The easiest thing to do in periods of uncertainty is … do nothing.
In the current economic “whiteout”, where the road is rough and the visibility nil, business and consumers are tightening belts, vigilantly managing costs, then watching and waiting until financial visibility re-emerges. It is a climate in which decision-making is driven as much by sentiment as rational risk analysis.
The question for the ICT sector is how long this stasis will last. Current business confidence surveys point to a protracted recession amid weakening global demand. New Zealand was in recession in the first three quarters of 2008 and the contraction will extend into Q4, with little if any growth seen in 2009. IDC believes a crunch time for business will come in the February tax take, when holiday pay and tax demands impact cash-strapped businesses, with the impact on ICT projects becoming clearer following the March and June planning cycles.
This will inevitably restrain overall ICT spending. IDC has downgraded its outlook for global IT spending growth in 2009 to 2.6%, down from a prior forecast of 5.9%. IT projects will be reviewed and reprioritised to focus on “keeping the lights on” rather than strategic transformation. Hardware will be most drastically affected, with consumers and business delaying upgrades or possibly opting for lower-end systems.
The good news for the telecommunications sector is core telecom services have a degree of insulation in this environment. Telecommunications is a necessary utility service, built into existing budgets and forming part of a contract bundle.
This is verified in IDC’s Asia/Pacific Economic Impact poll in October 2008.
CIOs were asked whether they expected to reduce, retain or increase their ICT spend in 2009. According to the poll 52% of businesses plan to maintain or marginally increase networking spend in 2009, while 59% plan to maintain or increase their telecom connectivity spend.
While this, of course, means just over 40% are looking for telecom cost savings, it nevertheless makes telecom services the lowest priority for spending reductions, behind peripherals (70%), hardware (58%), project-based IT services (58%), servers and storage (56%) and managed services (53%).
But insulation is not immunity. For large enterprises, the focus will shift to short-term, small capex, high-return projects aimed at cutting costs rather than strategic transformation. Small businesses will rationalise services and look for the tools to help control the budget.
There is potential here for a shift to mobile-only services for voice, particularly for companies with fewer than five employees, using a wireless PBX solution. We anticipate new hardware upgrades will be deferred, with users opting for converged devices where upgrades are necessary, in order to reduce the total number of company devices.
In the mid-term, this will create pockets of opportunity. Video and audio conferencing will increasingly replace travel, managed services will substitute infrastructure investment, and software that promotes efficiency all show promise in a cost-conscious environment. But in the short-term, most businesses will see the status quo as the safest bet.
For consumers, migration from dial-up will continue to slow, and there is a risk some will shift down the value stack to lower-cost broadband bundles. We are likely to see a shift to using prepaid mobile services to minimise bill shock.
This utilitarian approach is to be expected — but it is nonetheless painful for an industry investing $4 billion plus in total in next generation networks (NGN). New Zealand’s total telecommunication revenues were flat (down 0.4%) to $5.6 billion in 2008, and that was during a subscriber growth period. The current downturn risks a further pushing out of payback periods and stretching the business case to breaking point.
However, suspending further network investment is not the answer: the drive to all IP networks is as much about cost reduction as it is about new service and revenue growth.
Investment now is predicated on a business case spanning 15 years or more: economic cycles will not ultimately change long-term drivers for data traffic. Indeed, we believe mobile data growth is one of the bright spots in the year ahead.
Consequently, IDC believes committed NGN investment projects will continue — but the scale and timing of capex projects is likely to be reviewed and new services initiatives put on hold. Indeed, don’t be surprised if we see a warming from some competitive carriers towards the Government’s FttP strategy, as a means of shifting broadband capex costs from private to public hands.
Retention and customer care will become the industry focus — service providers that get this right have a real opportunity to win market share. But the current environment will inevitably accelerate consolidation among small players, further aggregating power in the hands of market leaders.
Weathering a storm is as much about endurance as tactics: this will be a tough year of slower growth, increased revenue pressures and short-term operational focus for Telcos. Nevertheless migration to NGNs and services will remain the overriding theme for 2009, both despite and because of the economic downturn.
The challenge for operators will be to maintain direction without being blown off course or capsized by the current maelstrom.
Nelson is telecommunications research manager at IDC New Zealand