The first signs of a recession are appearing in the European telecoms market. Vodafone has announced that its annual revenue will be at the lower end of expectations, largely because of weak handset sales and a poorer performance in Europe than expected in the first quarter of this year. Sony Ericsson’s profits evaporated in the second quarter of this year compared to the same period in 2007. The mobile handset manufacturer has focused on high-end smartphones and on the Western European market, leaving it more exposed to an economic downturn in the region. Infrastructure vendors are also expecting a difficult time: Alcatel-Lucent has predicted that revenue will decline by 2–5% during 2008. Meanwhile, companies as diverse as Motorola, SFRNeuf Cegetel, T-Systems and Telecom Italia all announced job cuts recently. Telekom Austria plans to cut 20% of the workforce in its fixed-line division over the next 18 months.
These developments could be attributed to local market factors or weaknesses in a specific company’s operations or strategy, because many players, including KPN, Nokia and Google, continue to report a healthy financial outlook. However, taking a broader view, and considering the stream of pessimistic economic forecasts, the indications are that the European telecoms sector faces a difficult period.
The implications of an economic downturn are manifold. The extent to which telecoms is resistant to recession is unclear, because neither of the two key building blocks of twenty-first century communications – mobile and broadband – have been majorly tested during an economic downturn in Europe. However, it is possible to predict the kind of strategies that operators should adopt in order to insulate themselves from recessionary impact.
- Focus on delivering value. As customers spend less money, it is inevitable that price will re-establish itself as the dominant decision factor when selecting a service provider. Operators should be wary of large-scale price cuts, but they must adapt their service portfolio to reflect the new era of frugality. MNOs should focus on improving prepaid and SIM-only options, introducing more flexible contract options and offering greater value multi-play bundles.
- Focus on core products. Value-added services and other nice-to-have features become discretionary when household spending is cut.
- Keep tight control on subscriber acquisition costs. If top-line revenue falls, it’s vital to keep costs under control to maintain profitability. For MNOs, this would include limiting handset subsidies, while focusing on retention and establishing and maintaining their own distribution channels.
- Implement cost saving measures. Many network operators have already pursued network sharing and network outsourcing deals. Any imminent recession offers an even greater impetus to explore this approach.
Clearly, the other major concern for operators in a commercially challenging environment is consolidation. They inevitably seek out economies of scale as they look to reduce costs, and struggling players may be acquired at a reduced price. By keeping internal costs under control and focusing on recession-friendly products, operators can protect themselves from the worst implications of the forthcoming recession and discourage unwanted suitors.