What Would Double-Dip Recession Do To Telecom?

It isn’t yet clear whether Europe, or other regions, will enter a double dip recession in 2012 or not. Analysts at Gartner already are predicting that the next recession in enterprise information technology spending has virtually begun, and that spending will slow through 2015.

The impact of the Great Recession beginning in 2008 is easy enough to describe. According to TeleGeography Research, revenue growth  slipped from about seven percent annually to one percent in 2009, returning to about three percent globally in 2011.

The Economic Cycle Research Institute says the U.S. economy is either just beginning to dip, or is about to do so, says Lakshman Achuthan, the managing director of ECRI. "The critical news is there's no turning back,” he says. “We are going to have a new recession." U.S. Double Dip?

If that turns out to be correct, service providers probably will encounter revenue pressure much as was seen in the last recession. The issue will not be so much that “lines” or “accounts” are abandoned, as that users will consume less. So “line loss” will not be the issue so much as “average revenue per user.”

Some believe that, even in the absence of a new recession, there will be no quick post-recession recovery for Western European telecom revenue, according to new forecasts published by Analysys Mason. End-user spend was down by 4.4 percent in 2009, and will decline at a compound annual growth rate (CAGR) of –1.8 percent until 2012, the firm predicted.  No quick return to growth

What was expected in the last recession was a greater degree of product substitution. "The more flexible cost structure of mobile networks means that mobile operators are winning more of the lower usage end of the fixed services customer base," the International Telecommunications Union says. "This has happened in voice, and 2008 has demonstrated that mobile broadband can substitute for light-usage DSL." Recession impact on telecom

Also, more consumers are likely to opt for prepaid and flat-rate packages for telecom services to try and control their spending.

Point Topic does not believe any recession would affect “line growth.” The total number of broadband lines in these countries will grow from 393 million by the end of 2008 to 635 million by 2013.

Adding in estimates for the remaining smaller countries suggests that the world will add a further 48 million broadband lines to reach 683 million in total over the period. Point Topic forecast

This represents a 10.8 percent per year compound growth rate, well down from 27.7 percent per year in the 2004 to 2008 period, but still substantial, Point Topic argues.

One major reason for the slowdown in growth is that most of the richer countries are approaching saturation with broadband; new customers are becoming harder to find and sign up. At the same time poorer countries such as China and India have gone through the initial phase of rapid growth and are now growing steadily rather than exponentially.

Whatever else one might say, the number of accounts or lines in service seemed relatively unfazed by the recent “Great Recession.”  Fixed voice subscriptions will continue a downward trend, as users increasingly switch to mobile and VoIP substitutions. The recession impact is likely to be on average revenue per user, not abandonment of service, as such. Line growth

For its part, Gartner believes enterprise IT spending in Europe, the Middle East and Africa (EMEA), which will be €604 billion in 2011, a 1.4 percent decline from 2010, will face headwinds through 2015.

Euro-based enterprise IT spending in the region will grow by 2.3 percent in 2012. Western Europe will continue to slow EMEA growth through 2015, according to Peter Sondergaard, senior vice president and global head of Research at Gartner. IT to Hit Double Dip

“The second recession is about to hit and CIOs must decide which way to turn,” said Mr. Sondergaard. “The continued global economic uncertainty and the eurozone crisis will impact your IT budget in 2012, and your business will face difficult budgetary questions,” says Sondergaard.

Sharply lower economic growth in the mature economies of Western Europe is the reason for the tight IT budgets.  Austerity measures brought in to deal with the sovereign debt crisis will curtail government spending on IT in particular and hinder economic growth, which will result in lower demand for IT products and services from businesses.

Western Europe, which accounts for 80 percent of EMEA enterprise IT spending, will see enterprise IT spending in euros decline by 1.8 percent in 2011 and grow by only 1.5 percent in 2012, Gartner predicts.

Government (including education) IT spending will account for the largest share of Western Europe enterprise IT spending in 2011, at 20 percent of the total. Gartner predicts that this sector will decline by 4.8 percent in 2011 and 1.7 percent in 2012, and that it will not recover to the level seen in 2010 until 2015.

