Financial Crisis the effects on European Communications.
The current financial crisis is affecting operators and consumers on different levels. Consumer spend on telecom services per household has fallen substantially during the last five years in all the principal sectors – mobile services, broadband and bundled offers. This is largely due to effective competition driving down prices. In addition, consumers do not need a loan to buy a mobile phone or pay monthly service fees, so a collapsing banking sector at this level is largely irrelevant. However, in most markets households are having to absorb far higher prices for food and commodities, as well as for electricity and heating (an important consideration in the run-up to the northern winter). In the UK, with inflation reaching 5.2%, telecom spend will be under increasing pressure. Nevertheless, for the majority of households in Europe telecom services are an ‘essential’, and thus it is unlikely that financial pressures will reduce spend in the long term. Indeed it is more likely that the current crisis will stimulate consumers to churn to other providers offering better rates.
Telecom operators have fallen into two camps during the crisis. The liquidity difficulties faced by banks will affect their ability to lend money for some of the operator network upgrades envisioned for the next two to three years. Many of these projects are financed by debt and will stall due to unavailable credit. Infrastructure vendors have some capacity to absorb these costs, but are themselves under financial pressure. This will have a knock-on effect on the device market, particularly in Europe. As an example, the sale of equipment and gadgets geared for HSPA networks will be delayed if the network upgrades are stalled.
Some of the larger operators, including the incumbents, can rely on standby facilities and regular revenue from end-consumers to see out the current economic crisis. However, as with Virgin Media recently, many have found themselves having to refinance their debt obligations, and have been placed under greater pressure to sell-off non-core parts of their portfolios. Smaller operators, without the shelter of a large customer base, may find themselves targets for buy-outs during the next few quarters.
As with the banking sector itself, there may also be increased pressure on governments to help finance some of the Next Generation Networks currently being built or planned. Most governments in Europe have trumpeted the ‘national’ need for these IP networks, and may now find it difficult to allow them to stagnate due to the financial difficulties of hard-pressed commercial operators. Thus the existing favourable regulatory terms (including guaranteed returns on investments) may be supplemented by greater State funding. As an example, the Italian government in September 2008 pledged to invest up to €1 billion in the country’s NGN infrastructure (around 10% of the estimated total cost). The CEO of Telecom Italia at the time asserted that the cost implications of building out an NGN would require collaboration between operators and governments, and would be too risky for individual operators to undertake without direct State financing. The Italian government intervention goes considerably further than that which other governments have yet been prepared to concede.
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