Are There Big, Permanent Demand Changes Post-Covid?

How much will the new business-to-business environment post-Covid “normal” resemble either the “old” normal or the temporary pandemic normal? And to what degree will the new normal create new trends that affect business models? 

The safest answer--based on history--is that the new normal will accentuate underlying trends in place before Covid, with incremental changes to business models for many businesses and industries. Most of us likely assume that the consumer and business shift to online behaviors--already underway before Covid--will be reinforced at a higher level. 

That includes a shift to remote work and more collaboration at a distance. But that arguably will affect many industries and firms in an incremental way.

The bigger issue is whether some industries--such as airlines, cruise lines and hotels--might see big and permanent drops in demand, which will force big business model changes, including industry exit if markets shrink.

Some believe business travel, for example, will never return to pre-pandemic levels. That will have negative repercussions for hotels, airlines, trade shows, restaurants and associated industries.

If demand shrinks, so must operating costs and investment. Some business models might break altogether. Most trade shows will suffer; some will disappear.

Beyond all that, the question is whether any important new trends with business model implications--unseen before Covid--could be created. “Contact-less” procedures and business processes could be one example of a big new trend affecting many, if not all, place-based businesses.

Big financial and technology disruptions tend to have a big short term impact on business models--revenue and cost; customers and sales; products and services; production and distribution--and operating procedures. 

The long-term impact is harder to gauge. Do disruptions such as recessions (economic cycles or deliberate result of government policies) cause new trends or only accelerate underlying trends. 

Will some industries find demand permanently reduced or enhanced? Which industries might see permanent shrinkage? How will they cope? Beyond big demand changes, what are the more prosaic operational changes?

Will a shift to more “contact-less” retail commerce emerge as a permanent shift? And how much in-person retail shifts permanently to online ordering and fulfillment? How much will remote work and work from home persist? Will business travel be permanently reduced? If so, how do sales and marketing practices change? 

The easy “answer” is that big recessions or pandemics accelerate trends already in place. You would have to search very hard to find a recession that actually reverses a key underlying trend. 

The obvious example is online retail spending, which in the United Kingdom, for example, sharply accelerated during the pandemic. The issue, of course, is how much reversion to the mean will occur once the pandemic is over. 

The conventional wisdom seems to be that a permanent shift could occur. The magnitude of the shift is the issue, as is the timing of the shifts.  

source: A.D. Little

It is easier to show that recessions accelerate technology substitution than to illustrate new trend causation or at least correlation.

The short term effect is obvious: technology investment drops in the wake of a recession, even if firm professionals tend to believe the opposite. 

In line with that expectation, there is some evidence that the Covid pandemic has caused firms hit by massive drops in demand to decrease digital technology investment, while firms able to continue operating have increased investment. 

Retailers, for example, have remained open while cruise lines and theaters have been completely shut down, while other travel-related entities such as hotels and airlines have seen drops in demand above 70 percent. It obviously is easier to maintain investment when revenue has not been devastated. 

source: BDO 

Disparate investment in technology might easily be explained by relative differences in firm and industry revenue during the pandemic. Streaming services gained customers and revenue. Cloud computing sales increased, as did purchasing of broadband internet access services. 

In contrast, it is hard to increase technology spending when a firm’s revenue has been reduced to zero or close to zero. As firms cut operating costs, their investments in technology also tend to be reduced. 

source: A.D. Little

The Next Normal: Digital Business or a Different Business?

McKinsey Digital Senior Partner Kate Smaje argues two apparently contradictory trends: business will need to be "more digital" after Covid, but also that most digital strategies could fail. At least that is what 92 percent of respondents to McKinsey surveys believe. 

source: McKinsey 

U.S. Fixed Networks Business Negative Revenue Trend Continues

U.S. fixed network service providers will face secular pressure (mobile substitution will continue) and strong cable operator competition in broadband access. Fixed network provider revenue growth has been negative in 2019 and 2020, and is not predicted to change much in 2021 and 2022, S&P Global estimates. Cash flow will suffer more than top-line revenue. 

Business revenue will grow more than consumer revenues, S&P Global predicts. 

source: S&P Global

How Many Hours a Day Do Tech Professionals Work When Remote?

With the important caveat that output is what matters, not input, a survey of professional remote workers at firms such as Amazon, Google, Microsoft, Apple, Salesforce, Uber, LinkedIn, Salesforce, Adobe, SAP, Walmart, Capital One and Intel suggests that almost a third of the respondents are working three to four hours a day. 

source: Blind

The survey conducted on website Blind also found a bit over a quarter of respondents reporting they are working five to six hours a day. 

Some 15 percent of professionals say they work seven to eight hours a day, while another 15 percent of professionals say they work nine to 10 hours a day

Some 11 percent of professionals say they work one or two hours a day.

PCCW Global on Becoming a Platform

PCCW Global believes the global connectivity business can become a platform if it focuses on open and universal settlements, for example, creating more liquid transactions and using open interfaces to allow robust partner interactions. That is one way to create more value in the ecosystem. 

The mindset, though, is that of a marketplace or exchange, more than a relationship between a supplier and its customers. Think of it as more a relationship between any partners that are part of the ecosystem. 

