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While visiting Bangkok at the end of January, it was clear that the new “coronavirus” was something serious. Face masks and hand sanitizer started flying off the pharmacy shelves. Most Thai people seemed to take it seriously, especially those who experienced SARS in 2002-4. Stories of China’s shutdown of Wuhan province were spreading, and given the Chinese government's incentive to understate the situation, these stories helped sound the alarm.
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Yet, few people expected COVID-19 to shut down the rest of the globe’s major economies, as it has in sequence over the last few months. The momentum of the global economy has been engulfed by the COVID crisis, and the tech industry is no exception.
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Keeping up with the industry’s newsflow and understanding it in this new context is a challenge. That’s where this newsletter comes in. For the next few weeks, at least, MTN Consulting plans to issue a weekly synthesis of news and views relating to COVID’s impact on the telecommunications industry.
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Feel free to send along comments.
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Best regards,
Matt Walker
Chief Analyst
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What is an "essential" worker?
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Wondering who is essential and who isn’t? The US Department of Homeland Security’s CISA unit maps out in detail its “Guidance on the essential critical infrastructure workforce.” This details a long list of Communications & IT workers who are classed as “essential” during COVID, for instance “Workers responsible for infrastructure construction and restoration” which can include “permitting, construction of new facilities, and deployment of new technology”. A similar resource was published by the EU on March 30.
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Aggregate network traffic has declined due to weak economic activity, but a rapid shift in where people work has caused network spikes. Some regulators have freed up spectrum to accommodate for these changes, including those in South Africa, Ireland, and the US.
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On the flip side, a number of countries have postponed pending 5G wireless spectrum auctions, including Poland, France, Spain, and the Netherlands. The impact will be to slow down network deployments by a few months. That also gives telcos time to lobby regulators for favorable auction rules, given the new economic climate.
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With COVID's rise, some operators have made public commitments to NOT layoff, at least for some period of time (e.g Charter), but many are not in a position to do so (e.g. Dish, AT&T). Further, many operators have workforce reduction programs, and these can be accelerated in a time of financial crisis. The upcoming earnings season may clarify the outlook for headcount.
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While layoff announcements haven’t yet been widespread, already some sizable operators have taken a financial hit from the crisis. Softbank is notable, as it blames COVID for a $16.7B asset write-down. Satellite firm OneWeb declared bankruptcy. COVID accelerated the bankruptcy filing of US-based telco Frontier Communications. Orange cut its 4Q19 dividend. It’s early, though. The real test will be upcoming earnings reports for 1Q20, when we find out exactly how bad things have gotten – and how telcos plan to respond.
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Vendors cope with cloudy outlook
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Some vendors have announced new financing packages for their customers, aimed both at bolstering good will and simply avoiding defaults on payment due. Cisco's $2.5B financing program, managed by Cisco Capital, is the standout so far.
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Meanwhile vendors are beginning to announce 1Q20 earnings. Some are reducing outlook (TSMC, SAP), while others are simply pulling guidance altogether (VMWare, IBM).
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China’s GDP declined in 1Q20, officially down by 6.8% from 1Q19. Negative growth in China is virtually unheard of, and the actual drop may have been worse. In response, China has not created a single massive “stimulus” program, but has directed enterprises to ramp up investment in key areas as the economy gets back to normal. Telecommunications is one area. All the telcos are publicly claiming to (still) be gung ho on 5G this year, and have publicized their capex plans. These are government-driven, though, and China's government has less control over its telcos over time. Actual capex will be constrained by weak consumer spending, the ability to share resources (as with the Unicom-Telecom deal), and leverage China Tower's network. That makes Alibaba’s recent announcement even more interesting. Last week, Alibaba announced it would invest $28B over the next three years in infrastructure, including overseas data centers. Alibaba has an edge computing partnership with China Tower.
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As the popular press has detailed, COVID has changed where people work, and both when and how much they consume entertainment content. Two points should be made, though. First, telcos build buffer into their network, employ sophisticated tools to monitor & plan network resources, and in general have had little problem coping with increased traffic. Second, telcos have limited revenue upside from these behavior changes. Flat monthly charges are the norm for most consumer services. Both of these points are generalities, though, and need to be monitored.
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Over the next few weeks, other trends to watch include the following:
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- With an economic downturn, consumers will be drawn towards cheaper devices and more flexible service plans.
- Most people rely on their employer's IT department for device security and maintenance, which complicates life for users and has already enticed a wave of spammers and hackers to exploit this audience.
- As valuations stabilize, we will see more M&A transactions in both the vendor and telco space.
Andreesen Horowitz maintains a page on “Coronavirus Resources & Readings” with links to useful medical, government and tech industry pages and Twitter handles of experts and journalists in the field.
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