Can European Telcos Return to Growth in 2016?

Service provider revenue in Europe has fallen consistently since 2009. That is not completely unusual. In five of six years since 2009, service provider revenues also have fallen in Japan.

So will the European telecommunications business return to growth by 2016? Analysts at IDATE say that will happen, although the impact of what appears to be a threat of recession in Europe might make that a daunting prospect.

The impact of the Great Recession beginning in 2008 is easy enough to describe. According to TeleGeography Research, revenue growth slipped from about seven percent annually to one percent in 2009, returning to about three percent globally in 2011.

So a new recession in Europe could well wipe out expected revenue gains expected to be in low single digits in European markets between 2015 and 2016.

Earlier in 2014, economists expected European Union economic growth of between 1.5 percent and 1.75 percent. But growth rates have dipped lower most of 2014, and might go negative in the fourth quarter.

Telecommunications service revenues were four percent lower in 2013 than in 2012, but the revenue decline should slow to perhaps -1.8 percent for 2014, with 2015 a transition year, IDATE expects. In 2016, European Union telecom revenue is projected to reach one percent for the year.

But a new recession could dash those hopes.   

In the EU28, mobile average revenue per user will have lost some 25 percent of its value between 2008 and the end of 2014. “Hence, in spite of the fact that mobile penetration

stood at 129 percent of population in europe in 2013 and will keep growing, operators earn less revenues year after year,” IDATE says.

Fixed high speed access average revenue per user was EUR 24.9 per month in 2008, declining steadily to EUR 22.3 per month in 2014. Fixed network voice revenue has been falling for about 14 years.

The IDATE study, sponsored by ETNO, the organization representing European telecom service providers, notes that 2014 revenue will fall about four percent, following at 2.9 percent decline in 2013.

Even mobile Internet access, a growth category in most markets, dipped 1.8 percent in 2014, though a better performance than the 4.5 percent decline in 2013.

Mobile remains the dominant form of Internet access, with the number of subscriptions approaching the 800 million mark in Europe. Mobile Internet access subscribers grew 0.9 percent in 2013 and likely will grow slightly by the end of 2014 as well.

Fixed broadband subscriptions grew from 157.7 million in 2012 to 163.8 million in 2013 and are expected to stand at 170 million by the end of 2014.

According to IDATE, at the end of 2014, for the first time, fixed broadband subscriptions will outnumber traditional circuit-switched fixed lines.

The big takeaway, though, is that the IDATE forecast will bump up against a likely recession in 2015 that is likely to depress revenues. All that is required is for a recession to shave one percent to two percent off service provider revenue growth rates.

Will Canada Telecom Revenue Drop 1% in 2020 Because of Covid?

It might be rational to expect connectivity provider revenue to dip in the wake of the economic shutdowns imposed to combat the Covid-19 pandemic. That might not prove to be the case. 

A better assumption is that markets growing before the pandemic will see reduced growth, but not a dip in growth. Markets that were flat will probably simply remain flat. Markets that were contracting before will contract afterwards. 

That might make sense two years after 2020, some might argue, but will not apply to 2020. After all, the economic impact of efforts to defeat the pandemic will lead to major dips in economic activity and employment. There will be significant numbers of business bankruptcies. All that should reduce aggregate demand for communications services. 

That appears to drive analyst thinking at IDC Canada. Analysts expect that the telecom services market will contract by almost C$2 billion with the overall revenue expected to fall to C$47.9 billion – a negative -0.8 percent decline from a year earlier. 

“As recently as December 2019, we had projected positive 3.2 per cent annual growth for the sector in 2020,” they say. By comparison, IT spending in Canada is expected to decline by negative five percent in 2020, according to IDC Canada's most recent forecast estimate.

The greatest adverse impact on telecom spending forecasts is the projected number of business failures, IDC predicts. The contrary argument would be that communications spending, overall, did not seem to dip in the wake of the great recession of 2008, but only flattened. 

source: IDC 

A dip in revenue might seem the obvious call, as consumption and consumer spending fell virtually across the board in the great recession of 2008, and the virtual shutdown of large parts of the economy in response to the Covid-19 pandemic would seem likely to produce something similar, if not worse. 

