Liquidity Impact on Service Providers?

Just about the only thing most people seemed to want to talk about, at some meetings during the recent Comptel convention, heavy with providers of wholesale communications capacity and retail service providers, was the possible impact of the banking crisis on the telecom business. It's a fair enough question.

For the most part, it is not good news. In a capital-intensive business, capital stringency is never a good thing. Some acquisitions will not happen, which means some asset sellers and buyers will be unhappy. 

Embarq, the fourth-largest U.S. phone company, has been trying to sell itself for weeks, the Wall Street Journal reports. But those plans are tabled for now because potential partners haven't been able to raise capital for a deal. That probably is going to be an issue for any would-be buyers of Nextel as well. 

Some network expansions will be put on hold, while others will be slowed, the reason being that available cash has to be funneled to operations, debt service, dividend payments and other uses when borrowing and credit are not easy options. 

On the retail side of the market, one would have to expect some organizations will delay planned purchases of new phone or other premises equipment, delay opening new branches or take other "headcount-related" moves that typically spur the purchase of new communications services and equipment. There are, for example, some indications that wireless "phone replacement" services offered by MetroPCS and Cricket Communications gained ground in the third quarter of 2008. 

MetroPCS Communications "pre-announced" an 82 percent rise in third quarter 2008 profit on a 41 percent increase in total revenue. The company added 249,000 net subscribers in the third quarter, a development MetroPCS believes shows it is benefiting from customers cutting their land lines. 

Executives at firms supplying bandwidth products say it will be a quarter or two before it is possible to assess any economy-related impact on Ethernet or bandwidth products. Some particular markets, such as New York City, might see a drop-off from financial sector customers, for example. 

On the other hand, providers of core IP bandwidth should see a largely neutral environment as far as aggregate demand, though there could be some pricing pressure, as broadband mobile services and consumption of video continue to grow. 

Nobody is buying capacity "on spec," and nobody has done so since perhaps 2001, so there is not much potential damage on that front. The fundamental price-per-megabit trends seem intact, and consumption of bandwidth likewise seems still to be in line with recent years. Capacity providers, unlike most in the business, are used to steady, relatively predictable price declines and demand growth of roughly 60 percent a year. 

And then there are the inevitable winners: companies that can tap credit to remove competitors from the market, grow service footprints and product lines, acquire human and other resources they might not have been able to afford recently.  So far, though, there is little firm evidence one way or the other about the potential impact of the liquidity problem.