Telco outlook for 2009

There is much apprehension about how the financial market meltdown will affect the communications industry. Many companies are now setting budgets for 2009 and need to make assumptions on how current events will play out, so Ovum developed planning scenarios that put boundaries on the uncertainties in the telecoms industry for 2009. Ovum believes the most likely scenario is a generally mild impact on the telecoms industry, with growth and spending slowing but not declining.

“At present, no one can predict with confidence what 2009 will bring. Scenario planning was made for times like this,” says John Lively, the report author and Ovum chief forecaster. Ovum analysed service provider revenues and capital spending during past recessions and the tech bubble burst of 2001/2002 to create three scenarios, based on different revenue growth rates and capital spending levels:

• Optimistic: brief slowdown in second half of 2008 with growth rates of revenue and capital expenditure (capex) returning to 2007 levels in 2009.
• Most likely: reduced growth rates in second half of 2008 continuing through 2009.
• Pessimistic: declines in wireline revenue and capex, with fixed capex falling 28% — a drastic but not unprecedented decline.

Underpinning the choice of assumptions is a belief that the absolute worst case — a global, severe economic depression and an unprecedented crash in the telecoms market — will be avoided.

“The downside risk is due mainly to fear of the impact of the financial meltdown, which could drive enterprise and consumer telecom customers to reduce spending more than they need to,” says Lively.

The report explains how reductions at the end-customer level could ripple down the telecom food chain, leading service providers to pare back capex. Whatever cutbacks occur at the end-customer level will be amplified at the infrastructure and component levels by the ‘bullwhip effect’.

Lively says that several telecom drivers remain in place in spite of the financial turmoil, opposing downward market forces: “Telecom has become more utility than luxury in most developed countries. Most telecom service providers are also cash-generating and self-funding, not directly vulnerable to impairments in credit markets.”

Lively cautions that with market uncertainty running at an all-time high, CEOs and CFOs should resist the urge to pick a single-point forecast and run with it: “Management should carefully consider what they would do under each of our different scenarios. Failing to do so in times like these puts companies at great risk.”

Ovum