24 Apr 2009

Looking at new data on how the economic downturn affects emerging market operators’ spending

The question of how the global economy is affecting the telecoms sector has been in every discussion for a while, but there seems to be a consensus on the fact that emerging markets are not to be as affected by it as developed economies.
A new report released last week by global ratings agency Fitch Ratings is looking exactly at that: telecom operators’ capital expenditure plans in emerging markets. And the picture is a mixed one. Spending is expected to be stable to decreasing in most emerging markets (far from a doom-and-gloom vision of all money taps turned off), while Africa is to see a rise in operator spending in 2009.
According to the report, infrastructure investment is expected to increase by about 10% in Africa, and markets such as Nigeria will be the main beneficiaries of it. Indeed, pan-African operator MTN has announced it would follow up its record US$3 billion CapEx programme of 2008, with an even larger US$4 billion expenditure plan for its 2009 financial year. US$2.1 billion will go to MTN’s operations in West and Central Africa, and MTN Nigeria is expecting to invest at least US$1.5 billion on its network during this year to improve on the quality of service on its network. Zain group is also planning its 2009-and-beyond spending plans: having already acquired a stake in Morocco’s Wana on its shopping spree (as mentioned in a previous post), the group is now sorting out its finances by arranging a new deal to refinance a $2.5 billion Islamic loan it signed in 2007, according to Gulf Daily News.
In other parts of the world, the picture is not as positive, but still not bleak either. In India, one of Asia’s leading growth markets, operator expansion and new regulatory decisions (such as 3G and WiMAX licences and the introduction of mobile number portability) should boost operator spending. As an example, latest entrant operators Swan Telecom, Unitech Wireless, Loop Telecom, ByCell Communications and Datacom are looking at outsourcing contracts and are already in talks with various IT vendors like Tech Mahindra, IBM, Wipro and Infosys. The rest of Asia seems slightly more affected by the economic downturn, but operators are still deploying or expanding their networks, subscriptions are still growing, and broadband access is still a priority for the industry.
The report predicts a worse situation in Russia, with “sharp cuts, with many regional fixed-line incumbents expected to slash their capex by over 50% from the previous year, and mobile operators to reduce budgets by up to 25%," according to Nikolay Lukashevich, Senior Director and Fitch's Head of Russian/CIS Corporates. However, looking at Informa Telecoms & Media 's forecasts for this year and until 2012, the market still looks strong, particularly thanks to a growing broadband market, the launch if IPTV services and the emergence of MVNOs. Russia’s subscription base growth is set to continue in the coming years, despite a forecast penetration rate of 150.8% by 2012. Operators’ investment in data networks, including GPRS, EDGE and latterly WCDMA and HSPA, will help to achieve a growth in data revenues to reach 54% by 2012. This is likely to contribute to the quite unique trend observed in Russia of increasing ARPU levels: while between 2003 and 2006 ARPU levels fell rapidly from $16 per month to just over $7 per month (a trend observed in all markets as they develop), they have since rebounded, reaching $12 per month at the end of 2007. This leaves operators with great opportunities to invest in new services in order to retain customers: at the lower-end, messaging applications are a strog focus, and on the fixed-line side IPTV services are taking off and operators are investing in developing quality networks to support the demand.
In all the events I’ve attended in the past few months in emerging markets, the economy is a matter of concern, but operators are adamant that they cannot halt their expansion plans, nor stop investing in innovative services in order to differentiate from their competitors. What they are doing is looking at new ways to make their spending more cost-effective. That is why managed services are creating such a big interest in emerging markets. And for some of the groups whose strategy relies on international expansion, now is probably the best time to clinch cheaper deals. That is certainly the view of my colleague Nick Jotischky, who says: “ask Etisalat about global macroeconomic conditions, and it says the current climate is an M&A opportunity. A void has appeared, since many traditionally strong - and expansionist - mobile operating groups, such as France Telecom and Telenor, are becoming reluctant to get involved in acquisitive activity. Their reluctance has encouraged some wealthy Gulf-based incumbents, which themselves face intense competition in their domestic markets, to look for growth overseas. And they are using the low-cost business models that have been a success in their home markets to gain large numbers of customers in Asia and Africa.”
How operators adapt to new market conditions are one of the main topics discussed at events in the Com World Series this year. It will be interesting to see how the answers evolve as the year goes by. 2009 will close with our Middle East event, with a special focus on Middle Eastern operators’ international strategies, which will be a great way to update Nick’s point.