Impact of financial crisis on the Communications & Media sector
1. How will the financial crisis
and recession impact
the Communications and
Media sector in Europe?
Communications, media and entertainment
2. Figure 1: Impact of recessions on European telecommunications services revenues (1980-2007)
400
300
USD billions
200
100
0
1980 1985 1990 1995 2000 2005 2010
Recessionary periods (indicative as periods differ by country)
Telecommunications revenues expressed in 1990 real terms
Source: ITU, World Bank and PA Consulting Group
Barring the self-induced dot.com crash of 2000-1, European telecommunications has
been quite resilient during past recessions (Figure 1), less so media and entertainment
where revenues have dropped by 5-15% on each occasion. However, the financial
crisis and its rapid contamination of the globalised economy make this recession very
different from anything we have ever experienced before. The communications, media
and entertainment (CME) sector will be impacted but each segment and market will fare
differently – who will be the winners and losers?
More to the point, what does this mean for you? Even if you feel comfortable
about your own company’s situation, have you thought about your main customers,
suppliers and competitors – how is your market changing? Are there new opportunities
or threats? Have you evaluated the main economic scenarios and developed action
plans accordingly?
For further insight into the crisis and how to respond, see Mark Thomas’s
handbook “Surviving and thriving in the economic crisis” available from
www.paconsulting.com
Who will be the winners and losers?
Pressure on short-term liquidity has been the most immediate impact of the financial crisis
in most industries. Companies that have relied on debt have suddenly found that it is no
longer straightforward or cheap to raise or roll over; having said that, the CME sector is
generally looked on favourably by banks due to its high levels of free cash flow. In fact
numerous companies in the sector have been able to raise debt funding in recent months
but going forwards some will find it much harder than others. Such generalisations tend to
be misleading, so in the following sections we have taken a closer look at the three main
CME segments: operators, content aggregators and suppliers.
3. Figure : Analysis of publicly-quoted European operators
3.0
Winners Potential winners
2.5
2.0
Liquidity
1.5
1.0
0.5
Casualties Targets
0.0
0.0 0.5 1.0 1.5 2.0 2.5 3.0
IV/MV
Figure
The horizontal axis
Operators – most had finished clearing up from the
assesses the level millennium debacle
of over/undervaluation Before the financial crisis hit, most network operators had managed to clean up their
by the market using a
simplified (and intentionally balance sheets following the dot.com crash, consolidation frenzy and 3G licence fee
conservative) form of bubble that coincided with the start of the millennium. A number of companies had even
discounted cash flow which
assumes that long-run
gone so far as starting/restarting dividend payments (eg, Vodafone, FT, DT), commencing
return on equity (ROE) share buy-backs (eg, FT, BT, Telefónica) and restarting their acquisition machines (eg,
will be close to the average Vodafone, FT, Telenor) – particularly with an eye to high-growth emerging markets.
ROE over the last three
years and long-run growth
will be around 3% per There are still a number of operators that hadn’t finished the job for a variety of reasons.
annum. On this axis, more
than one represents an
Typically these are the ones in the bottom right quadrant of Figure 2 that are trying hard
undervalued company, to improve their liquidity position through major cost reduction programmes, dividend
less than one is overvalued. cuts/suspensions and asset sales.
On the vertical axis we
have assessed liquidity, Theoretically some of these companies are takeover targets but competitors will probably
determined by the weighted
average of a number of
be more interested in acquiring specific assets or churning customers – taking advantage
factors: primarily interest of them while they are weak. Acquisitions are more likely to involve unquoted alternative
cover, dividend cover and fixed network operators (‘altnets’) or fourth/fifth mobile operators with cash-strapped
the ratio of debt to equity.
On this axis, a company shareholders who are unable to hold out until valuations begin to recover.
below one is likely to have
substantial difficulties in ‘Operators’ includes fixed, mobile and cable network operators. ‘Content
covering its debt payments
and therefore refinancing aggregators’ includes internet service providers (ISPs), television broadcasters,
its operations. radio broadcasters and print (newspapers and magazines). ‘Suppliers’ includes
network equipment vendors, passive infrastructure providers, handset suppliers,
The circle size represents
annual revenue. IT vendors, system integrators (SIs), etc.
