves in an even more-stiffer positions concerning the telecom industry.

5. LACK OF PROTECTION OF THE TELECOM INFRACTURE:

Protection of telecommunication infrastructure in the country, especially in remote areas, is a paramount need for operators. There have been recent talks of the potential passage of a bill by lawmakers, which seeks to give telecommunication infrastructure the status and legal protection of Critical National Infrastructure as well as other critical infrastructure such as power.

6. STIFF COMPETITION BETWEEN TELECOM COMPANIES IN THE INDUSTRY:

Delays in investment are also encouraged by market uncertainty due to the current antagonistic environment between operators, regulators and government. However, industry experts are not looking at the situation as an open and close case of throwing in more money. Some believe that certain level of transparency and support must come from government to guarantee the operators that such investments would not end in futility.

Investors in the Nigerian economy are not new to thesis uncertainties, in the petroleum sector about $100bn worth of investments is being delayed due to the delayed passage of Petroleum Industry Bill (PIB) according to the international oil companies (IOCs). Such uncertainty in the telecoms sector can have a knock-on effect for the consumer.

The US in the early mid 1970s was a perfect example of what market uncertainty can do. According to Jerry Hausman, a professor of Economics at Massachusetts Institute of Technology (MIT), regulatory issues delayed the introduction of cellular telephones in the United States for 7 to 10 years. The delay purportedly cost consumers about $31- $50bn (1994 dollars) each year.

The bill is a step in the right direction; however a delay in the passage will endanger the $25bn investment in the ICT industry as well as future investments will be endangered for the foreseeable future. It is also important to acknowledge that passage of the bill is not sufficient; awareness and enforcement are the true determinants of the effectiveness of the bill.

7. Insufficient Telecom Masts:

Telecom companies should endeavor to build more telecom masts so as to eradicate black spots from Nigeria. We should be able to receive and call without any hindrance. Telecom companies can decide to share masts so as to save cost.

These are persistent issues among others that have lingered for years. Telecom are battling with these problems and this has hindered their improvement in service. No business would thrive in an environment where resources that could have been used to do systems upgrades are diverted to pay for repairs and debts.

The new NCC board should craft out parameters to guide the performance and challenges of the sector. This is the only way they can be aware of the current state of the sector. It just happens that there are multiple regulations to stifle the telecommunication companies.

Some of this regulations should be revisited and new policies created to address the current problems of the sector. Just as the NCC should work on some of this things, telecom companies should look out for alleviant measures to better their services.

NCC should ensure the active enforcement of deactivation of unregistered subscribers. This way poor service quality would be curtailed. The NCC should create channels and deploy base stations, masts and fibre optic cables to mobile operators to combat mobile black spots.

The challenge of poor quality of service in Nigeria’s telecoms industry is not impossible to surmount. All that is needed is cooperation among all stakeholders to come together and solve the various problems.

Solutions To The Issues Faced By The Telecom Industry

The telecom industry has many challenges, which reduce the investment decisions made by potential investors in the industry, but there are approaches and solutions which will alleviate these problems;

1. Policy Reforms:

Previous changes (e.g. the Nigerian Communications Act 2003) are outdated as they focus on how voice calls are regulated and not on matters that relate to the new technological era. The focus today should cover competition in the sector, the market and other services the telecom sector is linked closely to such as finance, technology and media services.

The current government has shown its commitments in creating an enabling environment for the private sector to contribute innovative solutions to allow consumers to benefit from Information Communication Technology (ICT) advancements. This will in turn bring about efficiency and productivity in the telecom sector and eventually enhance economic growth.

To solve the issue of artificial low prices, a regulated minimum price level has to be put in place by the government and regulators. Big and small telecom operators can compete on the quality of the network and customer services they provide. The sector’s regulator, the Nigerian Communications Commission (NCC), should ensure that the quality of service provided by telecom operators are enhanced through an emphasis on the strength of their signals and the quality of their data services. Customers can also play a part in regulating prices by valuing and promoting services that offer the best customer experience and not those that offer only the cheapest price.

2. Public Enlightenment:

A comprehensive plan is needed to communicate to Nigerian residents the need to protect all critical infrastructures and the penalty for violating the law in the country.

3. Government Reforms:

A well-defined and legally backed fiscal and regulatory framework is needed to eliminate uncertainty about the telecom companies’ operations and potential investment. There is need for a uniform tax and levy framework across the nation which has a legal backing. This would protect the operators from exploitative charges as well as the creation of unbudgeted new levies/taxes. Ultimately, a properly designed tax and levy framework will increase the positive perception of due process in the industry.

