With the world turned upside down by the coronavirus, telecommunications companies face one of the greatest challenges in their history. Like other organizations, they have a duty to, first and foremost, support and care for their employees. But telcos are also under enormous pressure to continue delivering infrastructure and services critical to everyone, especially during a crisis of this magnitude.
Remote working, increased video streaming and global internet communications have quickly become the lifeblood of modern society, and many analysts believe once we’re through the worst of this virus, our industry will be one of the few still standing and, in some aspects, stronger than before.
However, according to a report by Analysys Mason, the impact of the pandemic is expected to result in the sharp decline of telecom operator revenues by 3.4%, a world away from its pre-COVID-19 estimated growth of 0.7% at the dawn of the new year.
With the International Monetary Fund warning that a recession is imminent, and could be worse than the 2008 financial crisis, this will be a major setback to an industry that already operates on tight margins.
Analysys Mason made the assumption that the most badly affected quarter in terms of economic output will turn out to be the second quarter of 2020, when it expects a fall of 11% (37% on an annualized basis). Inputs for the figures for Q1, Q2 and Q3 2020 were broadly based on a range of third-party GDP forecasts published on or after 23 March 2020.
In this scenario, it assumes that output in markets will start to rise in the third quarter of the year and will have returned to where it was in Q4 2019 by the end of 2021, having fallen 6.1% for the whole of 2020 and rising 4.6% for the whole of 2021.
That, said the analyst, represents in effect two “wasted” years. It also assumes that economic inactivity through unemployment and furloughed workers will rise to 25% in Q2 2020, falling to 15.5% by the end of 2020, then picking up through 2021 to reach similar levels to Q4 2019. After the expected 3.4% decline in overall revenue for 2020, against a previous forecast of an increase of 0.7%, Analysys Mason sees a modest rebound of 1% in 2021.
The analyst noted that consumer services, which account for 68% of telecoms revenue, have a demonstrable level of resilience during economic downturns. The resilience of the telecoms sector is largely due to its emphasis on remote working and entertainment which will undoubtedly result in the successful performance of fixed broadband services.
Also on a brighter note, the analyst was confident that operators would be able to limit the impact on profitability. It calculated that operator capex is likely to fall in 2020 because of constraints in the ability to build and because of disruption to the supply chain, and that the pandemic will reinforce and accelerate existing downward opex trends rather than introduce new ones.
Accordingly, telcos will be taking a more cautious approach to their 5G deployments. The effects of the coronavirus pandemic is also putting the telecom sector's supply chains at risk while handset and device revenue will be down due to reduced production of 5G smartphones and handset components.
Also, the report says telecoms is a relatively resilient sector and suggests that, going forward, it will perform ahead of general GDP trends. Analysys Mason expects telecoms to account for 2% of GDP in 2020, an increase from 1.9% in 2019. Consumer services are likely to show the greatest resilience during economic downturns.
Rupert Wood, research director and co-author of the report, said, “Telecoms should stay healthier than almost any industry in this crisis. Telecoms should show some of the strongest post-crisis investment, in part because cash flow is more resilient in the telecoms sector than it is most others, and because some governments will emphasise 5G and fibre in stimulus packages.”
When it comes to data roaming, the collapse of international travel as a result of coronavirus could cost the global industry $25bn in lost revenue this year - about half of what the sector makes annually from roaming charges - according to analysts at Juniper Research. Of this, about $12bn will be lost during the summer months as people are unable to go on holiday, revenue which is unlikely to be recovered.
Telecoms companies in tourist hotspots such as Turkey, Spain and Portugal are also more vulnerable as they rely on roaming charges from visitors for a large portion of their revenue. So far, telecoms have proven a resilient sector in the crisis, with subscriptions protecting the bulk of their revenue and the services they provide deemed essential by governments. But analysts at Juniper Research say the pandemic will signal the end of the roaming era.
At a time like this, operators have the chance to focus on efficiency and being nimble, reacting quickly to market opportunities and threats to their core business, reducing costs and optimizing capital. For example, a downturn provides a unique moment to urgently examine the difficult process of rightsizing. Whether it be streamlining the organization or renegotiating with suppliers, such as hand-set providers, the urgency of the situation can be a highly effective impetus for change.
Whatever the forecast, we’ve been in a similar boat before. The 2008 global recession brought about many of the same economic conditions albeit without the same impact on human life.
It has been over a decade since the last economic downturn and it made for extremely tough operating conditions for telecom operators. Customers sought to pay less and cancelled contracts more easily in an environment of more intense competition. From 2007 to 2009, many European operators’ average revenue per user (ARPU) dipped by more than 15 percent, and churn rates rose by the same amount for operators in both North America and Europe.
Operators moved to reduce operating expenditures and capital expenditures in order to maintain profits despite overall revenue decline. However, while rightsizing operating expenditures is important, reducing key network and IT investments, such as security, during a downturn does not correlate with resilience and safeguarding such expenditures should be a priority.
Telcos truly are under enormous pressure to continue delivering critical infrastructure and services during the coronavirus outbreak, with the added responsibility of their own balance sheet.
Telco companies have a vital role to play in helping communities and organizations respond to the pandemic. Every industry is economically hurting already from the COVID-19 pandemic. Now is the time for telecom operators to go the extra mile for their customers across all industries and help them recover.