Impact of Economic Crisis on Telecom Industry

recessionThe 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.

There are many telecom companies around the world, read about Ehsan Bayatthe head of Afghan Wireless.

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16 Comments on "Impact of Economic Crisis on Telecom Industry"

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Posts about Mobile Internet as of March 17, 2009 | IMHO Conferences & Consulting
7 years 2 months ago

[…] […]

Amit Agarwal
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Amit Agarwal
7 years 2 months ago
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… Read more »
Gerhard Fasol
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Gerhard Fasol
7 years 2 months ago
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… Read more »
Andis Locmelis
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7 years 2 months ago
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… Read more »
Jeanette Whyte
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Jeanette Whyte
7 years 2 months ago
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… Read more »
Pandith JP
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Pandith JP
7 years 2 months ago

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!

Paritosh Rai
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Paritosh Rai
7 years 2 months ago
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… Read more »
Ahmed Kamel
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Ahmed Kamel
7 years 2 months ago
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
Tom Swan
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Tom Swan
7 years 2 months ago
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… Read more »
Akram Tamimi
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7 years 2 months ago

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

Mehul
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Mehul
7 years 2 months ago

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.

Robert Syputa
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Robert Syputa
7 years 2 months ago
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… Read more »
Philip Virgo
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7 years 1 month ago
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… Read more »
Rupesh
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Rupesh
7 years 1 month ago
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… Read more »
khalid qazi
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khalid qazi
7 years 1 month ago
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… Read more »
Suman
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Suman
6 years 8 months ago

hi Mohit,

you have helped me a lot in preparing my project report, which is about telecom sector.
thanks a lot.
keep it up….

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