The telecoms market is not immune to the economic downturn. Revenue lines will be impacts. However, the real story is in the transformation of the telcos themselves into a new role in the emerging combined telecoms, media and IT industries. This role is still unclear and telcos futures will remain unclear until they establish their position in the new hierarchy.
The overall picture
The current focus on the economic impact on the telecoms market isn't a short term issue and not just triggered by the current financial situation. Trends in the overall telecoms market have indicated a slow down for some time. The complex interplay of legacy and emerging services are further compounded by ventures into new media and ICT markets. Every telco is looking at its transformation at multiple levels from infrastructure through service portfolio and up into organizational and business models. This is not new, but has been an on-going move since the liberalization of the telecoms market around the world. The real question is whether the underlying business model for the provision of communications-related services to businesses and consumers are viable. Or whether a new model is required embracing more of a wholesale/channel approach to delivering future services to customers.
Are telecoms markets insulated against the weakening economic situation? Every market will feel the impact of economic slow downs. Businesses and households/individuals alike will look more closely at their spending and some will have to reduce spending through unemployment or simply sub-inflation pay rises. Telecoms' tracking of GDP growth may come under some questioning now as the telecoms services become an inelastic demand while broader economic indicators slow down.
Our top-down analysis suggests that the economic impact on telecoms will be a reduction of around 1% on growth in telecoms service revenues around the world. This is not to say that growth stops at all. The relationship between GDP and telecoms services has been one considered by academics for many years. If it does still hold then China, for example, will still be looking at double digit growth in its telecoms services. The Western economies will still see some minimal growth. One important aspect of considering growth is that we should not look at individual services but at the services purchased by consumers and businesses alike. ARPU is not an ideal measure. Profitability per customer would be a much better metric but few telcos have the data to be able to do this currently given the multifarious systems that go to make up their BSS/OSS.
It is important to note that the economic cycle in different parts of the world, and the ability of countries to cope with an economic down turn, need to be looked at individually before drawing broad-based conclusions. The breaks may now be on the US and UK economies, for example, but China and many emerging markets have perhaps just taken the foot off the gas a little. Countries such as Japan, Argentina and Germany (to a lesser extent) have suffered economic down turns in the last 10 years and so the impact of the current drop in activity Is less of a radical interruption than in the US or the UK, for example. Those countries who suffered intervention by the state in their banking systems in the 1990s are generally better placed today as compared to their American or Western European brethren. And, a slow down of 1% on China's 10% GDP growth still represents a major growth overall for the country.
One distinction we should make very early on is that between a one-off decision to purchase a product or service and the on-going payment for a service. For the former, where we might be upgrading a phone, laptop or games console, we might think twice about it and get longer service out of the existing product. In the latter case, it will be a major decision to cut off the service. This is true for broadband and mobile in the consumer market and for business communications services both fixed and mobile in the business market. Telecoms service providers are further insulated with a typical 3 year contract length for the higher end business network and ICT services contracts. This won't stop the negotiators asking for price reductions as basic service prices come down, but the increased focus on the management of services (with a management fee attached) will help alleviate the drop in basic revenues. In some ways this will encourage telcos to accelerate their moves away from providing connectivity and product such as PBX and move more to a service culture much in the same way as many IT providers did 10 years ago moving away from providing 'tin'. In short, much of the service revenue to telecoms service providers is non-discretionary from the perspective of the customer. This is not to say that customers won't scrutinise their bills and seek cheaper alternatives, but they are unlikely to stop the service completely.
The consumer electronics and enterprise equipment and software providers won't, however, sit back and let the telcos control the market. Moves such as Apple's into the music and telephony/personal communications markets show that they feel they can control the market and relegate the connectivity piece to the status of mere utility bandwidth provider. The traditional PBX providers would have similar wishes from their perspective and Microsoft would also like to grab a chunk of the telco market from their OCS base. We are still some distance from the natural fall out of the convergence of all of these formerly discrete industries.
It is also important to keep in mind that the many flavors of convergence emerging in consumer and business markets mean that individual products and services are less likely to be considered in isolation. Indeed, one of the benefits of convergence to the customer is a saving across the combination of the included services. Product may well also be included in the new service without actually being sold to the customer- hence making revenue associated with product sales more difficult to track for vendors. The layers of additional service may well be needed to secure the basic service such as fixed broadband or the basic mobile connection much in the same way as the addition of a better in-car stereo, air conditioning etc underpin the purchase of the basic car.
Basic communications services are fundamental to our business lives. Mobile has become a critical link in keeping in touch and doing business. Linking locations, people and customers remains a means of improving business flow. Investment in corporate network infrastructure will, like everything else, come under close scrutiny. Some projects in the pipeline will be delayed and possibly cancelled. Investment in new areas such as Unified Communications may well be slowed. Having said that the Pre-paid and contract mobile
Business service migration over to more managed communications services could be accelerated as business users see the possibility of moving away from Capex to an opex solution and handing more of the running of the communications infrastructure and communications oriented applications such as voice, to a third party.
Companies will also accelerate the more holistic view of all communications and networking products/services within the IT budget. For example, mobile spend will now be considered more in line with other corporate spending as opposed to be left as a local, office administration or individually billed back expense.
