Ovum: Downturn's effect on 2009 'generally mild' for telecom

OCTOBER 9, 2008 -- According to planning scenarios it has recently developed, market research and analysis firm Ovum (search for Ovum) concludes that "the most likely scenario is a generally mild impact on the telecoms industry, with growth and spending slowing but not declining" in 2009, the firm announces. The scenarios are described in the October edition of Ovum's Straight Talk Monthly report to clients.

"At the present time, no one can predict with confidence what 2009 will bring. Scenario planning was made for times like this," says John Lively, the report's author and Ovum's chief forecaster. Ovum used its database of service provider revenues and capital spending to look at what has happened during past recessions and during the tech bubble burst of 2001-2002. Three scenarios were created based on different revenue growth rates and different levels of capital spending as a percent of revenue, which Ovum describes as follows:

Optimistic case:

Most likely case:

Pessimistic case:

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, Ovum says.

"The downside risk is due mainly to fear of the impact of the financial meltdown, which could drive both 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 their capex. Whatever cutbacks occur at the end-customer level will be amplified at the infrastructure and component levels by the resulting "bullwhip effect."

Lively also notes that several telecom drivers remain in place in spite of the financial turmoil, opposing the downward market forces. "Telecom has become more a utility than a luxury in most developed countries, and in many developing countries, demand is still driven by the need to increase basic teledensity. In addition, most telecom service providers are cash-generating and self-funding, and 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 your company at great risk."

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