For those that can’t wait for the full Deloitte report Comms Business Magazine has secured a preview of their views for readers as the company warns ‘what appeared to be at first a problem affecting the US sub-prime mortgage sector may actually be a slowdown affecting many of the world’s industrialised nations’.
Deloitte says that a vital question for the telecommunications sector is likely to be the extent to which the credit crunch, a global contraction in the availability of credit, may provoke a crisis in the telecommunications sector in 2008.
“An optimistic outlook for the telecommunications sector in 2008 would be that most companies should not suffer significantly, even in countries with large financial sectors that may bear the brunt of the sub-prime correction.
However, the impact may vary by type of company. Equipment manufacturers may be harder hit. It would be easier for a business or residential customer to defer an equipment purchase than to suspend voice or data services for a period.
As for service providers, they may be better able to weather the storm, at least in 2008. The world appears to be far more dependent on telecommunications than ever, and costs have generally fallen. Enterprise communications prices have declined steadily, in line with growing competition and the emergence of efficient software-based solutions. Consumer mobile and broadband prices have also fallen strongly, through a combination of excess supply, competition and regulation. In some markets, consumer broadband is nominally free if other services are purchased, making it particularly hard for customers to cut out this portion of spending. Given this, service revenue growth may hold steady, even if there were to be a downturn in 2008, and as a result, operators’ stocks may be seen by investors as secure.
An economic slowdown may even encourage some businesses to accelerate process changes that require communications. The need for efficiencies may encourage some companies to accelerate their use of offshoring; it may cause others to use home working as a means of reducing office costs; it could stimulate some companies to implement mobile data solutions as a means of improving productivity.
A more pessimistic outlook is that the gut reaction to a downturn may be for businesses and consumers to reduce spending wherever possible. Businesses may look at ways to cut telecommunications costs, both by negotiating hard on rates and applying stricter rules on usage among employees. Consumers may try to cap their spending by opting for smaller mobile bundles or downgrading broadband packages.
Investment may become harder to justify, as higher interest rates raise the cost of borrowing. This in turn may have an impact an operator’s ability to develop new services. Equipment manufacturers, software developers and other suppliers may suffer as result.
Macroeconomic trends are hard to predict and even harder to influence. In the light of current trends, telecommunications companies, while hoping for the best, may need to prepare for the possibility of an arduous 2008.
Bottom line
While a downturn in the telecommunications sector is far less certain than a global slowdown, the industry should be prepared to confront, or even better, to exploit, this possible outcome.
Mobile operators could use the prospect of a downturn to encourage consumers to consolidate all their voice spending on mobile, thus forgoing the monthly fixed line rental. A growing number of consumers have already chosen to make all voice calls via their mobile phones. Operators could try and maintain revenue flows by offering customers lower tariffs in exchange for longer contract terms. This offer may also encourage prepay customers to move onto a contract.
Non-core mobile services, from music downloads to mobile television, could be most affected if consumers cut their spending. Operators may therefore want to concentrate product development and marketing on the services they regard most likely to generate the bulk of revenues and margins, which in many markets is currently voice and messaging.
Mobile operators could also consider a renewed focus on the enterprise market. Operators could argue that mobile-based solutions, such as email and field force automation, could deliver vital efficiency gains to corporations.
Mobile operators may also need to consider starting or accelerating network sharing, for example, their radio access networks, as a way of reducing the cost of deploying and running networks, particularly if data usage remains low.
For fixed operators, demand for consumer broadband is likely to remain relatively steady. Non-core services may, however, suffer. Operators may therefore need to look again at their approach to bundling. Offering discounted combinations of fixed voice, broadband and IPTV appears to have become a common approach among fixed operators. While theoretically this offers good value to the customer, if the market were to slow, the value proposition could unravel. With fixed voice usage in sharp decline and IPTV embryonic, operators may find consumers increasingly indifferent to bundles, particularly in markets where mobile prices are low and free-to-air digital television is widely available. Consequently, operators may find a ‘pick and mix’ approach more compelling and more profitable. By allowing consumers to choose which services they want to bundle, they may be able to improve perceived value, while offering greater choice and flexibility. As with mobile, fixed operators should also consider offering lower monthly rates in return for longer contract terms, in order to stabilize medium-term revenues.
As for the enterprise market, fixed operators should highlight the range of operational efficiencies that could result from more, rather than fewer, communications. Operators could therefore recommend an acceleration of offshoring, video conferencing and home working, all of which could reduce costs.
Fixed operators may also need to re-examine their plans for next generation networks. Many operators’ long-term strategies assume fiber-based networks. While the credit crunch may raise the cost of finance, networks may have no choice but to upgrade, not least because of the expected operational efficiencies from next generation networks. Operators may have to share the cost and risk with partners, or try to renegotiate terms with financiers and suppliers.
Retailers, particularly those specializing in the mobile industry, may have to diversify. Mobile operators are constantly reviewing channel costs such as commissions and subsidies. Should a country’s economy slow, operators in that market may focus efforts on their own, branded stores at the expense of independent retailers. Should that happen, retailers may have to diversify into related products (such as PCs, peripherals and technical support) or services (such as fixed voice and broadband).
For all concerned, but equipment vendors in particular, growth in emerging markets could offset potential declines in the developed world. Emerging nations’ economies are forecast to continue growing steadily despite turmoil elsewhere. Telecommunications operators in emerging markets may continue to yield much higher EBITDA margins that are normal in western economies.
All telecommunications companies should scrutinize their cost base. Some may have accumulated excess weight, particularly during high-growth years. A slowdown may even be the impetus for some much-needed cost cutting and headcount reduction.
All companies should keep an eye out for mergers and acquisition (M&A) opportunities. A downturn could create consolidation opportunities across all parts of the value chain. Some emerging-world telecommunications titans may even consider fiscal discomfort and faltering valuations in the industrialized world as the trigger to start seeking out bargains.