Ovum: No quick fix for telcos

MARCH 15, 2010 -- The telecoms industry may have shown resilience during the recession but the focus on driving efficiencies and reducing costs looks set to continue, according to Ovum.

Telco Strategies for Recession and Recovery, a new report by Ovum, warns that although the economic downturn hasn’t resulted in the downward pressure on telco top lines that many expected, revenue growth is in decline for many mature market operators, and slowing for those in emerging markets.

The news isn’t entirely bad in communications overall, particularly in North America, Ovum says. There is a surge in mobile data and a new focus on prepaid. Cable operators are also seeing revenue growth and improving margins. The telcos, however, are struggling to grow revenues and are seeing their margins squeezed, Ovum asserts. The biggest downward pressure on telcos comes from declining fixed access lines, driven by substitution from mobile and VoIP.

“While the recession accelerated revenue decline, challenges such as market saturation, increased competition and regulatory intervention on roaming and termination rates won’t disappear just because the economy picks up,” said Ovum’s principal analyst Clare McCarthy.

One question for telecoms operators as the downturn hit was how user spending would be affected. As the quarters went by it became apparent that user spending was fairly resilient to the economic downturn, reflecting the fact that for the majority of users, telecoms is no longer expendable.

A global consumer survey of 39,000 people conducted recently by Ovum’s parent company, Datamonitor, indicated that only 7.6% of consumers indicated that they would definitely cut back on spending). However, over a quarter of consumers surveyed indicated that they either would or would consider cutting back on their telecoms spending, with a further 24% undecided. When asked which services they would look to cut back on, over 30% indicated that they would consider downsizing their mobile phone tariff, while 24% saw fixed voice as an area where they could make cuts.

Telcos are responding with cost-saving measures. In addition to cutting opex, telcos have also sought to reduce their capex, either through postponing or cancelling investment projects, or simply through using higher hurdles for return on investment in their decision-making processes. They are also accelerating employee release programs and stockpiling cash. Many telcos are emerging from the downturn with healthier balance sheets than when they entered, as well as significant cash balances, Ovum says.

The market research and analysis firm believes those that prudently managed their finances during the downturn will grow, but should be wary of initiating mergers and acquisitions programs designed solely to grow top-line revenues. Targeted mergers, acquisitions, and partnerships that fill key skill-set gaps will be the desire of telecoms going forward.

Ovum analyst Mark Giles said: “We expect activity, partnerships and possible acquisitions to occur, with telcos looking at over-the-top (OTT) services for consumers, as well as developing vertical expertise in ICT provision for enterprises.”