Where the core business model for a connectivity provider has been as a "pipe," in the sense of creating a product and then selling that product to a customer, a platform facilities exchanges of value between ecosystem participants. The revenue for a platform then is some form of a commission, a fee or some other monetization method. 

Can Firms Do ESG Without Damaging Profits?

Environmental, social, and governance (ESG) issues have become a staple for a growing number of larger companies, but a reasonable question is what impact any ESG initiatives have on the overall profitability goals of any organization or enterprise. 

Environmental issues include the energy a company uses and the waste it produces. Carbon emissions and possible global warming impact are “E” issues. “S” issues include labor relations, management or employee diversity, and social inclusion efforts.

The “G” is for governance or the procedures and controls that your company uses to meet legal and ethical standards while benefiting your shareholders. A strong and ethical structure is essential for any company that wants to be socially responsible.

The analysis can be complicated as ESG can cover many different goals, ranging from reducing carbon footprint to promoting gender diversity to other hard-to-measure impacts such as reducing corruption, bribery or diversifying board member representation. 

Some of the quantitative progress on many metrics costs almost nothing. Other efforts might involve substantial changes that impose high costs. But most ESG goals have huge elements of discretion in setting targets or goals. As with most other enterprise change efforts, costs are lower when efforts are phased and incremental.  

In more than 2,000 studies on ESG impact on equity returns, 63 percent showed ESG had a positive effect while only eight percent showed a negative one, notes Multiview Corp. 

Other studies suggest there is almost no correlation between firms using ESG criteria and those which do not do so.  

“There is no evidence that ESG funds outperform investment benchmarks (like a passive S&P 500 index fund) over the long-term,” says Wayne Winegarden, Pacific Research Institute senior fellow. The caveat is that determining when a firm is meeting universal ESG goals is a matter of judgment. 

One might conclude that firms should early do what can be done at low cost, and implement the tougher changes that affect supply chains, production, distribution or sales costs over longer periods of time, especially since much ESG value is gleaned from hard-to-quantify efforts that cause customers to view a firm more favorably. 

Making ESG a line-accountable item can “lift what is already a substantial contribution to our stakeholders further without eroding short term financial or operational performance. Over time, you build greater value and greater returns for shareholders,” said Mike Henry, BHP CEO. 

Still, promoters say ESG and positive financial returns can be explained by the following: 

• Prompts top-line growth – Sustainable products attract more B2B and B2C clients. 

• Reduces cost – ESG leads to less water intake and lowers energy use. 

• Minimizes legal and regulatory actions -You’ll see improved government support and earn subsidies. 

• Increases productivity – ESG principles attract more qualified employees and increase employee enthusiasm. 

• Optimizes expenditures – You will see better investment returns from sustainable equipment and manufacturing plants. 

Some argue that ESG companies must practice all three parts. Others might focus on progress in any of the three areas, and to varying degrees. Still, many would argue the total ESG effort should transform virtually all operations of a firm. 

source: Man Institute

Some might say that grand vision is unlikely to happen systematically and quickly. It is more likely to evolve in a few areas where progress can be quantified quickly and where costs are manageable. 

Other efforts might involve changing global supply chains to promote worker rights and wages, and will take much effort and time, also adding costs to the business. By definition, paying workers more will increase costs, and that has to be accounted for in the business model.

The measurement problem will remain difficult, though, partly because some costs are hard to capture, as are the benefits. Some might argue ESG success cannot be measured in terms of its contribution to firm profits. Executives running firms always will counter that financial costs must be taken into account, as ESG cannot be allowed to destroy the firm business model. 

A reasonable person might argue that the best way to approach ESG is to look for quick wins in governance or social areas, with longer-term efforts conducted on the environmental areas where basic supply chain, production, distribution and sales processes have to be redesigned. 

In other words, do early what can be done with operating cost elements; do more gradually that which requires changing capital investment elements, long-term contracts and supply chains. 

It arguably is important to do so in a net-zero way on the cost side, hoping for eventual positive returns on the bottom line or revenue top lines, to the extent such benefits can be measured. 

5G Spectrum Purchases Will Drive Up U.S. Mobile Capex

Vital though the new U.S. mid-band spectrum for 5G might be, the cost of acquiring rights to use the spectrum worries financial analysts. S&P Global, for example, says spending on the C-band spectrum is “excessive.” 

To pay for the licenses, U.S. mobile operator capital expenditure will be higher, also likely resulting  in lower levels of free operating cash flow and higher leverage.

source: S&P Global

At the same time, mobile operators will be tempted to promote aggressively to gain 5G share, risking higher levels of customer churn and profit margin compression as well. At least in the near term, new competition from Dish Network and continued gains by cable operators will limit top-line revenue growth. 

On the other hand, if you could choose the segment of the business one were in, most would prefer life as a cable operator. Cable will see revenue growth of about six percent over the next two years, with steady increases in cash flow. 

For legacy telcos, mobility would still be the top choice. Mobile revenue top-line is projected to grow at perhaps 2.5 percent over the next couple of years, according to S&P Global. 

Fixed network revenue growth will be negative over the next couple of years, with business revenue the bright spot, perhaps growing half a percent by 2022, with consumer revenues down four percent per year. 

The satellite industry might face some overcapacity issues once the low earth orbit constellations go fully commercial. And while there are variations, the data center and mobile tower segments should generally fare well, S&P says.