16 April 2009

The global economic downturn is affecting the communications sector as it is everyone else, but the industry is better placed than most to weather the storm, according to IDC’s Lee Doyle.

The communications sector has been one of the key drivers of global growth in the last decade and more. Telecoms and Internet services have swept the world, and the industry has expanded massively in response to the increase in demand for voice and data communications services.

As previous issues of Connections have made clear, though, even with this huge growth, the industry needs a transformation in order to leave it fit to face the future. Traditional telcos, in particular, are in need of significant change, as they seek to move from a world of carriage to a business environment in which those companies that succeed will be the ones best placed to offer a portfolio of services to their clients.

To bring about this kind of transformation, of course, requires investment, something that is harder to find when the economic winds blow cold. So will the industry be able to continue funding its development through the current period of global economic tightening?

Lee Doyle of analyst firm IDC says that actually the telecoms industry is, in many ways, better placed to cope with downturn than most other businesses. “Telecoms is unique in that it’s a regulated monopoly,” he says. “The nature of the business is that customers pay monthly recurring fees as part of contracts that are a year long if not more. So there is greater stability, although it’s really different in every country in the world, and it’s quite hard to summarise many countries.”

Doyle adds that, even in a recession, business and domestic users are continuing to buy telecoms services. “As a consumer I know my mobile phone and my TV is one of the last things I’d cut, he says. “And, reflecting that, current forecasts show industry revenues as at least flat, perhaps even slight growth, so the telecoms business isn’t in as deep a crisis as many. But that said, there are challenges. One of them is that, when domestic customers look at their home telephony services, cutting the cord and going mobile only looks really appealing in today’s economy – and people are doing so in record numbers.”

The connected world is a truism now – even a big global recession won’t turn the clock back

Lee Doyle, IDC To be successful in today’s market, Doyle says, operators need to offer a wide range of services to their customers. But that was the case even before the economy turned downwards. “People are clearly moving towards bundles to make savings,” Doyle confirms. “But mobile phones, broadband Internet and HD TV will be the last things a consumer will cut from their budgets. And it’s the same on the business side. The connected world is a truism now – even a big global recession won’t turn the clock back. As a telecoms provider, whatever type of business you are running, you have to be able to offer these services, or you won’t succeed. If you compare the telco world to the IT industry, it’s as if the business is still in the world of mainframes – not even client/server. The reasons for the shift to the next generation carrier model still exist, and they are still just as compelling.”

Strategically, therefore, it remains vital for telcos to continue their investment in infrastructure, and to continue bringing new services to the market. But that doesn’t mean, says Doyle, that savings can’t be made. Indeed, he argues, they must be made, to ensure efficient operations and to keep margins at an acceptable level. “Telcos, by their nature, are conservative organisations,” he says. “If they can defer spending, they clearly will. So some rollouts of IPTV, moving to 4G and LTE, upgrading the backbone, those will be deferred for a quarter or two, maybe a year in the case of LTE. Clearly they are cutting back, and we’ll see some reductions in spending over the course of 2009.

“But there are other things that they will still do: to improve coverage in an area where customers are dissatisfied, or a rollout in a particular city. Those will continue. And longer term, investments are going to be more carefully evaluated and each carrier is going to have to make investment decisions based on its own access to capital. Look at AT&T or Verizon–they have great resources. But smaller carriers who need to go to financial markets, or are more leveraged, that’s harder. Advantage to the incumbent in this case. Internet and backbone traffic continues to increase. That’s driving spend on big routers, bigger pipes if you like. Carriers can defer spend on these things, but they basically have to put them in to deal with demand. We think spend will return on these matters–you can run the network hot for a while, but soon it will get too hot. People are looking at timeframe, and the ROI bar is up. If capital costs more, then the return had better be higher! My belief is that if telcos can deliver services that provide substantial value, customers will pay for them. The trick is matching up the right service with the right customer.

“Access to capital is critical in this situation. For well capitalised companies with growing business models this may be possible, but speculative financing is probably not going to happen at the moment. And we are not going to return to a bubble economy where stupid money was being thrown around.”

Capital investments are one thing, but operational expenditure, for every telecoms business, is where the real savings can be made. “Opex typically accounts for 80 per cent of a telco’s budget,” says Doyle. “There are always parts of companies that can become more efficient, so firms will be looking to save money on billing, for example. There’ll be continued investment on efficiency, such as datacentre buildup, to support hosting activity and cloud operations. The telcos do need to continue to transform themselves.”

What will the industry look like when the world re-emerges into the light of growth? Doyle isn’t sure, but is confident on one thing. “There is going to be some consolidation and there’ll be a different balance of power over time,” he says. And he adds that the trends we have seen in recent years are not going to go away: “Globalisation is an interesting issue, because the telecoms market is still so local to each country. There is interest in cross border expansion and mergers, and we’ll have to see what emerges. Maybe big players can scoop up some cheap assets, but it will depend on regulation. In financial services we’re seeing a move away from deregulation, and the same may happen in the telecoms industry. The emerging markets where mobile penetration is still relatively low–India and China–are going to continue to grow. Will growth slow in those markets? Absolutely. But ultimately you are going to see another billion subscribers come out of those regions.”

This article first appeared in the Spring 2009 issue of Microsoft Connections in Communications magazine.

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