The worldwide economic crunch is beginning to severely affect Australia’s telcos, and I’m not just talking about the financing drought it induces for future projects such as the National Broadband Network. Australian telcos are now experiencing what could be termed a perfect storm: a collapsed dollar that forces up the cost of technology and international capacity inputs, an evaporated credit market which affects everything from basic commercial paper that funds ongoing operations through to longer term infrastructure financing; and a depressed stock market which reduces incentives for investment and impacts the structure of executive remuneration.

Coming soon: a slowing consumer market that may be spending less and taking more time to pay its bills. The economic crunch also has some impact on future public policy in the sector. Is it wise to be pursuing over $5.1 billion of public investment and subsidy in national broadband infrastructure under policies largely conceived in the good times of 2005 and 2006? How is future competition policy affected by the fact that the Australian telecom sector will look increasingly difficult to investors who might not want to support market players that have experienced difficulties making a business case without sympathetic regulation and policy?

Australian telecom executives, investors and policy makers also need to take a good long hard look at some of the myths about telecommunications that one continues to hear floating around.· Telecommunications is recession proof

Yes, there is an inherent inelasticity to telecommunications that ensures that demand doesn’t collapse in even the most dire economic circumstances. But this ignores the fact that much of the recent growth in telecom revenues is derived not from core services such as line rentals and basic Internet access subscriptions, but from more discretionary services: 3G value-added offerings, enhanced broadband usage quotas and speeds, IPTV and related content services. Likewise, much of the resilience of telecom revenues stems from legacy customer inertia – there may now be impetus for some to replace pricey PSTN services with VoIP services for example to cut costs.

· Telecommunications is a utility

If only it were so. Probably the most salient characteristic of a utility from an investment point of view is that it returns predictable low growth. The past fifteen years of telecommunications has been characterised by unpredictability – few forecast the extent of such things as SMS, pervasive broadband or the massive adoption of 3G services, offset by the death of “distance”, dial-up, paging and many more mainstays that drove industry profitability. At the same time, the end pricing of telecommunications services has fallen about 30% over ten years, partially as a result of access provider competition and price cap regulation, more as a result of cheaper technology inputs. CPI rose 30% over the same period. No sane investor would bracket telecommunications in a similar investment class with the likes of water or power. Telecoms is far too prone to technology disruption and the influences of sometimes poor regulation and industry market planning. On the latter, remember how 3G video calling was going to spin the industry on its head? Never happened.

· Telecoms will benefit from the pressure to cut travel, lifestyle costs

On paper this is an attractive proposition. As a business I need to cut expensive travel costs so I make greater use of videoconferencing. And as a consumer I don’t go out so much so I stay home to watch pay TV and play online games. But in practice, a deep economic downturn removes a significant minority from the market grid – it is more likely that several hundred thousand households in Australia will be pushed beyond mere cost-control into welfare-dependent poverty, while it is also likely that there will be pervasive small business failure. A significant proportion of the customer universe will effectively disappear. Likewise, if the velocity of the economy slows, businesses are unlikely to be making significantly greater use of communications technologies, because there will be a reduced number of required interactions with customer, partners and suppliers. This is especially the case for international trade. (As an aside, the falling dollar will also create pricing pressure on high-end mobile phone imports – it might be the year of the smartphone but Santa won’t be carrying nearly so many of them come Christmas time).

· The falling cost of telecom inputs will continue and take pressure off soft revenues

Again a vaguely plausible idea until one looks at the specifics of an Australian dollar that has declined 37% in less than three months against the US dollar. Much of the technology behind HSPA and FTTN rollouts is produced in US dollar, Japanese yen, Chinese yuan and Euro zones. The yen has appreciated even more than the US dollar, and the Chinese yuan is basically linked to the US dollar. The cost of technology inputs to Australian telcos will rise markedly with the local dollar falling to the US60-65c mark and likely to stay that way for some time. This is not just relevant for technology kit, but also for international capacity and termination costs – luckily many telcos have longer term contracts, often denominated in local currency, so the pain will be delayed here.

Are there upsides to the downturn? Smaller ISPs and carriers are likely to want to outsource more of their network and business operations which creates great opportunities for those able to satisfy that demand. Network owners, such as competitive carriers with DSLAM networks or wireless holdings, can complement sluggish retail growth with development of wholesale offerings as retailers look to diversify. There will also be upside for industry consolidation and brand building in tough times. The cost of labour and executive talent might also ease which is a positive for labour intensive activities such as the proposed NBN rollout. And, yes, if you are offering a service that can be shown to offer a clear price benefit – a good value VoIP or IPTV or broadband offering you can expect to build market share during the next two years.

Grahame Lynch