September 9, 2022

From Telco to NetCo and ServCo

Telcos are entering the Era of Specialization. They are selling off infrastructure – or creating subsidiaries to run it for them. The challenge is to ensure this process goes smoothly.

There's a famous quote attributed to Jim Barksdale, CEO of the pioneering Internet browser firm Netscape: “There are only two ways to make money in business: one is to bundle; the other is to unbundle.”

The reason this quote is so often repeated is that it nails a truth about the inevitable cycles of business. One minute everyone is consolidating – buying up businesses to make the most of economies of scale and other synergies—and the next they are selling off their constituents’ parts so that the newly independent divisions can reap the benefits of specialization.

Well, there's little doubt where the telco business is right now. We're unbundling.

ServCos, NetCos, InfraCos and TowerCos
All over the world, communications service providers (CSPs) are considering, or are in the process of, spinning off their infrastructure. They are either selling to third parties or structurally separating to run different parts of the operation. This has led to the creation of what are known as ServCos, NetCos, InfraCos and TowerCos.

The reasons are not hard to fathom. Telco revenues have been static for some time. A report by Deloitte states that the aggregate revenue growth for European telcos has been just one percent for the past five years.

Telcos also face competition from multiple directions, including from agile cloud players that don't have substantial infrastructure costs or regulatory scrutiny to contend with.

For these reasons, a number of telcos are now separating their businesses into distinct legal entities: a NetCo (to handle the network infrastructure) and a ServCo (to manage the customer-facing elements of the business). In some cases, they are even selling off the network infrastructure. Credit Suisse estimates there were €15 billion worth of tower sales from January to April 2021 alone.

Parts Worth More than the Whole
Financially, unbundling makes a lot of sense. The Deloitte report notes that NetCos typically achieve EBITDA multiples of 15-25x, compared to an average for traditional telcos of 6-7x. It also claims that, after separation, the value of the new companies combined can be 40 percent more than the original integrated company.

These numbers are hard to ignore, especially for investors, for whom agile ServCos, NetCos, InfraCos and TowerCos are a much more attractive proposition than inflexible vertically-integrated giants. The prospects for growth are so much greater. NetCos, unlike traditional telcos, are not constrained by regional licenses and can expand geographically by acquiring telco assets or via new construction.

Of course, for those telcos that do wish to unbundle, there must be a smooth business separation. It must come with clearly defined benefits and the right approach to automation. Most importantly, it must support the evolution into next-gen infrastructure and services for fiber rollout, 5G and ecosystem-based business.

At Netcracker, we are already planning for this. Our Netcracker Fiber Cloud Solution brings agility, operations automation and intelligent wholesale customer management to maximize the value of the NetCo fiber infrastructure. It comprises an optimized set of out-of-the-box BSS/OSS capabilities to address the specific needs of implementing, managing and expanding the fiber infrastructure business.

For any telco interested in unbundling, it provides an open and lean automation layer that minimizes time to value while offering a service-neutral platform for business innovation.


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