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Post written by:

Didier Pouillot

In charge of African Markets / Telecom Markets & Regulation practice leader

If the Covid-19 epidemic really does seem like an unprecedented crisis in all parts of the globe, the effect it will have on the telecommunications sector could not only be profound but also, and ultimately, be felt in ways that are comparable to what has happened in the past. In terms of economic impact especially, the industry’s three pillars could be shaken: revenue growth, maintaining margins and, potentially, investment levels… each for its own set of reasons.

What lessons can we apply to the Covid-19 crisis?

Can we establish some points of comparison to sketch out what we expect the sector’s future to be, in the wake of the radically different crisis brought by Covid-19? Probably more than we might have suspected at first glance, especially in terms of the impact on the sector’s main economic variables.

A few positive signs in the short term…

Some early encouraging signs revealed that the sector remained in fine fettle. From a technical standpoint, the networks stayed the course. By this we mean that the explosion in demand resulting from the measures taken to deal with the crisis (telework and confinement en masse) were able to be absorbed without a major incident, albeit at the expense of a few marginal adjustments, such as throttling the speed of especially bandwidth-hungry video applications. We should nevertheless note that, for several years now, operators’ investments have been geared towards satisfying their quest for ever greater speed and capacity (with demand that was increasing “naturally” by 20% to 50% a year, but hit that peak within a couple of weeks during the lockdown) and that this drive for more and faster is not going to end anytime soon.

From a marketing standpoint, customers have proven more loyal than usual during these times, resulting in lower churn and so a drop in customer acquisition and retention costs. This bit of good news also comes at a time when operators had been showering their customers with bonuses, offering them (usually at no extra cost) a wider selection of programmes and apps, touting the increased need for entertainment and distraction during the lockdown. And this while (temporarily?) overlooking the need to monetise services that has been so pressing over the past several years.

Despite which, and this is the third piece of good news, financial markets largely rewarded telecom players’ – and most digital tech companies’ – good behaviour: if the darlings remain the web’s top destinations (big and small) operators too saw their market caps back on a even keel, to varying degrees, after having initially plummeted with the coronavirus crisis first hit. Orange and Deutsche Telekom share prices, for instance, lost close to a third of their value between mid-February and mid-March (slightly less for the French carrier and slightly more for the German) but both then rebounded by 20%, and especially swiftly in the case of Orange.

… but medium-term uncertainties still linger

Looking beyond these bits of good news for the short term, there are still a number of lingering uncertainties over what the medium and long-term future hold, notably because of the already difficult situation that predates the crisis. From a broader economic standpoint, GDP “growth” forecasts stand, at best, at -7% for the eurozone as a whole in 2020. Even if we can expect a subsequent recovery, as the previous economic crisis revealed, the fallout could have a lasting effect on telecom market players.

Growth has been an ongoing issue in Europe in particular for at least 10 years. If the steady rise in demand for traffic volume is clear (it may even accelerate once again), the issue of monetisation – i.e. of translating increased traffic into increased revenue – is more critical than ever. To businesses’ and households’ budget restrictions we can probably add the fact that consumers have become used to, or aware that “free” has become the rule: so it is up to operators to monetise access (a recurring theme for years now) or generate income through third party revenue streams.

Customer loyalty, which held firm during the lockdown, could continue after consumers regain their freedom, and operators attempt to ease out of offering more and more for free. Operator switching fees, which are currently covered largely by operators themselves, may shoot up, and put a strain on margins.

The third area of uncertainty is investment potential. Fibre and 5G network rollouts are necessary to keep pace with the rise in traffic, but some operators have already reached their investment ceiling and, without clear prospects of increased revenue and healthier margins, they will be unable to continue to increase their spending. Restrictions on spending could weigh on rollout potential, and so affect their ability to meet the explosion in demand. This is especially true on the mobile front, where actions taken to voice concerns about the health risks caused by the proliferation of cell towers have proven particularly resonant during the pandemic and, of course, the crisis forced the postponement of 5G frequency awards in those countries where they had not yet taken place, starting with France!

 

It is a rather nuanced landscape that emerges from these few lines, with a sector working to stay the course and very much in the news these days, but for which the long-term challenges have never been greater. The coming months will no doubt help clarify the situation, but we can already wager that, as during previous crises, operators will find a way to rise to these challenges through restructuring and innovation.