Credit Crunch (Part 6): Happy New Deal!
Below is the sixth article in our series on the Credit Crunch and its effect on the TMT sector (previous here). We note that telecom stocks are weakening versus the market, but opportunities look likely from government fiscal stimulus packages, especially around 'Smart Grids'.
Anyone expecting a change in tone from the economy to start 2009 was wildly optimistic. The situation is deteriorating, and telecom will come under pressure. The stock market's feeble attempt at a rally over the past month has landed telecom in third quartile, in keeping with our views.
However, telcos should resist the knee-jerk reaction to cut personnel and investment - there are interesting opportunities on the horizon from fiscal stimulus programs. Remaining focused on, staffed for, and invested for the longer term opportunities is key.
From here on our perch in the UK, the new year seems to be kicking off with a very dire tone indeed. While we continue to firmly view telecom services as must-haves for consumers, which may even more than compensate for their own cost in some cases, there can be little doubt that the industry will come under pressure as things deteriorate, and some voices are already predicting a dramatic deceleration in growth in 2009.
At the very least, the glacial state of the housing markets in developed economies will mean that 2009 financial results from telcos and cablecos alike may reveal more about underlying consumer behaviour and usage patterns than previously, as the effect of new household creation on broadband service uptake is drastically reduced. Ditto for business spend, given the expected rise in corporate defaults and business failures.
It should be an informative and interesting, but not overly pleasant year, and already there are signs of pre-emptive measures to compensate - these will also no doubt be a recurring feature of 2009.
Over the past month, our proxy for the industry, the DJ STOXX Telecom Index (the largest and most diverse telecom universe in any equity market) has followed our oft-stated expectation that telecom will outperform the market in down-drafts, and underperform during rebounds.
We certainly would not want to suggest that the market is counting on a sustained economic recovery at this point (and if it is, it's wrong), but nevertheless this seems to illustrate our view that when investors opportunistically see better value elsewhere, the appeal of the "defensive telecom trade" will prove ephemeral.
DJ STOXX 600 Sector Ranked Returns, 12 December 2008 - 12 January 2009
This brings us back to our recurring question of what telcos should do to position themselves to be able to tell a different story to the market on the other side of the current catastrophe. As TeliaSonera demonstrates with an 11% personnel cut in Sweden, a necessary part of that story will be headcount reductions - that is a given. It also may be safe to assume that significant capex cuts are on the cards, as we saw during the post "dot-bomb" era, where mid-to-high single-digit capex/sales ratios for fixed line were commonplace.
The industry was fortunate in being able to emerge from that downturn with some considerable growth left in mobile and a largely unexpected fixed broadband explosion ahead of it. This time, however, we think the growth opportunities which will arise from the rubble will require a more hands-on approach to foster, and that there is a risk of throwing the proverbial baby out with the bathwater if companies are overly focused on the near term.
As our work on two-sided business model opportunities demonstrates, in many cases these growth opportunities will need proactive organic development via a conscious transformation effort within the telco and between upstream and downstream customers. However, other opportunities may arise largely as a result of external factors, creating entirely new markets for telcos.
These will require incremental investment, but also some good old-school telco capabilities, which may offer opportunities to redeploy, rather than fire, legacy employees. One fascinating example on the horizon may arise from President-elect Obama's American Recovery and Reinvestment Program, and similar economic stimulus investment packages around the world. A central plank of the ARRP proposal is investment in energy efficient technology innovations across the entire spectrum, and one essential element must be the smart grid concept.
An interesting report released by the GridWise Alliance just before Christmas last year attempts to quantify the investment required for widespread smart grid deployment by utilities in the U.S., as well as the likely impact on job creation arising from it. The eye-catching headlines of the report are that deployment of smart grid technology throughout the U.S. over the next four years would generate $64bn in investment activity, creating 280,000 new jobs, of which half would be permanent beyond the initial deployment program.
The vast majority of these sustainable jobs are expected to come from suppliers to smart grid utilities: equipment and service providers, contractors, and entirely new jobs arising from the altered business models of the smart grid and its ancillary offshoots. We have seen no comparable in-depth estimates from Europe, but given the number of households in question, the opportunity must be of comparable or greater scope.
The good news for telcos, in our view, is that many of the functions and assets required are core parts of the legacy telco:
- Most obviously, the capacity to provide and manage connectivity, an essential part of the smart grid proposition, which rests on being able to monitor and manage energy production and consumption throughout the value chain in real time;
- Existing field forces of engineers with vast experience at installing, troubleshooting, repairing and replacing networked devices and CPE, which are integral to the smart grid concept;
- Customer care, billing, and tech support capabilities for end customers;
- Managed service capability for desktop and back office applications throughout the value chain;
In addition, there is scope for Telco 2.0 aspects to come to the fore:
- The GridWise report notes that the smart meter device is "fundamentally a point-of-sale device and integrated with home automation and smart appliances will provide valuable buying / habit data which we have seen spur our economy in recent years when used in the food supply chain." Collecting and managing that data on an aggregated basis is precisely the sort of scenario we have envisaged for telco customer data itself. Energy consumption and telco service consumption data combined would be more powerful in a commercial sense, and indeed telco usage data would considerably enhance the usability and value of the utility data in accomplishing the stated goals of smart grid projects;
- One aspect of smart grid approaches is to allow individuals and enterprises to sell excess self-generated power back into the grid. This would require the formation of markets and trading platformsof the kind which some telcos have demonstrated experience in managing. Also, if telcos were successful in establishing themselves as trusted payment agents between third parties, there could be a more active role to play.
This is simply one early example in one market, but the severity of the current crisis almost certainly dictates that many more opportunities will arise from government fiscal stimulus programs is countries across the globe.
Telcos have much to offer, and much to gain, through this process, if they are adequately staffed and positioned, and if they invest now with a view to being prepared to rise to the challenge.
[Ed. - these themes will be informing our research agenda for 2009 and will be explored at our next event on 6-7 May in Nice, co-located with the TM Forum's Management World]