But that does not directly translate into consumer, small business and enterprise spending on communication services and products. According to TeleGeography Research, revenue growth  slipped from about seven percent annually to one percent in 2009, returning to about three percent globally in 2011. The recession affected revenue growth, but there was no dip in total revenues, overall. 

Underlying revenue trends will persist, in other words, within a couple of years after the event. Markets that were growing before will continue to grow. Markets that were contracting will continue to contract. Markets with slightly-positive growth will continue to grow slowly. 

Looking at cash flow earned by Canadian communications firms, total cash flow has been dropping since 2015, according to the Canadian Radio-television and Telecommunications Commission. In terms of revenue, mobile and internet access revenues (not profits, necessarily) have been growing since about 2014, while all other revenue sources have shrunk. 

source: CRTC

One important input for the mobility business that drives overall revenue is the role played by device sales, with a 43 percent compound annual growth rate between 2014 and 2018, while voice and messaging revenues actually had negative rates of growth, with data services, roaming and other sources were up less than six percent. 

Component	2014	2015	2016	2017	2018	Growth (%) 2017-2018	CAGR (%) 2014-2018
Basic voice	8,665.5	8,689.0	8,834.3	9,219.7	7,747.3	-16.0	-2.8
Long-distance	880.4	656.1	547.0	481.9	417.4	-13.4	-17.0
Paging	17.3	12.6	11.1	8.9	9.0	1.1	-15.1
Terminal equipment (including handheld devices)	1,673.7	2,129.8	1,911.1	1,896.1	6,961.9	267.2	42.8
Data	8,672.6	10,034.9	10,980.5	11,832.4	10,857.0	-8.2	5.8
Roaming and other	1,035.7	1,001.9	960.0	1,047.2	1,125.0	7.4	2.1
Data, roaming, and other – subtotal	9,708.3	11,036.8	11,940.4	12,879.6	11,982.0	-7.0	5.4
Total	20,945.2	22,524.3	23,243.9	24,486.2	27,117.7	10.7	6.7

source: CRTC

In other words, perhaps Canada is a market where revenues and profits had been dropping before the impact of Covid-19. A dip in 2020 revenues, as a temporary impact, ignores the preceding trend, which was downward. Again, the point is that the underlying preexisting trend prevails, after the temporary Covid-19 effect in 2020. 

Telecom service provider revenues did not change much in the wake of the great recession of 2008. In fact, according to some studies, U.S. consumer spending on communications actually grew, overall, in the wake of the Great Recession, for example. 

Some surveys found that device purchases slowed during the recession. But some surveys also found consumers willing to make other tradeoffs to keep their broadband, mobile and video subscription services. There was, in other words, less willingness to cut high speed access than other services, for example.

The point is that service provider revenues might not fall, though growth might be reduced to zero. In fact, some studies show that global revenue continued to grow even during the recession of 2008. 

 

IDC Canada says the fixed network voice, which has been a shrinking market, remains the worst-performing segment under all scenarios because of continued mobile and internet substitution, IDC says. However, long-distance revenue gains might be “major” gains from use of toll-free long-distance conferencing.

Wide area networking services could be affected by business failures, while internet access “will be one of the most insulated markets.” 

Mobile services, which account for almost half of telecom revenue in Canada, remain essential, and likely might see some roaming revenue loss, but not much other downward pressure, the analysts believe.

Not Everything that Occurs Post-Pandemic is Caused by the Pandemic

Some already speculate about the impact of Covid-driven 5G deployment delays in Europe, which both Ericsson and Huawei have noted. Analysys Mason predicts a significant 3.4 percent dip in developed market telecom revenues in the immediate aftermath of the pandemic, resulting from business failures that--at least temporarily--reduce the customer base. 

With the caveat that trends could be quite different from region to region, what is not so clear is how “permanent” the pandemic economic shutdowns will be, longer term, on infrastructure deployment by service providers, business or consumer spending on communications. Correlation is not causation. Not everything we observe, post-pandemic, will be caused by the pandemic. In other words, cyclical changes of a short-term nature and longer-term secular changes should not be confused.

