Don't go wobbly on me now George

As Margaret Thatcher said to George H Bush who was wavering before the first Gulf war "Don't go wobbly on me now George". For all of those service providers who have finally embarked on major transformation programs, now isn't the time to go wobbly on the need to cut costs, improved customer care levels through better customer service and slash lead times for bringing new products to market. Delaying investment because of the downturn could be the worst thing they will ever do.

But trying to figure out what the communications industry will do over the next year is a serious conundrum: there are so many variables in play. How long will the recession last? How deep will it be? Where will it hit hardest? Financially, we are in uncharted waters and even the best and brightest economists can neither agree on the answers or the best course to chart.

So let's start with what we do know. Communications company revenues are always pretty good indicators of the macro-economy. If the choice is between eating or calling your Auntie, eating always wins, so in down-turns, communications companies always get hurt. Or at least they used to when call rates were high and time/ distance billed. With so many flat rate packages now in play and growing reliance on broadband for so many things, maybe the impact of a downturn this time will be more muted than in the past. And in business communications, if the choice is an expensive flight or a conference call - conference calls win, so we may actually see the business communications sector getting a bounce rather than a chill.

Then there's cash. This recession has been driven by the drying up of capital and everyone nervously pulling in any discretionary expenditure because of the unknown. Communications companies are, of course, very big capital investors but they are also very big cash generators. These are the guys that lend to the banks, not the other way round. So what will happen to capital investment and its impact on communications suppliers? After the ‘dot-com' meltdown in 2000, we saw a very nasty capital freeze by the comms sector as they struggled to get their balance sheets back in order after a slew of dubious top-of- the- market investments. That freeze badly hurt the supply side and has triggered a lot of consolidation (Alcatel-Lucent; Nokia -Siemens etc). But this time around, cutting capital expenditure may be the last thing communications companies should do.

Most ‘tier 1' players are engaged in some kind of multi-billion dollar transformation program - the essence of which is to consolidate at the network level into one, multi-service, IP based infrastructure and shed the multiple, service-by-service, operational stacks that weigh down their operating costs. The current internal process and systems infrastructure is a mill-stone around every service provider's neck, slowing their time-to-market for new services; keeping their operating costs higher than they need be and delivering a poorer customer experience, particularly on the bundled services that they all aspire to. So cutting back on capital expenditure right now will directly impact their ability to be competitive both now and over the medium term.

This is the kind of conundrum that CEO's and Boards get paid big bucks to resolve. But unless anyone thinks that competition is going to get weaker in the future or regulators are going to ease up their pressure, such a decision to cut back on investment would almost certainly be very bad news for the long-term prospects of these service providers. This is the time when future fortunes will be made or lost - those players who can set a bold course and stick to it versus those who will dither and use the recession as an excuse to put off their transformation programs.

So what is actually likely to happen? Well, some short term pressure on revenues is inevitable as both consumers and businesses put the spending brakes on - so expect to see service providers posting earnings warnings along with everyone else. Every CFO in every communications company will be ordering up the usual cuts in travel, PR, training etc in an attempt to match the down-turn in income. Undoubtedly they will turn the ratchet on their suppliers as they did in the 2002 deep-freeze for better prices on deals having further negative knock-on's to the suppliers just as many were starting to recover. The Asian suppliers will continue their ascendancy with their pricing advantages and this will almost certainly drive yet further consolidation of the equipment suppliers.

We have also seen a lot of consolidation among the software and systems integration players. A few years ago, telecom software was characterised by dozens of small venture backed independent software companies and the trends to see these swallowed up by the likes of Oracle, IBM and Amdocs will quicken. Outsourcing will probably also accelerate, with more and more off-shoring or development work and taking over the running of legacy applications. We may see more companies taking on a Bharti-like approach of radically using outsourcing to control costs while they concentrate on marketing and product evolution. 

And what about the broader convergent services sector? How will the emerging friends of foes of the communications companies like Yahoo, Google, Facebook and eBay fare in choppy times? Advertising is always one of the first casualties in a downturn - interesting the WPP share price (the world's largest advertising agency) is used as a key measure of business outlook and right now it's headed south, so undoubtedly recession will impact the advertising based revenues of the emerging net based companies too.  Companies like Facebook and Skype have, in any event, been struggling with turning promise into revenue reality, so a downturn in global advertising revenues isn't going to help.

So while this may take some heat off these companies encroaching into the telecom sector, it's not good news for fixed and mobile players. Their new revenue sources are invariably planned around advertising based services as well, so a downturn could see the time horizon for new service introductions like mobile TV moving out by a year or two. No bad thing some might say in that it would allow the underlying network rollouts of 3G and fibre to start to match some of the hype.

So a bit of a curates egg in reality.  Good in parts but mostly bad. The smart players will hold their nerve and press on with their transformation programs - those that succumb to across the board cuts in investment will find themselves hurting badly when the inevitable upturn comes around.

Time for holding nerves - actions taken now will define those companies who capitalise on the boom that will undoubtedly follow this bust. So: don't go wobbly on me now George