Impact of Economic Crisis on Telecom Industry
The financial crisis that engulfed the world last year is now playing out in full proportions. This has spread to each industry and telecom industry is no exception. The impact of the recession in the western world and economic slowdown in the emerging countries is being felt in a big way by all the players in the ecosystem. It can be predicted that 2009-2010 will mark a very difficult and crucial period for the entire industry. This post is to analyze the impact of the crisis on each of the players and what can they do to minimize the impact
Carriers: It was earlier thought that the carriers would be spared from the impact of economic crisis. However, it is increasingly evident that they are indeed getting impacted due to restricted access to capital and consumers limiting their usage. In many emerging markets across Asia and Africa, the operators are small and dependant on the foreign capital to expand. The operators are constrained not only by the capital for investment but also by the lack of working capital. Lack of new investments is having an adverse impact on network coverage expansion. 3G auctions planned in many countries have also been shelved for fear of non participation by large operators. Investments in new technologies like LTE and WiMax are likely to be scaled down and I would not be surprised if many proposed installations of WiMax are permanently permanently after reviewing the business plans in light of current crisis. International long distance carriers are likely to see sharp fall in the traffic, due to lower IT spending and lower cross-country investments, which is unlikely to be compensated by the increase in traffic due to travel restrictions across the companies. The operators may resort to tariff reduction in a bid to increase the minutes of usage (MoU) but this would restrict their ability to offer flat data prices or other innovative data models. I foresee consolidation happening amongst carriers as the weaker ones bow out of the industry.
The operators would do well by concentrating on cost reduction initiatives. They may follow the initiatives of the Indian operators by adopting light-asset operation models, putting greater pressure on equipment vendors to adopt new models like managed service and capacity service. The carriers would do well by actively engaging in all kinds of infrastructure sharing opportunities. The cash rich operators may look for new M&A opportunities and cash strapped carriers will do well by limiting the handset subsidies. It is estimated that the industry spends over $50 billion in handset subsidies alone.
At least in the next three years, the traditional CAPEX will experience a CAGR of -3% to -4%, which forebodes a turning point for industry transformation. When revenue from voice services and traditional CAPEX cannot cover operators’ total cost of ownership (TCO), new services and new investment will become new opportunities and breakthrough points. New information consumption models, mobile broadband, and Internet applications will become the highlights of growth. This is the right time to evolve new business models to increase services consumption. Enhanced service consumption would ultimately benefit the carriers when the things start to improve. Operators can present mobile broadband as a viable alternative to fixed internet
Handset Vendors: Handset vendors were the first ones in the ecosystem to feel the pinch of the economic crisis. The replacement cycles lengthened which resulted in the lower replacement volumes and overall demand for new phones. At the same time, the device vendors witnessed heavy down-trading of devices by consumers leading to lower ASPs. The operators in the developed economies started to reduce the subsidy which also had an adverse impact on the value of the market size. The consumers on their part started to go for lower value contracts when their contracts were up for renewal and that lead to further erosion of device ASPs. Various device vendors and industry analysts have estimated the demand to be lower in 2009 by 5-10% over 2008.
Handset vendors need to focus on the costs and supply chain. Vendors may need to shift their high cost manufacturing units to locations where the cost of production is lower. New cross currency dynamics may also play a part in optimizing costs. They also need to rationalize the number of models to have better utilization of marketing monies. The emerging markets like India, China, Nigeria, etc. have been adding record subscriber additions which to a large extent are compensating the device vendors for loss of replacement volumes. The handset vendors should focus on value for money models and can learn from their experiences in emerging markets. I mean they can launch highly successful models of the developing countries in the developed markets and thereby increasing their market share as well as lower the cost of the model due to economies of scale. The handset vendors may also need to take a relook at their business models, partly due to the fact that carriers across the world are reducing subsidies and partly to emerge as end to end solutions player (e.g. RIM, Apple). The lower margins in the devices can be off-set with some of the services revenues if the solution is easy to use and relevant to consumer needs.
Equipment Vendors: The equipments vendors would be under pressure due to reduced investment by operators. However, if they focus on the managed services, they can get additional recurring revenue streams that would make up for the lower spending on network. The equipment vendors should wear the consulting cap and develop a provocative point of view on critical issues (like mobile broadband) that would entice the customers into spending. The vendors should try to develop new business models based on revenue share rather than fixed costs where the payments are linked to the benefits that the customer gets from the solution.
Content and Application (C&A) Providers: In one of my previous posts, I had predicted that the mobile entertainment would increase in times of recession. I got many responses from the readers both for and against the argument. I still stand by it that if the content is really good and affordable, it could be the cheapest source of information and entertainment in such times. If there are applications that help in job search or skill enhancement, they are bound to find favor amongst consumers. Relevance and pricing would be the key. However, lack of available funding to finance the development of new applications, and faster migration to ad-funded services – would have an impact on revenue growth.
