I recently received my copy of the Deloitte Touche Tohmatsu (DTT) Global Telecommunications Index, that company’s analysis of the global telecom sector during 2003 and 2004. This report follows on the heels of a Deloitte’s recent report: TMT Trends: Predictions 2005, which I discussed with Deloitte’s Philip Asmundson, who was recently promoted to national managing partner of that company’s U.S. Technology, Media and Telecommunications (TMT) industry practice.
The Index is part of DTT’s ongoing research and analysis, and the findings are drawn from objective data and performance metrics as well as expert analysis by DTT’s member firms’ team of telecommunications practitioners.
The report finds that from January 2003 to December 2004, the market value of the worldwide telecommunications industry increased by 28 percent, an improvement over the period covered in DTT’s previous report (January 2000–July 2003), which saw the telecom market drop by 69 percent.
No single global phenomenon can be responsible for the rise. In fact every region has its own reasons that reflect the unique nature of industry structure and competitive environment.
According to the report:
The rise in market value for EMEA was a surprise to many — exceeding Asia Pacific’s performance by a significant margin. The sharp increase reflected three major factors:
1) Higher earnings and multiples, mainly on the back of cost savings from existing constituents;
2) Contributions from new entrants to the index, particularly from the Eastern European countries and the Middle East, which have significant growth potential due to their low wireline and wireless penetration;
3) A turnaround in performance by Telecom Italia and France Telecom.
In Asia Pacific, increased earnings were the big story, largely driven by operating cost reductions in developed countries. China also continued to assert itself as an increasingly large and dominant market. Healthy earnings growth was partially offset by lower multiples, reflecting lower growth prospects in mature markets such as Japan and Korea.
In the Americas, large telcos such as Verizon and SBC reported flat or negative earnings as they faced off against new competitors offering discounted services. Despite that threat, some earnings multiples improved – mostly as a result of proposed mega-mergers such as SBC (AT&T), Verizon (MCI) and Sprint (Nextel).
In all regions, the dominance of the top five players was diluted by new listings and by continued growth in developing countries. The telco sector is in the midst of significant and undeniable change and incumbency is no longer a guarantee of success.
Here are some key trends DTT expects to see over the next few years.
China will continue to grow and influence the Asia Pacific region
China’s mobile penetration should grow significantly beyond its current level of 21 percent, with every five percent increase equivalent to adding the entire UK population to the telco market. China’s telcos are likely to seek opportunities outside of their borders, gradually becoming regional telcos. Also, China Netcom will list in the near future, increasing China’s impact on the index. Chinese telcos represent approximately 25 percent of the DTT Asia Pacific Telco Index, up from 22 percent in 2003. China is sure to replace Japan as the leading contributor to the region’s Telco Index.
“The only question is when?”
Eastern Europe will continue to drive growth in EMEA
The Eastern European countries, which collectively have a population comparable to the United States, will continue to develop their telco markets and attract investment as their economies grow.
India is the wildcard
India has a population on par with China, and has already established itself as a leading supplier of IT outsourcing. Mobile subscriptions in India grew by 102 percent per annum over the last three years, yet the penetration rate is still a paltry 2.5 percent. Can India follow China’s lead, or will the many historical factors which have constrained India to slow growth in the mobile sector continue to hold it back?
The US market will look very different when DTT compiles the next edition of the Telco Index
The US market is currently seeing fierce competition for traditional wireline telcos, which are facing competition from both cable and wireless operators. Voice over Internet Protocol (VoIP) is enabling cable companies to offer the triple play bundle of voice, video and data services, allowing cable players to attack the incumbents’ voice and internet markets. Wireless operators have persuaded some consumers to give up their wireline voice connection entirely, removing wireline telcos’ historical customer relationship. With the dividing line between cable companies and telcos becoming increasingly blurred, it’s likely cable companies will make an appearance in the next edition of the DTT Global Telco Index.