Great chance for more business or danger of overload and excessive demands? How the Corona crisis is becoming a litmus test for the business models of the telecommunications industry. And why it will survive the pandemic relatively well.
Minus nine trillion US dollars worldwide, minus 7.75 percent in the Euro zone, minus 4.2 percent in Germany: whether it’s the International Monetary Fund, the EU Commission or the spring reports of the leading German economic research institutes - no matter which sources are consulted these days, the message seems clear: experts around the world expect the economy to shrink massively because of the Corona pandemic. Reports of increasing short-time working, for example in the automotive industry, redundancies of employees and insolvencies in small and medium-sized businesses as well as among the self-employed dominate the headlines. Vítor Constâncio, long-time Vice-President of the European Central Bank, even speaks of "figures like in a war".
More than 9 terabytes per second
But what is the actual situation in the telecommunications industry in these times of crisis? At first glance, it seems to be in greater demand than ever before - after all, there is one overarching maxim in both the professional and private environment: stay in touch. A social need and an economic necessity, as a look at other figures impressively shows: according to DE-CIX, operator of the world's largest Internet node in Frankfurt, Internet traffic has increased dramatically since the outbreak of the crisis: be it through video calls, which have increased by 120 percent, the streaming of moving images, or the use of online gaming: the already enormously high data traffic increased by another 800 gigabytes to 9.1 terabytes per second in mid-March and has remained at this record level. An almost unbelievable number - and a development which creates special challenges for telecommunications companies. It is now up to our industry to make the increased use of data and telephony available – in a seamless and safe manner. It is not without reason that our CEO Tim Höttges described the telecommunications networks "as digital lifelines of society" in his presentation of the latest quarterly figures.
Is our industry therefore automatically one of the winners of the current crisis, in both the short and long term? The conclusion seems obvious, but a serious answer to this question must be much more differentiated as is already revealed by a glance at our own figures for the first quarter of 2020: on the one hand, our Gross Adds in mobile and broadband in Germany declined, while on the other hand this development was mitigated by lower churn. While we suffered heavy revenue losses in retail roaming and mobile handset revenues across Europe, fixed call revenue increased sharply. We have also seen limited impact on bad debt so far. This means that despite negative effects that have hit us as well, overall, we are affected by the Corona crisis to a limited extent – also due to appropriate mitigation measures. This is also reflected in us sticking to our annual forecast.
However, if you take a look at the entire industry, it seems that the global pandemic is creating uncertainty: according to a business survey of Bitkom and the ifo Insitute, one in three companies in the IT and telecommunications sector has suffered a drop in demand. For 55 percent of these companies, the Corona crisis had a negative impact, while only three percent reported a positive effect. As a result, many providers corrected their financial forecasts for 2020 - or even suspended them altogether. The market research and consulting company Analysys Mason, for example, expects a year-over-year decline in revenues of 3.4 percent in developed markets for 2020 and an industry-wide decline in earnings (Ebitda) "in the low single-digit range", which is, however, so far only considered temporary.
Recession depresses revenues
One reason for this is the generally significantly deteriorating economic environment - both for business and private customers: companies are confronted with declining sales and shrinking profits and even the threat of insolvency. According to Analysys Mason, telcos' revenues in B2B mobile will drop by 12 percent this year, and by 10 percent in B2B fixed business. At the same time many private customers are shying away from investments when facing the threat of short-time work or even layoffs, which is why demand for expensive contracts and premium devices is declining. Revenues in roaming are also dropping noticeably: according to forecasts by Juniper Research revenues in this segment will fall by up to 25 billion US dollars worldwide between March and November 2020. The main reasons for this development: due to the strict, state-imposed restrictions on global travel, private customers spend their holidays in 2020 primarily at home. Moreover, international business trips take no longer place.
Decline in IT projects, upswing for IT security
While customers are forced to cut costs and hence put some IT projects on hold, which means that project-based IT business of ICT companies will suffer over the course of the current year, the topic of cybersecurity now moves into focus. The reason: the potential for an increased number of cyber-attacks is rising, because more employees are working from home and customers are being served online. Since many companies still have to catch up in these areas, they invest in data security and the technical reliability of their workplaces, so providers of ICT services such as IT security face increased demand.
Fewer dividends, more automation
The Corona crisis will also affect telcos in terms of costs: the temporary closure of shops and buildings has reduced capital and operational expenditures. Supply chain issues and contact restrictions could have a negative impact on plans for fiber and 5G expansion, as well as on 5G spectrum auctions, thus delaying planned investments. On the other hand, personnel costs can probably only be adjusted to a limited extent, as the industry’s ability in implementing layoffs, short-time work or salary cuts is limited due to its relatively good situation. At most, telecommunications companies will refrain from hiring new employees or external service providers. Another issue is the threat of payment defaults, since private customers and small business owners could postpone the payment of their telephone and DSL bills in the event of crisis-related defaults. To strengthen their cash position, the first telecommunication companies have already cut dividends.
Sounds gloomy? Even though the Corona crisis has covered the outlook for the telecommunications and IT industry with a few dark clouds, I am convinced that things will continue beyond the horizon - because many telcos will also make use of the time during and after the pandemic to drive the internal transformation of their companies towards digitalization and automation. This development cannot only save costs but will also increase their competitiveness and in the long term allow them to come out of the crisis stronger. This prediction is based on the prerequisite that the industry deals constructively with the possible change in consumer behavior as a result of the crisis – be it that customers become even more price-sensitive or use online sales channels more than before and demand products that support the trend towards increased working from home or more generally towards hybrid forms of work.
Further changes and opportunities that the current crisis is triggering for socially relevant topics such as work culture or education will be examined in detail in the third and final part of our Corona series.
What are your experiences with the crisis? From which insights will you benefit in the period after the pandemic? We are looking forward to exchange ideas with you!
Does the collaboration run smoothly when working from home? Do the networks remain stable and our customers solvent? And in the long term, will digitalization become a catalyst for the digitalization of our work and education? In this three-part series, we're talking about the impact of the pandemic - on Deutsche Telekom (Part 1), the telecommunications industry (Part 2) and our society (Part 3).