Overview

The economic crisis of 2008 is likely to be of historical magnitude. It seems to have depth and geographical width sufficient to transform the world: its economy its institutions and its industries. ICT and telecommunications are likely to be affected as much as all other sectors.

Innovation may act like the engine of the ICT / telecommunication industries, but access to capital and economic growth are the brakes and the gas pedal. The cost of capital in many markets, even for investment grade companies, is currently high enough to cause long term damage to any companies needing to seek financing, and weakened consumers are freezing spending and causing revenues to shrink.

As of early December, 2008 no one knows if we have reached the bottom, or if markets are set to plunge much further. But whatever the outcome, companies in the sector need to be prepared for both the possibility of further declines or the start of a recovery.

As part of our annual review of the technology, media and telecommunications (TMT) sector, the TMT industry group of Deloitte Touche Tohmatsu has made a few observations, and a few industry specific predictions, on the year to come.

The first observation is the extent to which the broader industry has failed to be decoupled from the downturn, and even is suffering disproportionately in many instances. The old cliché was that TMT was a long term growth industry, riding a wave of convergence and digitization that implied growth rates significantly above global GDP growth, even during periods of economic chaos.

While that may have been true at one point -- the sector weathered the 1987 market shock and 1990-92 recession quite well -- it seems less true today. Industry growth decreases in both the developing and developed worlds are more-or-less matching anticipated declines in economic activity, and this is occurring across multiple sub-verticals within technology and telecommunications. A key factor may be the industry's post-2001 reliance on the consumer, which makes revenues even more volatile than in past cycles.

However, the bad news does not stop there, at least for some segments of the industry. While the most pessimistic forecasts for fourth quarter GDP declines in the United States are around 3-5%, and the global contraction is estimated to be about 1-2%, some bellwether tech and telecom companies are pre-announcing revenue shortfalls that are between 20 - 30% lower than seasonal patterns would suggest.

Startlingly, these sorts of shortfalls are occurring in sectors in addition to the notoriously cyclical semiconductor industry: enterprise software, security, telecom infrastructure, and others are feeling the downturn – but magnified by a factor of ten. This phenomenon where TMT companies experience a levered deceleration of revenues is new and something that management teams are quickly trying to adapt to: even those executives who have managed through previous downturns are in uncharted waters.

The second observation is that there remain pockets of growth within the broader slowdown. We note that certain new computing products (like netbooks), telecom handsets (smartphones), software categories (Software as a Service, also known as SaaS) and media niches (WiFi radio) continue to show positive revenue momentum, even while the broader industry is rapidly contracting. While these exceptions may be growing slower than would be expected during better economic times, their relative growth still impresses and often more than 20 per cent higher than the underperforming IT sectors.

Key Trends

Moving from the general to the specific, what trends are we seeing that seem to be a direct consequence of the economic crisis?

Being Cheaper Helps: The dramatic emergence of the category known as netbooks is an obvious example. These less functional devices are capturing the notebook ‘best-seller lists�: from essentially no sales in 2007, as many as 50 million could be sold in 2009. Their principal selling point appears to be they are roughly half the price of regular notebooks. Other instances of ICT thriftiness would include the relative growth in Software as a Service, increased use of Linux or open source solutions, and an increase in the use of unbranded or generic IT solutions.

Free is Even Better! Cash strapped consumers are not eager to spend on new devices and services. But carriers and service providers see that as an opportunity and are subsidizing or giving away for free smartphones, netbooks, televisions, PCs, routers, set top boxes.

This is Probably a Bad Time for New and Expensive Services: It is not like mobile TV was setting the world on fire in 2008 – adoption worldwide was still under 1%. But the pricing model and premiums charged suggest that the already slow ramp is unlikely to accelerate and may even go almost to zero. If a service can't be profitably monetized, 2009 will not be a good year.

Sharing is Good: Whether it is sharing common resources through virtualization, cloud computing or a mandated common fibre optic infrastructure we expect to see more IT buyers realize that spreading the buying decision across multiple users is a winning solution for everyone – except of course for vendors who profit from building redundant infrastructures.

Saving Money is As Important as Saving the Planet: GreenTech was the success stock market story of 2007, but it has also been among the most adversely affected during the downturn with cancelled plants, inventory overcapacity and stock valuations off 70 per cent. Corporate social consciences may the first casualty of any downturn.

Some sub-sectors within green technology are proving counter-cyclical. The SmartGrid suite of solution is attracting attention and revenues: not only is creating a more efficient electricity grid something that can save the producers and consumers of energy a great deal of money, governments are often listing SmartGrid investments as a favoured recipient of stimulatory infrastructure spending. Further, common sense IT solutions (such as tuning the cooling of data centres to the most cost effective levels) are available to all and are starting to be applied as part of cost-cutting measures, as are any solutions that involve “making the most of what you have� such as telecom companies making better use of their customer data.

The economic crisis of 2008 is momentous, but it will end. At that time a new and more cost-disciplined TMT sector will be positioned to be even more profitable, flexible, and customer facing. The lessons learned during these hard times are painful lessons for the industry and the planet, but we are already seeing new devices, business models and entrepreneurs emerge.