C&A providers need to take a hard look at their business models and need to incorporate new ways of reducing cost of ownership for the consumers. C&A providers can look at sachet model to offer content at affordable pricepoints or they can offer unlimited access to content for a fixed fee. With the launch of new application stores by Nokia, Samsung, Microsoft, etc. the content providers should focus on the new application stores to compensate for any loss on the operator portal. The economic downturn will push operators to release their grasp on the mobile content industry and open-up mobile Internet. This would be a great opportunity for the content providers to increase their revenue share and offer content at affordable price.
In summary, it is clear from the above discussion that each of the players of the ecosystem would need to take a relook at their business models. The winners would be decided on the basis of the innovation that they can bring to their business models. The survival of organizations would not depend on how fit they are but how responsive are they to change.
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Hi Mohit:
A good article but I have to say not as interesting as your previous ones…Anyways, my comments are as following:
Operators – In the developed nations where carriers bundle their handsets along with the contract, I feel carriers would need to come out with the ‘Airlines kind of’ of pricing model in which they can increase the price of models which are very popular and decrease the price of models which are not selling at all…One of the biggest telecom companies in the world spends 1/3rd of its working capital on buying handsets but they dont manage their inventory very intelligently and in the real time…Operators have to become smarter in bringing down their inventory levels and somehow bring down their WC requirements.
Secondly, operators are in service industry and should try and think of themselves as retailers…Try and mine your existing customers data such that you create incentives for them to spend more with you…Tesco recently said that they attribute $150m from such activities alone and they dont spend much to do this…So Operators wear your retail cap…
Handset Vendors – As you rightly pointed out, pricing is the key…Lots of handset makers are coming out with just too many handsets which is hard for even them to differentiate between 2 or 3 different handsets…
Spend wisely and dont create handsets which have everything in it…Not all the people in the world are looking for camera and GPS in the phone they own…Yes, Nokia is the biggest producer of cameras but then what is the percentage of phone being used as a camera today?
Equipment Vendors – Not much to say
Content Providers – I think this is the key these days in the telecom value chain and they are the ones who have just shaken up the whole industry but the fact still remains they are hardly any content providers who make money from digital content…Hardly anybody has mastered the art of making money through this…So creating good content by itself is not everything…One has to learn how to market it and make money out of it…To do that understand your customer base and do targetting marketing and promotions…Create incentives for your customer base to buy your content…Make them feel that cost of living without your content is greater than the cost of buying your content…
I know its a long comment, but just wanted to give my list of ideas as welll…
Amit Agarwal
Hi Mohit,
Nice article. I am afraid, we can tell almost the same about many industries now…
What I would add here is:
1) CAPEX reduction for telcos now will come back in 2010 and 2011 with fewer launches of new services,
2) Probably we will not see “boom” in M&A activities, as owners of potential targets should have a time to come out of shock from the look how their entities value has deteriorated. I think, only exception will be targets to which this is the last alternative.
3) Handset producers – I think demand for different built-in fetishes will reduce for a while, so the proceeds from high-end handsets will go down mostly from volume drop.
4) Equipment vendors. First, what comes into my mind – to run to my broker and do some short sales deals with their shares. Second, what comes – stop, stop, they have gone through several in-industry crisis situations, so their revenue streams are well diversified now (hardware, software, maintenance, repairs, swaps etc) and what else – they have good “customer locking” strategies. So, for operator, it is pretty hard to change capex+opex spending in short term.
Hi Mohit,
I enjoyed your article!
I would like to add a couple of points:
Not all operators in Asia and Africa are small and dependant on foreign capital to expand nor are they constrained by lack of working capital. Operators in China are investing huge amounts of capital to rollout 3G networks, which should provide a huge boost to some handset manufacturers and equipment vendors.
There are also several Middle Eastern operators (e.g. MTN, Batelco) that have strong balance sheets and are seeking to acquire new operators/licences in Middle East and Africa, which again should provide a boost for equipment vendors and handset manufacturers.
I am in agreement with you that mobile entertainment should increase in times of recession. However, for this to happen each of the various players (operators, handset vendors, development community, etc,) need to adopt a more “open approach” and work together to develop workable business models. There are lots of separate initiatives such as GSMA’s OneAPI and as you mentioned the apps stores (Nokia, Apple, Android, etc.), which should help content providers increase their revenues but perhaps there needs to be more collaboration between these various initiatives to result in a “win-win” for the industry.
Jeanette
A radical thought for Handset Vendors: Sale of used or refurbished handsets (think Amazon, Maruti). Apart from increasing revenues and profits, it will also provide useful insights into consumer behaviour.
