Telcos have recently issued a stream of mixed messages about the potential consequences for their businesses of global economic turmoil. A significant number of major players are adopting an optimistic stance at present, and attempting to minimise the effects of the downturn. The consensus among these telcos is that the true impact of the economic downturn has yet to materialise. A number of questions arise from looking at the public relations statements issued by telcos.
- Are telcos being deliberately overoptimistic in order to bolster investor confidence?
- Are they trying to divert attention from their high levels of debt and substantial ongoing capital requirements?
- Or are they trying to buy for themselves a breathing space in which to formulate their plans, once they have a more accurate picture of demand in the early recession ?
One key area of focus for telcos is cost control; they clearly want to conserve cash at present, either to build up reserves or to service existing debt. Companies that have taken on heavy debt burdens as a result of marked expansion in recent times are finding their survival under serious threat in the current economic situation. Plainly, telcos will be curbing supply-side investments in favour of a more measured investment approach and cost control. Smaller players that are unable to make economies of scale will be unlikely to continue building access networks with duplicate footprints. Investments in next-generation access networks and evolutionary mobile technologies will be more disciplined. Similarly, as in other sectors of the economy, M&A activity will be more selective.
The demand side is more difficult to predict, as telecoms services have never previously been tested in a downturn. The market has changed beyond all recognition since the last recession, in the early 1990s. At that time, mobile was a minority service and POTS was standard on the fixed side. Spend on telecoms, as a share of GDP, demonstrates a relatively consistent downward trend. Given falling GDP, increasing inflation, a shrinking enterprise sector and fear and uncertainty in the consumer market, end-user demand will suffer. The extent to which revenue will fall is more difficult to forecast at present. It is likely to be several months before real market behaviour confirms the level of the downward trend in spend.
