With several companies already reporting Q1 results, we are starting to get a better idea of the impact the coronavirus crisis is having on the TMT sector. Many companies have withdrawn or skipped an outlook for the year, citing uncertainty about the economic climate. The impact of the unavoidable economic recession following the restrictions on activity is indeed difficult to predict. We look here at some of the issues at stake and give a cautious prognosis that the recovery may be smoother than after the credit crisis in 2007-2011.
Direct impact: margin pressure
We look first at the direct impact of the crisis, which is driving the economic slowdown. This is based on the extensive daily news coverage available in our Covid-19 dossier and weekly summaries.
The telecom sector has experienced a spectacular increase in traffic due to the increase in home working and lockdown measures. Only international roaming traffic has declined. However, the increased traffic has not resulted in higher revenues, as many of the services being used more, such as video calling and streaming, are delivered over the top, and few broadband connections have any data caps. At the same time, costs are increasing (termination, interconnection, rights, free services).
A small positive effect may be felt in the increase in calling, and some consumers may be upgrading broadband subscriptions as well. The closure of retail outlets and limits on the movement of technicians may impact new customer connections and hardware sales, but shops are starting to re-open already in many countries, and operators are developing new 'contactless' home visits. Altogether, telecom service providers are not seeing a huge impact on revenues, but may see higher costs. This results in margin pressure and could lead to price increases in future.
The media sector is experiencing a strong increase in demand for content. At the same time the advertising market has been hit by the collapse in the retail sector and live events (especially sport). As the quality of the inventory falls, so do ad rates. SVOD services like Netflix (ad-free) are doing well. The halt to production in the film, TV and theatre segments is leading to lay-offs, and efforts to conserve cash, such as skipping dividends or halting share buybacks.
Recovery may be quick, depends on governments
It's important to recognise that the current crisis is not of an economic origin, but was caused by the Covid-19 virus and related government measures. The movement restrictions have affected nearly everyone and had a direct impact on the economy. A wave of job cuts has started, to be followed by profit warnings and bankruptcies. Bad debt risks will increase. According to Moody's, the sectors entertainment, horeca, retail and transport will suffer the biggest drops in employment.
Nevertheless, we can assume that many of the lay-offs are temporary, and companies will resume activity and investment. The shape of the economic recovery (a V, W, U or L-shaped recovery) will depend on how quickly 'stay home' and social distancing measures are removed. This of course depends on developing a vaccine and general immunity in the population, as well as the success of contact tracing to halt the further spread of Covid-19 infections. The stimulus measures by governments and various other relief funds also play a role in the pace of economic recovery.
At the moment it's impossible to say when the economy will be fully back to normal. Each country is taking a different approach, and even once restrictions are lifted, a psychological effect on people's behaviour may remain. The latter could have a positive effect on the economic recovery in general and the TMT sector in particular, thanks to more awareness of the opportunities created by digital technology, including in terms of sustainable business.
Comparison with 2008: recession not as deep
The previous recession had its roots in the US housing market and gradually spread across the world. While the impact was felt for several years, stock markets factored in the correction early and registered sharp falls of around 50 percent in the first 18 months.
It's questionable whether stock markets have hit bottom yet in the current crisis. The S&P 500 dropped almost 35 percent in the month from mid-February to mid-March and then started to recover. This is less of a fall than in the previous recession and also of much shorter duration. This is likely due to the double cause of the virus and related government measures. The sooner the virus is brought under control, the sooner the restrictions on activity can be lifted.
If the markets are again pricing in future expectations, and there is no 'second wave', the recession will not be as deep and probably shorter.
Impact on telecom: a-cyclical
As noted above, the telecom sector is confronted with an enormous increase in demand that has not necessarily led to higher revenues but is affecting costs. The result is margin pressure, and we've already seen the first profit warnings and dividend cuts.
Looking further ahead, a recession is taking shape. Unless a quick V-shaped recovery occurs, the recession will have a number of effects, however long it may last.
- The telecom is remarkably immune to economic downturns and at most late-cyclical. This is due to the strong reliance on connectivity and use of long-term subscriptions and contracts.
- Nevertheless, consumers and businesses will at some point start looking for cost savings. It can always be cheaper, after all. This means that in theory a recession is good for price fighters. Buying a new smartphone can be delayed, and subscriptions can be downgraded (fewer channels, GB, lower speeds, etc). 'Free' services also do well in this environment and may replace paid services. Examples include calling over WhatsApp or using Wi-Fi more instead of 4G.
- Changes in behaviour during the crisis could become more permanent, such as more telework, videoconferencing and webinars. This supports the sector and the importance of its infrastructure, and allows customers to save costs without impacting their telecom budget.
Lesson from the credit crisis: rise of the price-fighters
What happened during the previous crisis in the telecom sector? The rise of the smartphone, mobile internet and OTT services started and all have become more established in recent years. More notable is the launch of a number of price-fighters, many of whom are still around and thriving, such as Simpel in the Netherlands, Masmovil in Spain or Sosh in France. Some operators have noticed the trend already, for example Deutsche Telekom with its new offer Fraenk and Orange Flex in Poland. This goes along with the drive to reduce costs, digitise operations and support customers during the crisis.