Predictability is what the CIO wants in terms of all costs. Telecoms Expense Management Software (TEMS) has been making a big push over the last 12 months and this, in conjunction with more managed service is likely to accelerate.
The impact of companies going out of business, merging and reducing overall levels of employment will see a reduction in enterprise usage of all services. Corporate networks won't be majorly impacted as this is long term contract based. Mobility will be impacted with a reduction in business paid mobile contracts. However, the overall impact for mobile will be scaled down as these users will migrate to the consumer market. Mobile devices and broadband are fundamentals and will not be impacted (with the caveat on total spending below). The growth in mobile broadband, dongles, embedded and all, will continue to provide strong growth in the next 12 months.
Some verticals will, of course be affected more than others. Finance will see some significant reductions whereas Government is likely to remain stable. And, Retail will tighten its belt as the knock on effect of consumer spending filters through the full value chain.
The inelastic nature of demand and the move to multiplay services and multi-screen consumption of content and communications should insure the industry as w whole against any major down turn, but the domestic CIO and the individual consumers will look to tighten their belts in some ways.
We may well see a migration from contract to pre-paid in those countries where mobile contract is strong, as this will allow users to reduce spend on the pre-paid platform. Contract is a good way for uses to upgrade regularly to the latest shiny entertainment device. This move to pre-paid may well slow that new device adoption curve down. The tendency to adopt the new services such as mobile TV will certainly be impacted. Mobile revenues were already under pressure due to regulatory changes in Europe[e affecting Mobile Termination rates, roaming changes and competition for mobile minutes.
The good news for consumers is that service providers are increasingly going down the road of bundled services and packaging of services. So, more of these micro issues will be lost in the bundle. The service providers have to acknowledge that the total of say three services will mean an overall reduction in spend from the consumer, but the service provider gets to keep the revenue. The total market will be impacted. Consumers get a better deal, less exposure to individual price changes and the incumbent provider gets more of the consumer's wallet. An, with competition, number portability and the drive to save money, users will be in a position to shop around.
Traditional minutes usage and quantity of messages will be impacted by people thinking of saving money, but inclusive minutes and SMSs will also serve to soften the decline. Service providers will move to more flat rate packages to give customers the comfort of no surprises in monthly and annual bills
Telcos themselves are, of course, subject to the same financial pressures. The cash rich nature of the business helps but investment will be closely scrutinised. Capital investment is a long term, 10-15 year program, especially when it comes to total network migration and projects such as Fibre to the Home. Basic service revenues will be impacted by a few percentage points but the so-called 'value added' services such as IPTV mobile TV will see an extended delay in mass market uptake.
The economic situation may well make telcos look at their investment plans, but the fundamentals persist: revenues have been declining so telcos need to rationalize their infrastructure in order to shore up margins in the future.
Looking at total traffic on the telco networks also poses a question: with an increasing proportion of traffic not carrying revenue with it, telcos will need to continue to invest to carry the growing traffic volumes.
On an individual country level, the impact of the economic down turn will depend on a number of factors including the state of local competition within the telecoms industry but also in adjacent sectors such as cable TV, media, IT services and software. However, all of the topics covered above were already in play for the telcos. The decline in basic service revenues for mature markets from fixed and increasingly mobile services necessitated a review of underlying costs. The appeal of 'value-added' services have proved more difficult to promote than everyone had hoped and these may well suffer the strongest impact from the economic down turn as they fall into the discretionary spend category or require a major migration from an existing service. Inertia has always been a major factor in service uptake and economic pressures are not likely to change that position other than in the business market where more managed services may well result.
As telcos move out of their comfort zone of the traditional high margin services, they will have to accept that margins will be challenged as they have to acquire content/skills to provide the customer experience they seek. Margins in the IT services and media sectors are somewhat thinner than in the PSTN or mobile segments and their coming together will bring telco margins down.
Possible scenario changes
Having looked at all of the potential changes in the market surrounding the telecoms industry there seem to be several key market scenarios that should be considered. Not wanting to sit on the virtual fence, but that is probably where we will all end up in a hybrid solution, we should consider all of them:
Telcos become marginalized and return to wholesale away from the customer
Telcos move into media services and become the key service provider for consumers
Telcos move into the IT services and software arena and become thee core ICT provider to the business community
Telcos build on the network centric nature of their business through data centre service oriented developments and become the core of the Cloud, delivering services through a multitude of channels to the end customer in business and consumer markets alike
The key issue for the telecoms-oriented players is what lessons can be learned from the companies coming out of consumer electronics, TV & broadcasting and the media from a consumer angle, and from software and IT on the business front. And, of course, we should not forget the new wave players who offer services to customers over the top of the Internet such as Google and Amazon, but to mention a few!
This is not a question of whether the telcos can dominate the value chain or eco system in these 'new' markets for them, but whether they can insert themselves into the eco system and leverage the value of the network infrastructure and its associated services in some form of aggregation role as a real service provider in the new eco system/value chain.
We are not simply converging technologies, but a whole series of subtly interlocking value chains into the new multi-media marketplace.
The calamity scenario is that the telco becomes totally disintermediated and left with just the basic connection. Is this calamitous? It implies lower costs of doing business and potentially higher, but still significant, margins.