Content vendors should seriously look into innovative business models for charging for content – other than advertising. Companies like Google are making all (or most of) the money by directing their users to the content they are looking for!
In Japan, the financials of telecom operators is excellent, and investments are increasing. Read the details in our market reports:
http://www.eurotechnology.com/store/
and especially in our overview report:
http://www.eurotechnology.com/store/jcomm/
which also includes the latest financials.
What have Japan’s operators done in anticipation of the crisis? They have largely eliminated the handset subsidies and changed the handset business models which has greatly improved the financials of the operators and has been very bad for the handset industry, again read the detailed analysis and data in our JCOMM report on Japan’s telecom sector:
http://www.eurotechnology.com/store/jcomm/
Interestingly NOKIA’s response to the crisis was to essentially terminate business in Japan – after working for 20 years to achieve a 0.3% market share in Japan.
Gerhard Fasol
http://www.eurotechnology.com/
fasol@eurotechnology.com
Great article!
As correctly stated by you, CAPEX and OPEX are the key challenges in 2009 and 2010. Cost is going to play a vital role. Vendors either cut their margin and earn on economy of scale or get out of box idea to deliver more in less. Good think look from network SON (Self Optimization of Network) features. How well they are designed and minimum manual intervention.
Vendors will pay a big role by demonstrating that saving on CAPEX by bringing down cost per MB and OPEX by reducing maintenance cost (high MTBF), optimization and planning cost, size of equipment (reduce lease cost, etc).
Dear Mahit,
The grade of the impact will vary according to geographical region. Here in the gulf region the impact is less because of avialable cash from the days of the booming oil prices. Carriers in this geographical area are still considering aquisitions and mergers and are also lookingg for ” inside house” re-arrangement and restructuring to cut on costs and increase quality of service to customers. For vendors and professionals with OSS/BSS understanding and experience this might be a golden opportunity. The same could also apply for System Integrators and experienced Project Managers.
Best Regards,
Ahmed Kamel
Hello Mahit,
I enjoyed your article. In some areas, I believe the telecom industry is quite healthy. Those involved in expanding broadband networks will likely fare well over the next few years. Subscibers today would rather give up their landline phones than give up HS Internet access. Is life possible without Google?
On the other hand, it appears that IPTV expansions beyond the Tier 1 market will suffer. New projects will likely be put on hold, with the justification being, that service providers wish to wait for technology to mature. The real answer is, they don’t want to invest scarce capital in anything that will not turn a near-term profit.
One rather new entry, Over-the-top video, I think could be the dark horse. TV Subscribers today have HDTV with over 200 channels. They sit in their easychairs and say, “Nothing’s on!” I believer that OTT video will be a reasonable means of entertaining ourselves through tough times, rather than watching the news and thinking of our fathers’ stories about the Depression.
Thanks,
Tom Swan
Operators are starting to be more and more concentrating on OPEX/CAPEX savings, but still enough room for spending.
With HSPA and LTE knocking on the door, and the need for mobile broadband on the rise network modernization become immenant.
Hence, there is a good opportunity for vendors and we still see the spending spree on the go, probably less than the last few years.
Today we heard of BT signing a deal for a global VoIP QTalk product, and one can get the feel of cost obsession which the vendors more or less practicing the same.
BR,
Akram Tamimi
What do you feel about the second-hand (gray) market for handsets? Ideally in an Indian environment, where mobiles are increasingly penetrating the lower income class (autorickshaw drivers & house maids), the market for second hand mobiles should hold its momentum, and pure play carriers can still tap this market. In that case don’t you think that the end to end service provider is at a loss as they do not have access here?
Also, I feel that handset vendors should target markets like India with better support. Imagine the size of the market lost to fake batteries, headsets etc.
The downturn in the economy has perverse beneficial aspects to it:
- It forces more re-evaluation of where products and markets are headed and how greater value can be delivered to under-served populations.
- If you believe that the environment is a growing concern, then it can be seen as a needed wake up call. Because many of us have jobs in the industry as marketers, developers or analysts, we tend to drive for growth above all else. Growth is beneficial but we must increasingly think in terms of social costs and benefits trade offs. I happen to believe that ITC including mobile devices provides positive net environmental impact and magnified social impact that more than justifies continued promotion. But we must keep in mind that growth is not written in stone. Further compelling the industry to become lower cost, environmentally friendly including lower power consumption and self configuring distributed networks helps the continued proliferation of mobile broadband at a lower cost and more acceptable environmental impact.
So, as painful as this may be, including in personal terms as fellow colleagues may face layoffs, there has been a growing need for society to rethink how it grows so that it becomes more sustainable.
