September 27, 2011
As a former investment analyst, I remember the feeling when stock market screens turn deep red. Such days turn one’s stomach upside down on a dealing floor. But even from the outside, such days are unnerving. The big question in the telecoms markets making the rounds at present is how the current market turmoil will affect the telcos. The 2008 financial crisis might provide some clues to what we could expect in 2011 and 2012, albeit in a less-pronounced fashion:
- Consumer spending on communications will remain pretty stable. During the last financial crisis, spending on communications remained largely untouched by the consumer. We do expect a slight migration towards flat rates for customers with the desire for greater cost certainties and towards prepaid by customers with the desire to lower their communication expenditure. One obvious danger in times of turmoil are price wars between service providers. They can offer only short-term growth relief, but at a high cost. Resulting poor margins will be felt for a long time.
- Businesses will put nonessential IT projects on hold or water them down. We have not yet seen evidence that COOs and IT departments have tapped the brakes on their tech buying, but they certainly have become more cautious. If the economies of the US or Europe go into recession — a possibility, but not our baseline forecast — that will hit IT budgets, as happened in 2008 and 2009. I am hearing from telecoms providers that their enterprise sales pipelines are already under pressure as customers slow their IT investments and look for ways to reduce their telecom services spending. Projects that support end-users with their sales efforts, e.g., sales force automation projects, are likely to be less affected than others.
- Unified communications and workplace virtualisation will benefit. Workplace virtualisation projects remain an important topic for businesses. TCO reductions and the move from capex- to opex-based payment models drive the uptake of cloud-based UC offerings and workplace virtualisation. Soft phones, instant messaging (IM), and video features have become a real alternative to desk phones in many organisations. The need to reduce office overheads further increases the acceptance for hot-desking and remote working. Hence, packaged solutions for the home-based and mobile worker become more attractive (including fixed and mobile access, security, identity management, soft phone clients, UC/video clients, hardware maintenance, etc.).
- Emerging markets operations will provide some respite. There are plenty of markets where there is still healthy growth. Turkey just reported GDP growth of nearly 9%, basically Chinese levels. India is close, as are many African countries. Telecoms providers with operations in most emerging markets will enjoy the tailwind of positive financial contributions to the group, just as in 2008. However, a word of caution — rising inflation in these emerging markets will lead to anti-inflation efforts that could overshoot, leading to slower-than-expected growth.
- The trend towards network sharing and combined rollout will increase: As telecoms providers scramble to reduce costs, telcos turn to the concept of managed networks and network sharing again. These initiatives promise better cost control and opportunities for new service offerings through consolidation of fragmented network assets. In the two years after the last crisis we saw landmark deals for network outsourcing and sharing, e.g. Going forward, we expect a lot more joint infrastructure projects between operators as they roll out LTE and FTTX networks. In this context, telecoms providers will also have to decide whether they continue their generous dividend payouts at the expense of capex.
- Counter-cyclical M&A opportunities will be ignored as usual: Telecoms providers should look to M&A opportunities in adjacent business areas such as billing, security, and business intelligence. However, we expect most telecoms providers to forego such opportunities despite the fact that valuations have fallen significantly in most markets — just as in 2008.
A level-headed approach in terms of crisis conveys an aura of clear vision and determination, two aspects that help attract customers. Erratic changes to strategy and go-to-market approaches are signals of desperation and scare customers away. Telecoms providers should use the current turmoil to push ahead the business transformation process towards ecosystems manager and solutions integrator with more and not less vigour.