Recession Not the Issue, Structural Is What Challenges Telcos

The global telecom industry performed pretty much as it always does during the recent recession. Basically, revenue growth continued at low single digits, overall. As always is the case, some industry segments fared better than others, but consumer demand for communications and entertainment video services was steady.

Some might wonder whether some clear signs of consumer frugality will affect growth rates for some time to come, but even that is not the big issue.

The big issue is that wired communications is an industry with a cost structure too high for expected revenues over time, so cost cutting must continue and network operations must become even more efficient than they have, up to this point.

Ovum researchers point out that "the economic downturn hasn’t resulted in the downward pressure on telco top lines that many expected."

But Ovum researchers also point out that "revenue growth is in decline for many mature market operators, and slowing for those in emerging markets."

“Market saturation, increased competition and regulatory intervention on roaming and termination rates won’t disappear just because the economy picks up”, says Ovum Principal Analyst Clare McCarthy.

Telcos are cutting operating expenses and capital investment. They are also accelerating employee early retirement programs and stockpiling cash. Many telcos in fact are emerging from the downturn with healthier balance sheets than when they entered, as well as significant cash balances, Ovum says.

What's in Store for Telcos in 2010?

U.S. telecommunications service providers lost about 10.5 percent of their current installed base of voice access lines in 2009, Fitch Ratings estimates. The bad news is that losses will increase to 12 percent in 2010.

The good news is that business line losses, which accelerated during 2009, will stabilize. Also, market share gains by cable competitors lessened in 2009.

But pressure from wireless substitution and weak housing starts will continue in 2010. And there is a statistical headwind as well: as the installed base of lines shrinks, the loss of any given number of lines automatically represents a bigger percentage.

Business and residential access line losses should stabilize in 2010 and continue in the range of 3 million to 3.2 million per quarter. That's a bit better than has been the case over the last year or so. The bad news is that because the denominator (installed base) now is a smaller number, even a smaller numerator (lost lines) will result in a higher rate of loss.

Like cable companies, the growth rates for new broadband access subscribers has been slowing, and will slow further in 2010.

Fitch estimates that broadband access subscriber growth slowed in 2009 to 1.7 million net subscribers. Fitch forecasts that total broadband net subscriber additions will slow in 2010 to approximately 1.4 million. The slowing growth is reflective of higher penetration of these services and to a lesser extent a growing substitution by wireless data.

With regard to network-based video, Fitch estimates that offerings by AT&T, Inc. and Verizon Communications Inc. will grow by 2 million subscribers in 2009, but this rate will likely slow in 2010 to approximately 1.5 million. The slowing growth rate reflects increasing penetration and a slowing of coverage growth as these operators enter their final phase of deployment.

Finally, business and commercial service revenue erosion peaked in first-quarter 2009 and Fitch expects the total 2009 decline to be over six percent for wireline companies with this trend the result of growing unemployment.

It is likely that the unemployment rate is near its high so Fitch believes that reductions in business and commercial revenues should be modest, in the range of one percent, in 2010.

In total, Fitch estimates that aggregate wireline revenues will decline in 2010 near the mid-single-digit range, a modest improvement over 2009. Operators with a larger growth services revenue mix should experience revenue erosion in the low single-digit range. EBITDA will similarly fall in aggregate by a low- to mid-single-digit range for the industry as benefits from headcount reductions offset losses of high-margin legacy services.

How Strong a Recovery; What Impact on Communications and Technology?

Since 70 percent of U.S. economic activity is generated by consumers, consumer behavior will be key to the arrival of a sustained period of growth. Conversely, anything that imperils consumer spending will weaken, choke off or abort any recovery.

In the past, this hasn't been an especially tough question to answer. Historically, recessions and recoveries roughly conformed to the principle of the bigger the bust, the bigger the boom, and vice versa. That, in turn, was underpinned by the underlying robust health of the U.S. economy.

Real growth in the four quarters following postwar recessions averaged 6.6 percent and 4.3 percent over the following five years.

Those figures are substantially above what economists seem to be calling for at the moment. The current recession has lasted a record seven quarters and has been marked by a near-record average gross domestic product decline of 1.8 percent per quarter.

All of that would, by historical standards, lead to a prediction of a powerful and sustained recovery. Yet forecasts of a two-percent recovery in growth are only one-fourth as strong as postwar experience suggests.

That suggests economists believe something has changed. We can argue about what the changes might be, and what is causing them. But this is not a political issue. As a simple matter of hope for America to get back to work, the anemic growth forecast is worrisome.

As someone who historically has tracked new technology and communications, as well as a citizen who wants the best for his country, it must be said: this does not bode well for our nation, our children or faster deployment of all sorts of interesting and useful tools people can use to enrich their lives and their work.

We might disagree from time to time about what should be done. That isn't the point. Clearly, something rather important is happening; something that defies historical precedent.

Perhaps the economists are wrong. They have been wrong in the past. I hope they are wrong about this. I continue to believe in the power of technology to make a huge difference in peoples' lives, and to fuel robust economic growth, which is, first and foremost, the way we are able to increase wealth and spread it around. I hope, for our nation's sake, that this continues to be true.

For that reason, I really hope the economists are dead wrong about the recovery rate. If not, we have some serious soul searching to do. Perhaps we have been dead wrong about some of our core beliefs.

Global Telecom Revenue Up Again

For all the talk of how IP-based services will cannibalize legacy communications revenue, only narrowband voice services seem to be stalled at this point. In 2008, projects Insight Research, worldwide service provider revenues are predicted to grow to $1.7 trillion
in 2008, and to keep growing to $2.7 trillion in 2013.

While the overall CAGR is 10.3 percent, there are notable regional differences. The Europe/Middle East/Africa (EMEA)region has the slowest growth rate at 5.2 percent annually. The Asia Pacific region is experiencing the highest five-year growth overall, at 15.5 percent. The Latin American region is next with a growth of 12 percent.

Broadband wireline revenues are growing at a 6.7 percent cumulative annual growth rate over the forecast period, while narrowband wireline services revenues are essentially flat at 0.4 percent over the same period.

Clearly wireless and broadband are where the growth is. Wireless revenues will grow from 60.3 percent of all telecommunications services revenues in 2008 to 72.3 percent in 2013.

Wireless services revenues are growing at 14.4 percent over the forecast period, while wireline services, which includes both broadband and narrowband services, grows much more modestly at 2.6 percent.