Ovum Helps Telecoms Vendors Look Ahead: Planning Scenarios for 2009

(Business News & Technology News, 10 Oct 2008)

In September 2008, the scale of the financial market meltdown grew by orders of magnitude, and apprehension about its effect on the communications industry reached new heights. Recognizing that many companies are now setting budgets for next year and need to make assumptions on how current events will play out, Ovum developed several planning scenarios that put boundaries on the uncertainties in the telecoms industry for 2009. Ovum believes the most likely scenario is a generally mild impact on the telecoms industry, with growth and spending slowing but not declining. The scenarios are described in the October edition of Ovum's Straight Talk Monthly communication 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 extensive 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. The scenarios can be summarized as follows:

Optimistic case: brief slowdown in 2H08 with growth rates of revenue and capex returning to 2007 levels in 2009.

Most likely case: reduced growth rates in 2H08 continuing through 2009.

Pessimistic case: declines in wireline revenue and capex, with fixed capex falling 28 percent—a drastic but not unprecedented decline. A significant slowdown in mobile revenues and no growth in mobile capex between 2008 and 2009.

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.

"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 "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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