Industry Voices—Walker: The hidden truth about 5G is layoffs

Last month’s Mobile World Congress was full of excitement about 5G and growth opportunities in areas like connected cars, but telco revenues have been stagnant for years. To afford the network upgrades that loom in the next 2 to 3 years, telcos are getting serious about cutting labor costs.

AT&T, CenturyLink, Deutsche Telekom, Proximus, Shaw, Telstra, Verizon, and Vodafone are among the telcos with recently announced layoff programs; the list will grow over the coming months.

Capex pressures will force the labor cost curve down in 2019

Capex and labor costs total to roughly 32% of telco revenues as of the third quarter of last year, but the mix varies over time. During the LTE build-outs of 2014-2015, labor costs fell and capex rose, in relative terms. When LTE build-outs slowed, the two cost lines began converging towards 16% of revenues. As operators scale 5G spending, capital intensity will approach 18%, and labor costs will be forced toward 15% of revenues.

Source: MTN Consulting, LLC’s “Telecommunications Network Operators: 3Q18 Market Review” (Dec. 2018)

The layoffs ahead should not be a shock. The telecom industry’s total headcount has hovered in the 5.1 million to 5.2 million range since 2011, but years of telco spending on digital transformation, software-defined networks (SDN) and artificial intelligence (AI) tools have all been leading towards a slimmer workforce. The question now is the pace of the transition. One key factor is the health of the economy; the 2009-2010 recession came with massive layoffs. Recent cuts in GDP growth outlook by bodies like the IMF and OECD are definite warning signs.

The costs of layoffs are often underestimated

When operators like AT&T, Sprint, Verizon and Telefonica announced big layoffs in the 2009-2011 timeframe, they generally came with big hits to earnings. Telefonica’s 2011 decision to cut 6,500 jobs in Spain over three years came with a $3.8 billion charge to earnings. This is typical of what many telcos face with workforce changes. Most operators can’t simply cut 5% of staff and expect to save 5% on labor costs. They might save 5% in year three, if they’re lucky. There are upfront costs to deal with: buyouts, funding pension plans, and employee lawsuits.

Layoffs also affect operations. While the term “redundancy” has appeal to management consultants, the employees left to run the company rarely see it the same way. Layoffs can cause poor morale, increased turnover and missed deadlines. These problems are not going to be solved by more automation.

Telecom job markets vary by country and operator type; layoffs will too

Across the globe, operator strategies and input costs vary widely. Generally, the higher the GDP per capita, the more salient is the issue of labor costs. For example, the average telco employee in Canada costs $59,000 per year, far higher than India’s $18,000. As operators in these two markets budget their 5G upgrades, Indian telcos are more focused on minimizing capex outlays than their Canadian counterparts.

Figure 2 shows how the capex and labor split can vary.

Source: MTN Consulting, LLC’s “Telecommunications Network Operators: 3Q18 Market Review” (Dec. 2018)
*”Euro 4” is the sum of Deutsche Telekom, Orange, Telecom Italia and Telefonica.

As shown, the “average” telco spends 15.7% of revenues on labor costs, and another 16.5% on capex. That’s as of the third quarter last year. These ratios change over time and across markets, though, as does the outlook for layoffs:

United States—By global standards, capital intensity for AT&T and Verizon is low. Labor costs are more significant, and have been a major focus of both operators. Already, their combined headcount fell by 5% in 3Q18, versus 3Q17. These declines will continue:

• On its latest earnings call, AT&T said it plans to increase usage of automation, AI and other technologies to enable efficiency gains, suggesting more layoffs. Last year the company cut 10,700 union jobs and planned the closure of three more call centers, according to the Communications Workers of America.  

• Verizon announced a 7% cut of its workforce in December 2018 as part of a voluntary separation scheme. In early 2019, the company then announced plans to layoff 800 (out of 11,400 employees) from its Verizon Media business, as it struggled to compete with digital advertising giants such as Google and Facebook. 

Canada—Labor costs in Canada are even higher than the U.S., as a percent of telco revenues. Most Canadian telcos have done at least some downsizing recently; Shaw’s early 2018 voluntary separation scheme is just one example. Total industry headcount fell 1.3% year-over-year in 3Q 2018, to ~163K; the year-over-year declines will worsen, but probably not approach U.S. levels. 

Europe—Labor costs are more burdensome (as a % of revenues) for a group of four large European operators than for AT&T and Verizon. The difference is small, though: 17.4% of revenues for Verizon and AT&T vs 18.6% for the “Euro 4," which is comprised of Deutsche Telekom, Orange, Telecom Italia, and Telefonica. The bigger issue is capital intensity: this is already high by historic standards at 17.2% of revenues. That’s due in part to fiber spend. As real 5G spending starts to hit the books, European telco layoffs will accelerate.

What could ease the pressure?

There are two big things that could slow telecom’s job erosion. One, if operators manage to deploy 5G with less than a 1% increase in their capital intensity ratio. Two, if operators find tangible, quick ways to lower their customer acquisition and customer retention costs, primarily on the mobile side. Yet vendors are unlikely to suddenly drop prices, and high CRC/CAC costs have plagued telecom operators for years. The result: Industry headcount will continue heading south, ending 2020 well below 4.8 million employees. The 5G transition will have real downsides.

Matt Walker is the founder and Chief Analyst of MTN Consulting, LLC, an independent market research firm. He has over 20 years of experience in telecom industry analysis, consulting and research program management. Based in Asia for most of his career, Matt currently lives in Chandler, Arizona. He can be reached by email at Follow him @mattwtelecom, or LinkedIn

Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by Fierce staff. They do not represent the opinions of Fierce.