The Fading Signal: Why Telecom Profitability is Declining in Nepal and Across the Globe

Tech Topic: Reason for declining profitability of telecom sector in Nepal and its comparison with various other developed, developing and South Asian countries and future ahead

The telecommunications industry, the backbone of global connectivity, is experiencing a significant downturn in profitability worldwide, a crisis particularly acute in Nepal. This decline is driven by evolving communication methods, regulatory pressures, and intense competition.

Nepal's Steep Climb: A Localized Crisis

Nepal's telecom sector, led by Nepal Telecom and Ncell, faces a sharp decline in revenue and net profit due to:

• Over-The-Top (OTT) Services: Platforms like Messenger, Viber, and WhatsApp have eroded traditional voice and SMS revenue streams. Nepal Telecom reported a 22.37% drop in interconnection revenue. While data usage is high, it hasn't compensated for losses, shrinking the market from NPR 100 billion to below NPR 75 billion.
• Burdensome Tax Regime and Fees: Operators face a combined tax burden of 21.2% (VAT, service charge, ownership tax), plus corporate tax (30%), spectrum, and royalty fees. This leaves only a meager 5% net profit from gross revenue. Ncell states 50-60% of its income goes to taxes and regulatory fees.
• Exorbitant License Renewal Fees: A NPR 20 billion GSM license renewal fee every five years strains financial reserves.
• Intense Market Competition: Aggressive pricing strategies and declining data costs by players like Nepal Telecom and Ncell have squeezed margins.

• – Nepal Telecom's net profit dropped 48.67% in Q3 FY 2024/25.
• – Ncell saw a 6% year-on-year revenue decrease and a 48% net profit drop over three quarters in 2020.

• Market Instability: The revocation of Smart Telecom's license in April 2023 due to unpaid fees highlights market precarity.
• Revenue Decline: A continuous revenue decline of approximately 28% over seven years for major operators raises concerns about investment in future technologies like 5G.

A Global Echo: Developed Nations Feel the Pinch

Developed countries face similar challenges:

• Market Saturation and Competition: Leading to declining Average Revenue Per User (ARPU) and reduced pricing power. Germany saw wireless communication prices drop by 6% (2020-2024).
• High Capital Expenditures (CapEx): Massive investments in 5G rollout and fiber optic networks incur significant debt, especially with rising interest rates. German telcos invested €13.2 billion in broadband infrastructure in 2023.
• Slow Monetization of New Technologies: The return on investment for 5G and new technologies has been slower than anticipated.
• OTT Impact: These services drive data usage but siphon off traditional revenue without compensating network providers.
• Regulatory Pressures: Prioritizing consumer interests often limits pricing power and M&A.
• Increasing Operational Costs: Energy, labor, and legacy infrastructure contribute to declining Return on Invested Capital (ROIC), with some failing to cover costs.

The Developing World's Struggle: Universal Themes, Unique Obstacles

Developing countries share challenges with Nepal and developed nations, plus additional complexities:

• Amplified High CapEx: Building foundational infrastructure in challenging terrains with lower average incomes makes recouping investment difficult.
• Significant Debt: The global telecom sector carries substantial debt from continuous upgrades.
• Price Wars and Low ARPU: Intense competition drives down already lower ARPU due to income disparities and prepaid users.
• OTT as "Dumb Pipes": OTT services increase data demand but cut into traditional revenue.
• Regulatory and Political Barriers: Complex frameworks, spectrum allocation issues, and instability can delay projects and increase risks.
• Skilled Worker Shortage: Hinders deployment and maintenance of advanced networks.
• Macroeconomic Pressures: Combined with other challenges, often lead to profitability and ROIC falling below the cost of capital.

South Asian Neighbors: A Tapestry of Hurdles

Other South Asian nations face distinct challenges:

• Pakistan: Political instability, low ARPU, mismatch between dollar-denominated fees and local currency revenue, high taxes, infrastructure costs, and profit repatriation issues.
• Sri Lanka: Unhealthy competition, broader economic crises, high inflation, reduced consumer demand, and historically excessive taxation hindering rural investment.
• Bangladesh: Profitability issues from SIM and corporate taxes, stiff competition, regulatory uncertainties, decreasing subscriber growth, poor service quality, and limited technological expansion.
• Maldives: Tourism-dependent economy's downturn impacting mobile demand, high CapEx for undersea infrastructure across scattered islands.
• Bhutan: Small market size, mountainous terrain making service provision expensive, continuous investment in rapid technological advancements with slow returns, high license fees, and stringent collateral requirements.
• Afghanistan: Prolonged political instability and conflict, infrastructure destruction, increased operational risks, and unpredictable tax policies.

The Future Ahead: Strategies for Revival

Hope for the telecom sector lies in strategic pivots:

1. Cost Optimization: Replacing legacy infrastructure, migrating to cloud, leveraging automation/AI for network management, vendor consolidation, contract renegotiation, and resource auditing.
2. 5G Monetization and New Revenue Streams:
   • High-Value Use Cases: Remote surgeries, manufacturing automation.
   • Flexible Business Models: Enterprise solutions (B2B) like private 5G, IoT, cloud services, cybersecurity.
   • Consumer (B2C) Value-Added Services: Enhanced mobile broadband, mobile gaming, smart home solutions, often bundled.
   • New Avenues: Network-as-a-Service (NaaS), network slicing, edge computing, exposing Open Gateway APIs.
3. Customer Experience (CX) Enhancement: Customer-centric approach, personalized offers, proactive communication, and AI-driven omnichannel customer support to minimize churn.
4. Strategic Partnerships and Ecosystems: Collaboration with OTT players, tech companies, and infrastructure sharing partners to reduce costs and expand reach.
5. Fiber Optic Expansion and Monetization: Expanding fiber to underserved areas and offering cloud computing, security, and IoT services over these connections, coupled with aggressive customer acquisition.

The telecommunications sector is at a pivotal juncture. While declining profitability presents challenges, it necessitates a transformative approach. By embracing innovation, optimizing operations, and strategically diversifying, telecom companies can navigate this complex landscape, secure their financial future, and continue powering global digital transformation.