The amount of digitized information pushed over the world’s communication networks continues to grow at 60% per year, placing new demands on technology companies and the telecommunications networks that underpin the digital revolution.1
The telecommunications industry has fared better than most through the recession, but now is not the time to be complacent.
Increasing pressure on profitability has companies focusing on both the top and bottom lines — actively seeking to reduce internal costs, solidify market position and compete in a rapidly changing environment.
In May 2009, Deutsche Telecom estimated that its EBITDA2 might fall 2% to 4% this year, given the present conditions. Franco Bernabe, CEO of Telecom Italia, called the first quarter of 2009 “a crisis, the likes of which we haven’t seen in 50 years.”3
Yet as tough as the economic crisis has been on telecommunications companies, it has also been a validation. According to data collected as part of our Opportunities in adversity survey, telecommunications companies have been less hard hit by the recession than other sectors of the global economy.
Recurring revenue and tight fiscal controls have enabled operators not only to survive, but to thrive during the economic downturn. Throughout the recession, cash flow has stayed strong.
Stock prices and credit lines have held up well as investors turn to telecom as a safe sector in turbulent economic times. The figure below is based on data from the Dow Jones Stoxx 1800 as of 5 September 2009. It illustrates telecom performance vs. main index performance over the last 12 months (rebased).4
Much of this resilience stems from the notion that telecom services are increasingly seen as nondiscretionary purchases. Fixed voice and broadband access services are perceived as household essentials, while demand remains high for leading-edge smartphones even as consumers delay replacement of entry-level handsets.
In some emerging markets, where consumers might have been expected to be under even greater pressure to reduce their spending on communications services, revenues have remained buoyant. The one storm cloud looming may be the potential for a lag in revenues as mobile customers look to reduce their monthly expenditure once their contracts come up for renewal.
Wireless companies have also been protected by a largely variable cost structure. One leading global operator, for example, has reported that a full 69% of its mobile costs are variable, making it possible for the industry giant to cope with all but the steepest cyclical changes.
Two classes of companies
As positive as the numbers are, don’t be deceived by the high average of the sector. The economic downturn has fragmented the industry into two classes. There are the largest players, which have managed the downturn fairly well. And then there are the smaller players that may be struggling.
Tough economic circumstances have accentuated the scale factors we noted earlier this year in The power of the pipe — interviews with leaders within the telecommunications industry in Europe and North America. The economics of telecommunications increasingly favor large integrated incumbents, as the industry stands on the cusp of a new wave of infrastructure investment.
Regardless of size, operators are using the same tactics to try to retain market share — more cost-cutting supported by value-based pricing strategies, including bundling and flat-rate subscriptions. Many initiatives are now focused on up-selling existing customers with add-on services intended to reduce customer churn.
Many new services, such as mobile internet, require major network investments, as well as larger marketing expenditures and steeper handset subsidies. But consumers appear reluctant to pay a premium for faster network access. As a result, any spending on value-added services may appear to benefit technology and internet players more than the network owner.
Telecommunications companies face multifaceted challenges in maintaining profitability. These include:
- price deflation
- technology companies influencing the customer experience
- governments demanding infrastructure improvements
In our Opportunities in adversity survey, telecom respondents indicated they were more concerned with eroding margins than revenue slowdown, compared to other sectors.
The dilemma seems particularly acute because most telecommunications companies have been in cost-reduction mode ever since the internet bubble burst in 2000—2001. Under pressure to maintain margins in the face of rising vendor costs, this instinct seems to be stronger than ever.
Expansion plans in developing markets have been and may continue to be hard hit. But even as some telecommunications companies keep cutting back, others are moving confidently ahead with their plans.
Jose Maria Alvarez-Pallete, the Latin America director of Telefonica, told the Reuters Latin American Investment Summit in May 2009, “We do not see the need for our investments to be conditioned to the current situation, we are still seeing growth and we still want to capture it.”5
Positioning for the future
Long-term market dynamics can change surprisingly fast in telecommunications. The amount of digitized information pushed over the world’s communication networks continues to grow at a rate of 60% per year, placing new demands on the technology companies and the telecommunications networks that underpin the digital revolution.6
Operators that react too slowly to this changed environment may lose competitive advantage when a new market order begins to take shape. But moving too fast could prove equally fatal.
Consumer behavior — demand for mobile internet services, for example — has long lagged the development of new business models and new technologies. In an increasingly complex value chain, telecommunications companies should begin to think about a strategy that strikes a balance between avoiding risk and seizing opportunity.
1. "EMC and IDC Study Forecasts Explosive Growth of the Digital Universe," Wireless News, 17 March 2008, via Factiva, (c) 2008 M2 Communications, Ltd.
2. Earnings before interest, taxes, depreciation and amortization.
3. Stefano Rebaudo, “UPDATE 2-Telecom Italia 2008 div 'floor' to build on – CEO,” Thomson Reuters via Forbes.com, 8 April 2009.
4. Thomson Datastream, 5 September 2009
5. Elisabeth O’Leary and Robert Hetz, “Telefonica sticks with Latam plans,” Reuters, 8 May 2009.
6. "EMC and IDC Study Forecasts Explosive Growth of the Digital Universe," Wireless News, 17 March 2008, via Factiva, (c) 2008 M2 Communications, Ltd.