Communications, media and entertainment
4. Figure : Timeline showing recessions and major telecommunications developments
First GSM First 3G
network live network live
Early liberalisation EU
such as UK duopolies liberalisation
1980 1985 1990 1995 2000 2005 2010
Figure 4: Impact on operators of the crisis and recession
Slower handset Consumers Reduced expenditure
replacement for premium content
Operators Content
Reduced
aggregators
expenditure
Reduced
Deferred CapEx Enterprises advertising
Increased outsourcing
Deferred CapEx
Suppliers
Reduced lending Deferred CapEx
Higher borrowing costs Increased outsourcing
Banks
Figure 5: Analysis of publicly-quoted European content aggregators
3.0
Winners Potential winners
2.5
2.0
Liquidity
1.5
1.0
0.5
Casualties Targets
0.0
0.0 0.5 1.0 1.5 2.0 2.5 3.0
IV/MV
4
5. How will the recession affect operators? In the recessions of the 1980’s and 1990’s,
operators fared reasonably well but cast your mind back to those days and the industry
landscape was very different (see Figure 3). It was dominated by fixed voice incumbents;
some countries were still liberalising their telecommunications markets; and, mobile
operators were still the new kids on the block. Will it be different this time? Figure 4
summarises our view of the main impacts on operators.
As of today most pundits believe that the main impact of consumers tightening their
belts will be delayed mobile handset replacements – tough for the handset suppliers
but beneficial for operators that subsidise handsets. That is, unless someone starts
a price war to win over the more price-sensitive customers.
The enterprise market will be affected by companies trying to reduce costs or going
out of business. This might be offset somewhat by greater expenditure on productivity-
improving services and solutions.
Be careful about your forecasts for new services or any growth in existing services.
Consumers and enterprises alike are unlikely to spend more on communications in the
current environment unless they can see a clear business case with low up-front costs.
A longer-term issue that shouldn’t be forgotten will be the need for some governments
to raise additional funding to pay for the bailouts and economic stimulus packages.
Any increases in personal or corporate taxation will affect consumers and enterprises,
which in turn will impact operators – as we show in Figure 4. Of more concern is any
form of sector-specific taxation such as that contained in the 2010 US Budget plan,
“A New Era of Responsibility”, which proposes a tenfold increase in spectrum fees
over the next few years. Might this happen in your market?
Content aggregators – suffering from advertising cutbacks
This segment didn’t get into such a mess at the start of the millennium as the operators
and so in most cases companies are less leveraged – except for those who have a
(newspaper/magazine) print background or have expanded into telecommunications.
A number of European network operators (such as Deutsche Telekom, France
Telecom, Telefónica, and Vodafone) grew over the last 20 years through international
expansion. Although their domestic markets may have matured, they are continuing
to grow through their exposure to emerging markets. The same has not been true
of the content aggregator segment except for a few rare cases such as Vivendi
and RTL. Most are heavily reliant on their domestic markets and consequently
very exposed to their vagaries.
Advertising is the critical revenue stream in this segment. In recessions advertising
expenditure typically shrinks by 5-15% – even though industry bodies argue that the
most successful companies behave to the contrary.
Communications, media and entertainment
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6. Figure 6: Impact on content aggregators of the crisis and recession
Slower handset Consumers Reduced expenditure
replacement for premium content
Operators Content
Reduced
aggregators
expenditure
Reduced
Deferred CapEx Enterprises advertising
Increased outsourcing
Deferred CapEx
Suppliers
Reduced lending Deferred CapEx
Higher borrowing costs Increased outsourcing
Banks
Figure 7: Analysis of publicly-quoted global suppliers
3.0
Winners Potential winners
2.5
2.0
Liquidity
1.5
1.0
0.5
Casualties
Targets
0.0
0.0 0.5 1.0 1.5 2.0 2.5 3.0
IV/MV
Figure 8: impact on suppliers of the crisis and recession
Slower handset Consumers Reduced expenditure
replacement for premium content
Operators Content
Reduced
aggregators
expenditure
Reduced
Deferred CapEx Enterprises advertising
Increased outsourcing
Deferred CapEx
Suppliers
Reduced lending Deferred CapEx
Higher borrowing costs Increased outsourcing
Banks
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7. The recession is therefore more significant for this segment than the financial crisis.
