The world economic outlook has become increasingly grim, as the impact of the financial crisis has extended from the financial industry to communications companies. Although this crisis runs deep and broad, it is important to understand how various segments of the communications industry are situated to weather the storm. To this end, we may also look back at prior economic downturns, such as the collapse of the Internet telecommunications bubble in 2000.
Comparisons With The Post-2000 Dotcom Crash
The collapse of the Internet/telecommunications bubble of the 1990s corresponded to the bubble in stock valuations and corporate debt. Expectations of continued growth of fiber optic and other network capacities, deemed necessary to satiate the perceived exponential growth in user demand, caused excess capacity in long line and Internet networks. Telecommunications companies went on a rampage of acquisitions based on the premise that increased demand would resolve massive debt and overcapacity concerns.
European and international wireless service operators engaged in a strategy of "win at any cost" pursuit of 3G licenses that has was partly an attempt to create barriers to market entry. 39
While specific instances of overexpansion of capacity and aggressive pursuit of auctions are evident, the overall structure of the telecommunications industry is on a more solid footing at the onset of this economic crisis than was the case for the prior Internet/telecommunications collapse. While this does bring to question the winning bids of recent auctions for 700 MHz spectrum and deployment plans of AT&T and Verizon, industry expenditures in general have tracked well with rising consumer demands.
The "McDonald's Hamburger Effect"
Speculation has mounted about how the economic downturn will affect incumbent operator revenues and prospects for new deployments. Previous periods of economic slowing have shown resiliency in demand for basic services. What may now be considered basic services includes mobile voice, text messaging and Internet access. Discretionary spending categories are premium data services, roaming charges and multiple overlapping accounts. In general, we may expect to see some slowing demand for discretionary services, however this comes on the heels of a ramping demand for 3-D data services and significant early growth of WiMAX.
In fact, BWA/WiMAX subscribers worldwide reached 2.3 million in Q2 2008 - a 19% growth over the first quarter and a 70% increase over Q2 2007, according to the 5th issue of the WiMAXCounts (www.wimaxcounts.com).
As individual consumers and organizations seek to reduce their spending and cut back employees, they will be pressured to do more with less. Because basic connectivity is vital to business and personal livelihood, the dominant trend will be preference for more efficient and cost-effective services and operating methods. This trend may be summed up as the McDonald's hamburger effect; purveyors of lower-cost goods and services benefit as they pickup defectors from premium services. As a gross analogy, premium services may be viewed as Starbucks while basic categories of services may be seen as proverbial 'McDonald's hamburgers'.
We expect well-positioned incumbent operators to fare well during the economic downturn. Meanwhile, expansion of greenfield operations will be more adversely impacted by difficulties in acquiring new funding (previously-funded greenfield operations may continue relatively unaffected.)
Impact on WiMAX and LTE Ecosystems
The early impact of the financial crisis has already affected smaller suppliers in the WiMAX ecosystem. Several suppliers of equipment have reported belt-tightening measures. Alvarion for example has said they have taken additional measures to anticipate potential slowing. Aperto and Redline have likewise reorganized and cut expenditures.
A slate of tier one suppliers have announced projected slowing of demand for handsets and infrastructure throughout 2009. Nortel, perhaps the most vulnerable of the major suppliers, faces gloomy prospects that require employee cutbacks and potential dissolution of the company. Nokia expects has reported lower sales expectations for handsets and network infrastructure 40. Nokia has reduced its Q4 sales forecast by 6% in expectation of a slump in the global handset market expects the mobile and fixed infrastructure markets to be affected by the crisis. With the possible exception of Nortel, however, we do not yet expect the economic crisis to result in a shakeout of the industry.
We have heard of the chilling effect of this crisis among venture capital funding sources. At a recent financial industry event in New York City, startup companies were warned that they must quickly become cash flow positive since fresh funding would be hard to come by. Other industry players have suggested that due to the rapid payback for WiMAX greenfield deployments, sufficient funding for continued growth will be forthcoming.
In general, economic downturns favor incumbent revenue flows. But offsetting the importance of incumbent revenue is a shift to more efficient competitive networks characterized by both 3.5 G and WiMAX.
The impact of the economic crisis is being felt in waning consumer demands that are likely to impact subscriber growth and consumption habits. As world governments implement unprecedented stimulus, we remain guarded in our near-term forecasts for the industry.
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39 See: 3-G Wireless Auctions as an Economic Barrier to Entry
40 See Nokia Customers Hanging Up - Forbes.com
