It’s a CAPEX world for mobile operators

Posted by Dimitris Mavrakis Monday, November 24th, 2008

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When mobile operators go to the negotiating table with infrastructure vendors, there is only one thing they want to discuss: CAPEX. Operators seek to minimize the upfront investment (and are currently very aggressive on pricing) regardless of the fact that a marginally higher cost can yield significant savings in OPEX and eventually pay for itself.

These aggressive price negotiations and competition have allowed Chinese vendors Huawei and ZTE to successfully enter the international market (since workforce costs are much lower in China compared to the Western world). Chinese vendors have also been known to shrink margins in order to enter the developed Western European markets, driving prices lower than their competitors could afford.

CAPEX is the driving force behind infrastructure contracts, but several operators fail to consider OPEX in these aggressive negotiations. When Huawei entered the international market, it won several contracts (by aggressively undercutting prices) but did not have the established support and maintenance network to provide a similar service to its competitors. This eventually led to issues with hardware faults and software bugs, costing hundreds of thousands to several operators that had not considered these issues. Nevertheless, the Chinese vendor has gone to considerable lengths to “Westernise” its operations and is now considered as a direct competitor to incumbents NSN and Ericsson.

However, priorities are slowly shifting to OPEX, illustrated by several trends in the market. Green base stations, consolidation of hardware platforms, streamlining operations show that operators indeed are looking at minimising OPEX - after all, it is something they live with year in, year out without having the choice to back out. And indeed, OPEX has broken several business models of operators, ISPs and other businesses.

Vodafone, for example, reports that CAPEX for FY2006/2007 was GBP4.2 billion when OPEX was GBP6.7 billion! The same presentation outlines the importance of minimizing OPEX. Some North American operators also report that OPEX is often 5 times higher than CAPEX, as high as $30 billion per year.