In previous recessions print has always lost market share to television and radio.
Since the dot.com crash, the Internet’s market share has grown rapidly and we expect
that this will continue through this recession, albeit at a slower pace, at the expense of
all other media. The winners in this segment will be the companies that have strongly
embraced or grown up with the Internet. The losers will be any print-based companies
that failed to see the trend, for some of whom it could be the end of the road.
Equipment and service suppliers – a mixed picture
There are many European-based suppliers but the segment is best viewed from a
global level and by its sub-segments: network equipment vendors, handset suppliers,
IT vendors, system integrators (SIs), etc. A few key players, such as Samsung, NSN
and Huawei are missing from the chart because they are divisions of larger groups
or are not publicly quoted. Despite this it is clear from our analysis that the network
equipment vendors and handset suppliers are in for a stormy ride whereas the SIs
are in better shape.
Having been hit hard by the dot.com crash, European and North American network
equipment vendors have been under huge pressure during the last decade from China.
Massive overcapacity has been addressed initially by major cutbacks and then through
consolidation, such as Alcatel-Lucent and NSN. Many of these companies are still
bleeding cash and so the recession will necessitate further cutbacks, mergers
and possibly bankruptcies.
Unfortunately the financial crisis and recession, combined with low cost competition
from Asia, are a ‘perfect storm’ for equipment vendors (see Figure 8). Not only is their
indebtedness a problem but most of their operator and enterprise customers are looking
to defer capital expenditure to improve their own liquidity. For example, will mobile
operators try to sweat their 2G and 3G investments through upgrades rather than
investing in 4G as the vendors hope?
However, as the English proverb goes, “every cloud has a silver lining”, and for the
network equipment vendors the maturing European telecommunications markets is
increasing demand for network outsourcing to reduce operators’ operating costs.
Some mobile handset suppliers are hoping that smartphone take-up will compensate
for slowing sales of other handset models but the deeper and longer the recession the
less likely that consumers will be willing to spend on handset replacements – regardless
of the new applications and services they might offer.
Because system integrators (SIs) typically work across many industries they were
less exposed to the dot.com crash although they did suffer somewhat from a post-Y2K
hangover. Most are not hardware manufacturers and have built substantial outsourcing
businesses which provide recurring revenues. The financial crisis will have a low impact
on most SIs because their liquidity is generally better than the network equipment
vendors’. However the recession is likely to reduce operators’ and content aggregators’
expenditure on applications development as it capitalised. Much more importantly for
SIs will be their exposure to industries harder hit by the crisis and recession, such as
financial services, retail and manufacturing.
Communications, media and entertainment
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8. Figure 9: Scenario examples
Base case
GDP
Lost Decade 2
Great Depression 2
2008 2009 2010 2011
What does this mean for you?
Even dropping down from the global to a regional level is still a generalisation from your
perspective. What you are most interested in is your own market, which in most cases
tends to be a specific country. You need to develop your (short- and long-term) action
plans based on what you think might happen to the overall economy and its impact on
the key players in your market.
What might happen in the economy?
Examples of three scenarios (see Figure 9) that you might evaluate:
• A normal recovery starting in late 2009 or early 2010
• Major depression where the economy gets much worse – as bad as or worse than
the Great Depression of the 1930s
• Very slow recovery similar to Japan’s ‘Lost Decade’ of the 1990s.
‘Base Case’: most companies are already taking appropriate actions assuming a base
case where the economy starts to recover later in 2009 or early 2010. Cost reduction
is important (particularly need for working capital) but it is also important to ensure the
business will be competitive when the recovery begins. The company needs to be agile
and well positioned in the marketplace so that it is able to take advantage of market
opportunities as fast as, or faster than, potentially weakened competitors. Targeted
investments should also be considered seriously where management believes the
earliest and strongest growth opportunities will occur in the recovery.
