Telecoms Shines Amid the Gloom
Independent analyst comment - John Lively, VP Forecasting and Analysis at Ovum
The credit market collapse supposedly put an end to mergers and acquisitions. The deal to take Bell Canada private, which depended on private equity group financing, has gone belly up. Yet last week we had news that Verizon is paying $5.9 billion in cash to acquire Alltel, making it the largest US-based mobile phone company. France Telecom also offered cash, and shares, in its unsuccessful $42 billion bid for TeliaSonera. Companies doing deals in today's environment have to do so without the benefit of private equity black magic. The fact that some of the largest telecoms companies in the world are now able to do so is a reflection of their financial strength.
Signs of strength are also evident in the revenue trends of telecoms industry players. Fixed service provider revenues have grown for eight consecutive quarters, and while some of that is an artifact of the falling dollar, there are many examples of real growth in fixed line revenues fuelled by new broadband-based revenues. Mobile revenues, which grew by 16% in 1Q08 versus 1Q07, and topped $160 billion, show no signs of being impacted by today's economic climate. Service provider spending also remains strong, with fixed capex up 21% and mobile capex up nearly 13% in the most recent quarter, compared to a year earlier. Sales of telecoms gear have kept pace as well, with switching and routing gear up 24%, optical networking up 23%, and cable TV equipment 18% higher than in 1Q07. These trends are discussed in greater detail in Ovum's recent report Capex and equipment market update: 1Q08.
It may seem paradoxical that our industry is having such a good year at a time when others are suffering declining revenues and profits, and the general economic outlook is for higher inflation and lower growth. The explanation is simple: service providers' forward-looking infrastructure investment and conservative financial management put them in a strong position to capitalize on the current business environment. Higher oil prices mean people are travelling less and using the phone, email, and videoconferencing more. Durable goods purchases are postponed in recessionary times, while communication, entertainment, and social networking services are not. Telecoms has been 'sticking to its knitting' over the past several years, and is now reaping the benefits.
Of course, it's hard for anyone who lived through the telecoms bubble burst in 2001 not to worry that today's good times will also come to a crashing end. But things are different now. The industry is growing at reasonable, not geometric, growth rates. Credit market excesses were applied to real estate, not to telecoms infrastructure. Mobile broadband is beginning to drive large increases in network traffic, and there are more signs of capacity exhaust than capacity excess in major networks. Consumers and enterprise customers show signs of an increasing appetite for communications services. These are all signs that the most recent results are sustainable.
Lest we not become overconfident, however, there is something to beware of. Whenever telecoms regulations become less favorable, due to price controls, mandated network sharing, or other means, it has a chilling effect on the industry. So for all the reasons cited above, the telecoms industry should continue along its current positive track, with the caveat that the net balance of regulation among the world's countries does not tip toward the negative.
Posted to the site on 10th June 2008