The short-term impact is going to be clear enough, since policy makers created a deliberate recession. Recessions tend to depress growth, and also telecom spending growth by businesses and consumers. What remains to be explained, though, are the long-term effects, if any. 

source: Analysys Mason

And while post-pandemic spending is likely to be depressed, a rebound to the underlying trend is almost certain to happen within two years, as was the case in the wake of the 2008 Great Recession. And some believe flat connectivity revenue growth, not contraction, is in store, even if economic growth falls fairly sharply. 

source: IDC

There is a long term decline or flattening  trend at work for connectivity services that is hard to pin on any single recession, since spending in the aftermath of the Great Recession of 2008 actually recovered by 2010. Looking at global telecom spending, which is relatively flat, despite growth in developing markets, something else--or several trends--seem to be at work. 

Internet-based product substitutes often allow users to reduce spending even as value increases. Competition is causing price declines for virtually all products. Open source and products that improve with Moore’s Law allow firms to reap value even when total cost is less. Virtualization of most processes also allows value to increase while the cost of solutions often decreases. 

source: Statista

The issue is whether the effects of the Coronavirus pandemic will be transitory or permanent. If gross domestic product grows, that will drive higher IT spending, and presumably also higher enterprise connectivity spending.

Some would note that the longer-term trend for enterprise spending on information technology both tends to track GDP growth, but also has shifted to “newer” technologies, and away from legacy products. 

It can be hard to quantify telecom spending that is buried in wider information technology forecasts, but IT spending tends to grow over time, and often at rates faster than GDP grows. Telecom spending tends to fall, over time, in real terms, though growing (globally) at about one-percent annual rates. 

source: IDC

source: IDC

The impact of the Great Recession of 2008 was sharp, but relatively short, if it had effects at all, on productivity levels, research and development spending or gross domestic product. So the question is whether the same thing will happen in the wake of the pandemic. A return to the underlying trend might well be assumed. 

source: Intereconomics

Some might note revenue trends in the aftermath of the Great Recession of 2008 that they would describe as “permanent.” So some might hypothesize that post-pandemic trends will similarly be long lived. 

BT Global Services saw its revenue from businesses grew between 2005 and 2008 but suffered a long-term decline after 2008,  Analysys Mason notes. Revenue from data services and managed network services increased in both 2009 and 2010, but at a slower rate than in the previous three years.

Orange saw revenue from enterprises become stable between 2005 and 2008 but began to fall steadily after 2008. 

The rate of decline of business services revenue for AT&T and Verizon increased significantly after 2008. Both business services divisions served mainly large enterprises.

The issue, though, is whether those are long-term effects of the recession itself or are simply reflections of wider underlying changes in the business. We can note that consumer spending on connectivity, as a share of household spending, has been dropping for a decade since 2008. Yet few customers would likely argue the value they derive from the lessened spending is lower than it once was. 

source: Scope, OECD

Business spending likewise has been computer-centric rather than telecom-centric for some time, though growth trends can be flattened in the wake of a major bubble burst or recession. Spending growth flattened in the wake of the Internet bubble crash of 2000.  

source: Researchgate

In part, that reflects slower revenue growth, as business budgets set such spending on a “percentage of revenues” basis. Slower revenue growth also means slower IT spending growth. So temporary dips are expected. The issue is whether long-term trends also are created. 

source: IMF

The value to be wrung from better technology also means less information technology spending is required to achieve a desired objective. Also, much spending is shifting from hardware and software to services, which are much harder to quantify, in terms of impact, value and productivity. 

Enterprises might be spending less on connectivity services, long term, because the unit prices of connectivity services are dropping so much. Business customers might be substituting less-costly products for legacy products (IP telephony for traditional long distance calling or conferencing services). 

Business demand for fixed network voice arguably continues to drop, much as consumer demand for such products began to drop about 2000. 

The bottom line is that permanent trends specifically caused by the pandemic are going to be subtle and hard to quantify.