In Europe alone, it is estimated that the communications and media sectors will need to refinance over 30 billion Euros of debt by 2010. In the context of this financial crisis that appears challenging, even if this industry is traditionally seen in a positive light thanks to its high levels of free cash flow. Indeed baring the dot.com crash of 2000/1 the European telecommunications industry was quite resilient during past recessions. However this, as we keep hearing from the financial press, is no ordinary recession. will it be a fight for survival, just a difficult patch or the opportunity of a lifetime, and whatever scenario plays out, what should the industry players do to ensure they emerge stronger at the other side? Who will be the winners and losers?
More to the point, what does this mean for your business? Even if you feel comfortable about your own company’s situation, have you thought about your customers, suppliers and competitors? How is your market changing? Are there new opportunities or threats? Have you evaluated the main economic scenarios and developed appropriate action plans?
Who will be the winners and losers?
Pressure on short-term liquidity has been the most immediate impact of the financial crisis in most industries. Companies that have relied on debt have suddenly found that it is no longer straightforward, or cheap, to raise new money or roll over their financing.
Operators
Before the financial crisis hit, most network operators had managed to clean up their balance sheets following the dot.com crash, consolidation frenzy and 3G licence fee bubble that coincided with the start of the millennium
However a number of operators didn’t manage to finish the job for a variety of reasons. Many are trying hard to improve their liquidity position through major cost reduction programmes, dividend cuts and asset sales.
How will the recession affect operators?
In the recessions of the 1980’s and 1990’s, operators fared reasonably well but cast your mind back to those days and the industry landscape was very different (see Figure 3). It was dominated by fixed voice incumbents; some countries were still liberalising their telecommunications markets; and, mobile operators were still the new kids on the block. Will it be different this time?
A longer-term issue that shouldn’t be forgotten will be the need for some governments to raise additional funding to pay for the bailouts and economic stimulus packages. Any increases in personal or corporate taxation will affect consumers and enterprises, which in turn will impact operators.
Equipment and service suppliers
There are many European-based suppliers but the segment is best viewed from a global level and by its sub-segments: network equipment vendors, handset suppliers, IT vendors, system integrators (SIs), etc.
Unfortunately the financial crisis and recession, combined with low cost competition from Asia, are a ‘perfect storm’ for equipment vendors. Not only is their indebtedness a problem but most of their operator and enterprise customers are looking to defer capital expenditure to improve their own liquidity.
What does this mean for you?
Even dropping down from the global to a regional level is still a generalisation from your perspective. What you are most interested in is your own market, which in most cases tends to be a specific country. You need to develop your (short- and long-term) action plans based on what you think might happen to the overall economy and its impact on the key players in your market.
What might happen in the economy?
Examples of three scenarios that you might evaluate:
- A normal recovery starting in late 2009 or early 2010
- Major depression where the economy gets much worse – as bad as or worse than the Great Depression of the 1930s
- Very slow recovery similar to Japan’s ‘Lost Decade’ of the 1990s.
‘Base Case’: most companies are already taking appropriate actions assuming a base case where the economy starts to recover later in 2009 or early 2010. Cost reduction is important (particularly need for working capital) but it is also important to ensure the business will be competitive when the recovery begins.
‘Great Depression 2’: operators and content providers must understand what such a bleak scenario means for their business. In the CME sector it will mean low (and falling) revenue per customer, few opportunities for up-selling new services, and demand for services that reduce ongoing costs for both consumers and enterprises.
‘Lost Decade 2’: rather than negative growth, operators and content providers will need to prepare for stagnation. To address this, similar measures can be taken as for a major depression scenario but in less extreme ways. Cost savings for consumers and enterprises will still dominate but subscription-based services will be more attractive.
How will your market change?
The key players have already been impacted by the financial crisis and the recession. Take a fresh look at your main customers, suppliers and competitors using the analysis set out in the first part of this article for each of the scenarios that you have identified – see Figure 7.
Major customers: are any of them in the Casualties or Targets quadrants? What would be the impact on your business of them being acquired or going bankrupt? How much do they currently owe and are their payments taking longer?
Critical suppliers: are any of them in the Casualties or Targets quadrants? What would be the impact on your business of them being acquired or going bankrupt?
Vulnerable competitors: what would be the impact on your business of them being acquired or going bankrupt? Assuming that you are in better shape, do they have assets that you might be interested in acquiring? How else might you take advantage of their current weakness?
What should you do?
By now your executive management team should already have a good understanding of your liquidity position and taken the necessary actions with shareholders and banks regarding maturing short-term debt, interest payments and dividends.
Do you have short-term contingency plans in place for the other scenarios, particularly with respect to events concerning other market players (customers, suppliers and competitors)?
Having readjusted your short-term plans, you can start to look further forward. Some of the questions that you need to address include:
How should you adjust your business mix in the short and medium term to focus on economic profit and build on your competitive strengths?
How can you improve performance in the medium term? Large cost reduction programmes etc.
What might your market look like in 5-10 years? How can you take advantage of the current environment to emerge from the recession in a stronger position?
PA believe it is possible to arrive at a strategy not just for surviving but thriving in the current crisis. It involves evaluating the main scenarios for your key markets and realistically appraising your position in the context of changes in your competitors, customers and suppliers. These scenarios should look at the dynamics of the industry, as some of the outcomes may not always be intuitive. From this assessment you will then be able to build short-, medium- and long-term action plans that take account of the many uncertainties that abound.
The authors can be contacted via +44 (0)207 881 3365 email: cmeinfo@paconsulting.com www.paconsulting.com/industries/communications/