Understanding Incentives To Avoid The Status Quo
I’m often challenged about alternative operators and their capability to build or more specifically to overbuild network. Whether it’s telecoms or electricity, whether it’s in Galway or Glasgow, understanding the incentives behind individual operators will help explain network investment behaviour and why we can and do overbuild.
For a business like enet, with a goal of achieving real scale, our investment model is relatively straightforward – we will invest and build infrastructure in new geographies to help us deliver new revenues. The more network we deploy and the more buildings we connect, the more incremental revenue we achieve. While the business case can be marginal, the creation of new revenue streams can justify the capital costs and make it investable, sometimes with longer paybacks anticipated.
On the other hand, take an incumbent operator, who has network in a given geography and is already in receipt of the available revenue. Logic dictates that that proposition is not as investable. What shareholder wants to spend huge sums on capital projects when they are already getting the revenue from the premises in question? The reality is there will always be internal, competing projects vying for capital making it even tougher to justify overbuilding your own network.
On an international basis, the need for State intervention in telecommunications infrastructure is increasing. This is driven by the criticality of communications infrastructure to national economies but also crucially, the relative weakness of the private sector business case. Even with the support of a government subsidy, three scenarios typically exist for incumbent operators when faced with the possibility of overbuilding.
Firstly, the incumbent wins the State subsidised scheme but still must invest significant capital to retain the revenues it already receives – not hugely attractive for shareholders. Secondly, an alternative operator succeeds. In the case, the incumbent doesn’t face the huge capital costs but once the competing (superior) network is built, the incumbent faces a period of revenue decline – far from ideal. Thirdly, somehow the scheme reaches dysfunctionality or fails to materialise and the status quo is maintained. I’d argue that the last scenario is the best case for any incumbent – their funds remains available for other capital projects or debt servicing while the revenues are protected.
While the latter scenario might well suit the incumbent, it does nothing for the citizen craving connectivity, the start-up business battling broadband bottlenecks or indeed the stimulus of the wider economy. The stakes have never been higher. The global challenge for policy makers is to avoid the status quo, to ensure the delivery of world class infrastructure and to enable citizens in all corners with the very best digital infrastructure.