Consequently, investor confidence in the environment will be improved which will in turn increase the probability of more capital investment in the industry.

4. Diversification of the Industry:

To ensure long-term growth and sustainability there is a need to improve on general business processes/practices to create new revenue streams, recreate existing products, diversify into new areas for which the resources and capabilities are available and establish a minimum market price.

This will result in increased investors’ confidence and will enable operators to serve multinationals including Small and Medium-sized Enterprises (SMEs) that are dependent on their internet services (better quality service). The sector needs to be considered important to Nigeria’s economic development as it provides the infrastructural backbone for new digital economy that drives socioeconomic development across all sectors in the economy (ecommerce, Mobile banking).

Investments in operating telecom infrastructure are essential for economic growth as proper infrastructure leads to efficient operations of the sectors involved in the economy.

Sectors for telecommunication industry to diversify:

1. Mobile money:

Before the turn of the 21st century, most money transfers from the urban or suburban areas to the rural areas was largely manual. Transferors generally used messengers to physically deliver cash to recipients in the rural areas with the hope of 'privacy and security of the transaction' – a hope that was often dashed. Enter the 21st century and there was an explosion of bank branches and consequent surge of new account holders – a scenario that did not overcome this challenge.

In conjunction with the banks, Telco are able to provide a solution that allows a user execute a money transfer using a personal identification number and secured text message. At the end of the text message is the recipient who can reach out to the corresponding bank to get the transferred money.

Whilst the fee earned from this transaction represents increased income in the bank's primary business, the fee earned by the Telcos represent income from a new line of business.

2. Insurance services:

Telecommunication companies now plans to provide health and life insurance – a largely untapped market. Whilst some blame the state of the insurance sector on the economy, perhaps telecommunication companies are thinking differently. Who sold the insurance product to the customer? How was the product sold? Given 21st century and the profile of this customer (information which they have privy to), was there a better way to sell the product? Have insurance companies actually reached out to all potential customers (again, an asset which the telecommunication companies have)? Telecommunication companies are capable of profiling the customers and selling the appropriate insurance product to them. In this regard, telecommunication companies act as insurance agents – collecting premiums via deduction of airtime and knocking off traditional insurance brokers. Again, whilst the premiums earned represent increased income in the insurance company's primary business, the commission earned by the telecommunication industry represent income from a new line of business.

3. Music and video marketing:

In Nigeria, artistes in the music and movie industry are constantly plagued with the nefarious activities of pirates. Creative works are illegally produced/duplicated and sold to customers vide compact discs – a situation that has eroded the earning potential of these artistes.

With the presence of the internet and rise in smartphone usage, artistes are able to knock-off these pirates by collaborating with the telecommunication companies to securely sell their music and video works to customers. To the Telco's this arrangement is a double-edged sword – enables the artistes fight piracy and compete for a share of income earned by hitherto formal marketers of the music and video works.

Globally, the story is not different, international telecommunication companies are giving the traditional players in various industries a run for their money. Based on the case studies highlighted above International telecommunication companies are now competing with:

• Leaders in the International Money Transfer space (e.g. Western Union) for market share. In this regard, relatives in the developed countries are able to send money home using the mobile money platforms of these telecommunication companies.

• Major Insurance marketers who were once responsible for sourcing and selling insurance products to customers.

• Established online distribution platforms (e.g. iTunes etc.) who have since dislodged the traditional music and content sales outlets.

Whilst the potentials for developing new services are endless, telecommunication companies must brace themselves for a probable examination by regulatory agencies. In this regard, there would be a need to continually engage relevant agencies in each industry to obtain clear guidance around a new service opportunity to ensure certainty when the dividends begin to roll in.

Conversely, regulatory agencies must not stifle the creativity of telecommunication companies. They must seek to understand the model of each business opportunity and to the extent that the telecommunication have done nothing more than automate previous manual processes (which was not subject to regulation), the relevant agencies must ensure consistent application of rules.

Conclusion

In conclusion, we have been able to see some factors affecting investment decision making in the telecommunication industry. Those factors though having serious consequences, have simple solutions, some which may not be so simple in the implementation.

In recent times, the telecommunication companies still operating as traditional telecommunication companies, has recorded a decrease in the number of subscribers and in revenue. These are factors that every wise investor would look out for before laying out money to invest in the industry.

The money now belongs to the innovative company or group of telecommunication companies who become diverse in operation and fluid in decision making and organization.