Trouble in the Telecom Land

The credit crunch and the slowing economy is beginning to impact everyone. How fortuitous can one(/I) get - slowdown effectively kicked-in just months after I reentered the industry in April this year. With the re-emergence of a sellers market in the country, jobs have now become a matter of chance than choice for potential job seekers. The Slowdown has effected almost everyone in the telecom value chain from equipment makers to phone companies and application developers. With the trouble continuously spreading to other verticals, there seems to be no safe haven for investments. Even traditional enterprise communication giants like Cisco that are more shielded because of multi sector clientele, are facing the heat because of slowdown in financial, IT and automative sectors. Announcements of gloomy sales outlook are a common place today but we must draw solace from the fact that although wireless may encounter slowdown, it will fare better than most other industries in these hard economic times.

With an extended housing slowdown in most of the markets, anything related to housing market is going to be in trouble. Now that the housing market has ground to a halt, demand for broadband, voice lines and IPTV/cable services will slow drastically. This will have a rippling effect on service providers resulting in tightening of their infrastructure spending. It is expected that there will be delays of close to one year in the NGN buildouts of companies like BT, Verizon etc. This will have a multifold impact on equipment vendors like Alcatel, Motorola, Nortel etc. Alcatel has already announced job cuts and Nortel is on the verge of filing for bankruptcy. The root of their problem lies in costlier credit - it is forcing service providers to postpone their capital expenditure spends like upgrading their networks and launching newer suite of services. The problems are extending to handset manufacturers too, with lower demand from new customers and longer than expected replacement cycles of existing customers. Whats disturbing for them is the fact that, lower demand from saturated markets is not being offset by robust handset sales in emerging markets.

The slowdown has different set of challenges for the Asian market. It could not have come at a worse time for Indian and Chinese governments who, after months & years of delaying the 3G spectrum auction currently find themselves wrong footed with a risk of completely missing the 3G bus if the auctions are delayed any further in search of right valuations. In the current macroeconomic scenario, the telecom sector plays the most important role in maintaining a robust GDP growth of over 7% for these two countries, and hence both governments are treading carefully to avoid any policy mismanagement. The Vendor ecosystem is waiting for the 3G auctions as the resulting network roll outs may just give them enough cash and time to counter the current economic slowdown.

Also the currently prevalent weakness does ripen the market for takeovers. The slowdown will accelerate further consolidation of the sector especially among smaller players. There will be renewed interest from companies looking to buy into US telecom assets. Huawei has already expressed soft interest in acquiring Nortel. The Private Equity players who have been missing from the telecom scene after the Avaya and Alltel transactions may renew their interests in the sector. Apart from mergers and joint ventures, further network sharing arrangements will become commonplace. Operators will also push their respective regulators to make sharing more appealing by introducing new policy initiatives. No matter what be the case, everyone in the ecosystem better gear themselves for a long, hard effort to fight slowdown.