Economic downturns usually result in acceleration of some trends such as commoditization of basic services and resurgence of reseller channels. We saw this happen to some degree during previous cycles, although we are now reaching into somewhat economic unknown territory.
I was most interested in the analysis but a recession is a time of change – including to new business models.
I am currently working, among other areas, on routines to aggregate demand so as to turn what is perceived as high risk investment in infrastructure into low risk leasing deals underpinned by long term contracts.
One of my class at Business School (London Business School MSc06, i.e. 1971 -3) made millions doing just that during the UK rail privatisation when the rolling stock operating service companies were formed.
They were floated as supposedly risk investments when they had 3 – 5 year contracts and the timescales for new build meant these would inevitably be extended to 10 -15 years. He expected to make money but not nearly so much as quickly as he did. When others realised what he had done he was bought out with even cheaper finance than he and his partners had raised.
Most current UK costings for next generation fixed/mobile broadband networks are cloud cuckoo land wet dreams which can (and must) be radically cut (sometimes by 75 -80%) by the imaginative use of existing infrastructure.
The other side of the equation is to aggregate public and private sector demand. This is easier said than done but I have been involved in both failed and successful exercises in the past. Then add 3 – 5 years contracts, including with those who pay up-front for “must have” facliities, and crisis turns into opportunity – including to pull through mass-market demand for next generation multi-media mobile devices.
Recession then turns into opportunity when major suppliers support patchworks of incremental, local networks, using mixes of terrestrial and satellite wireless and fibre for both trunking and local distribution. That requires, however, going outside their marketing channels.
That is much easier said than done unless and until desperation drives innovation – I had five years as a Corporate Planner (i/c planning and budgeting for the European Subsidiaries, Middle and Far East, R&D, “office systems” and “innovative applications”) with a multinational operating in most countries of the world.
The temptation to follow the herd can be overwhelming. It was often up to me to “prove” to my board that we would do much better by not joining the lemmings.
Because I had been hired because I had previously been a business development manager with a major ICT company, including risk assessments on bleeding edge innovations and changing markets, I had credibility and prevented the organisation from going down a whole series of financial black holes by no only encapsulating risk analyses into analogies that the board would understand but also giving them lower risk/high profit ways of obtaining “bragging rights” as to our leading edge credentials. Part of the approach was to focus on market, as opposed to technology innovation, while supporting a long-standing “family” of enthusiastic academic and SME innovators who brought us their ideas to test out. The other part was to have a stable of low cost alternatives that would enable us to increase market share when times were hard but leave on the back burner when times were good and we were able to milk the cash-rich, sense poor.
That did, however, mean ignoring calls to” optimise”. Today’s optimal solution is tomorrows sub-optimal
solution. And the moment you assume linearity in any solution (as do far too many economists and mathermaticians) you have assumed away both problem and innovative solution – and joined the lemmings.
Philip Virgo, Secretary General,
EURIM,
The Information Society Alliance
http://www.eurim.org.uk
virgo.philip@eurim.org
I am working with one of the major middle east telecom company with Corporate finance function and having 1o+yrs of telecom experience. In my opinion major impact will be on Capex spent, Companies will defer thr capex requirement and will not be much open and liberal in investing in new technology and products. 2009 and 2010 is the year of keeping cash intact and reduce debt, as one of the HSBC recent reports say “Cash is King” in these times.
Good time for merger and acquisition, some of the European and Asian operatiors will be on sale, cash reach companies will acquire them.
Revenue growth will be minimal or negative in middle east, Asia will grow slow.
Negative revenue growth in middle east will be on account of slow down and negative population growth. You may see negative population growth in Kuwait in Q408 on account of job loss , people are moving back to thr countries after losing thr job, Same will be the case of UAE, Bahrain and Qatar.
India’s revenue growth will be slower on account of competition (Reliance GSM, and TRAI’s tariff reduction).
Hi,
The new subscribers in India are coming at around $2 ARPU, which will make it tough for the operators to sustain them over long time. The operators need to manage the costs of maintaining the subscribers and one such way could be charging a premium to call on the ‘customer care’ line.
Another way of subsidising services for these low ARPU subscribers would be to rent their “Caller Tune” service like a voice hoarding to corporates which in turn would help the telecos to ask for a rental from the corrporates and post that as credit into the subcribers account who has put his caller tune on rent. This way also a telco could make some profits, while subsidising the service by around 30 cents.
The handset vendors need to launch variants of popular models, like without Infrared as that has been taken over by bluetooth, and thus continue to create the demand, while releasing one more handset in the replacement market.
Rgds
hi Mohit,
you have helped me a lot in preparing my project report, which is about telecom sector.
thanks a lot.
keep it up….