‘Great Depression ’: operators and content providers must understand what such a
bleak scenario means for their business. In the CME sector it will mean low (and falling)
revenue per customer, few opportunities for up-selling new services, and demand
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9. for services that reduce ongoing costs for both consumers and enterprises. Because
inflation will be negative, there will be a tendency to wait before spending money and
this will encourage operators to put minimum upfront costs onto a contract or focus much
harder on pre-pay (or pay as you go) models so that customers can manage costs more
actively. In the most extreme cases, operators may have to change their operations
dramatically (in some cases perhaps withdrawing all subscription services) so that they
can operate a much more simplified business model to enable them to make profits
in such difficult times. Such models have been used by operators in many developing
and emerging economies, particularly in Africa and India, and operators in developed
economies may need to learn from them
Ultimately this type of scenario may unleash a ‘mega-consolidation’ where only one or
two converged infrastructure-based operators are able to operate profitably in a country,
testing the judgement of regulators, competition authorities and governments.
Needless to say the outlook for infrastructure and service providers will be extremely
difficult – downsizing and consolidation will become the order of the day. Any introduction
of new technology such as LTE will be suspended for as long as the depression lasts.
With the fall-off in capital investment, services such as outsourcing will become critical to
the survival of many suppliers.
‘Lost Decade ’: rather than negative growth, operators and content providers will need
to prepare for stagnation. To address this, similar measures can be taken as for a major
depression scenario (see Great Depression 2) but in less extreme ways. Cost savings
for consumers and enterprises will still dominate but subscription-based services will be
more attractive. Competition will be harsh and building a sustainable cycle of continuing
enhancements to service packages for the same cost will be critical to retain customers
and generate strong margins.
Communications, media and entertainment
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10. Figure 10: Analyse your market for each scenario
Market Actions
Medium to
Scenarios You Customers Suppliers Competitors Short term
long term
?
Normal recovery
Great Depression 2
Lost Decade 2
Equipment suppliers will struggle but the introduction of new technology will still be
possible yet delayed, just as 3G was successfully introduced in Japan during its Lost
Decade. Outsourcing will grow steadily as operators work hard to find all possible cost
savings. Some supplier consolidation will occur albeit not at the same pace as in the
major depression scenario.
How will your market change?
Undoubtedly the key players in your market have already been impacted by the financial
crisis and the recession. It is dangerous to assume that the status quo will remain
unchanged even in your base case scenario. Take a fresh look at your main customers,
suppliers and competitors using the analysis set out in the first section of this document
for each of the scenarios that you have identified – see Figure 10.
Major customers: are any of them in the Casualties or Targets quadrants? What would
be the impact on your business of them being acquired or going bankrupt? How much
do they currently owe and are their payments taking longer? Should you be proactive
and enter into discussion with their senior managers to find out more details and perhaps
offer help in some way (not necessarily financial)?
Critical suppliers: are any of them in the Casualties or Targets quadrants? What would
be the impact on your business of them being acquired or going bankrupt? Do you have
alternative suppliers to whom you could switch? As with some of your customers, should
you be proactive and enter into discussion with their senior managers?
10
11. Figure 11: Develop action plans and contingency plans
Market Actions
Medium to
Scenarios You Customers Suppliers Competitors Short term
long term
Normal recovery In progress
Great Depression 2 Contingency
Lost Decade 2 Contingency
Vulnerable competitors: what would be the impact on your business of them being
acquired or going bankrupt? Assuming that you are in better shape, do they have assets
that you might be interested in acquiring? How else might you take advantage of their
current weakness – what might you do to attract their customers or better employees to
you? Could the market situation attract new competitors?
Government: when looking at the medium to long term outcomes for your market, don’t
forget to consider the effect of the financial crisis on the government. As highlighted
in the earlier section on operators, there may be taxation and licence fee implications
resulting from the government’s actions to address the crisis.
What should you do?
By now your executive management team should already have a good understanding
of your liquidity position and taken the necessary actions with shareholders and banks
regarding maturing short-term debt, interest payments and dividends.
Have you done everything regarding revenue assurance, capital expenditure deferment
and operating cost reduction? Our experience is that these tend to be approached
from an accounting or process perspective with limited understanding of the underlying
technology or appreciation of the customer impact. There may be quite a bit more that
you can do without damaging the customer experience or your brand.
Do you have short-term contingency plans in place for the other scenarios,
particularly with respect to events concerning other market players (customers,
suppliers and competitors)? See Figure 11.
Communications, media and entertainment
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