While there is no consensus as to whether we will endure a recession, all are clear that we will pass through a downturn – a period of lower economic growth and rising prices. What might this mean for the telecoms community? The last downturn caused largely by the implosion of the dot.com bubble hit the telecoms industry hard. Can we expect more of the same?
The dot.com implosion of 2000 and 2001 was a seminal moment for the telecoms industry. Companies such as Vodafone and Orange had only ever known growth and increased profitability, while for many manufacturers growth had become a way of life. Companies were structured to grow quickly rather than to minimise costs. Being at the forefront of the latest developments was more important than EBITDA data, hence the incredible sums paid for 3G licenses in the UK. Suddenly in 2001 all that was called into question. Operators had to face up to a future where, perhaps, revenues would not continue to grow and new services would not forever emerge which would lead to ever rising ARPUs. The result was somewhat of a knee-jerk reaction, with operators cutting much of their spending and then having to re-justify why it was essential. The knock-on effect decimated manufacturers such as Nortel who in some cases shed half of their staff and placed severe pressure on other parts of the value chain such as consultancy.
The current downturn looks very different. Firstly, it is not centred on the telecoms industry, but is more general and is impacted by changes in energy, raw materials and food costs. Secondly, the telecoms companies and those in related value chains have for the most part already gone through a period of adjustment. Operators are now much leaner entities and the manufacturers have gone some way to adapt to this changed marketplace. Finally, and most importantly, if anything this downturn might increase consumer spending on telecoms. This is because factors such as increased fuel prices might cause some to make greater use of telecommunications rather than travelling while others might spend more time in the home, consuming entertainment, rather than going out to restaurants or shows. Indeed, as we pointed out in a recent book, telecoms is likely to benefit from recessions, terrorist threats and other shocks to the economy as consumers rely more on their phones and broadband connections while economising in other areas.
It is possible that a downturn might reduce the willingness of some to invest in new unproven technologies and business models such as mobile TV and WiMAX-style data services. This may be no bad thing. But the established players are well placed to weather any economic storm and possibly to increase in strength as a result. The downturn is different this time, at least for the telecoms industry.