CTA paints gloomy picture for US consumer tech industry

The Consumer Technology Association (CTA) has published new forecasts for smartphone, laptop and TV sales in the US, which do not look the most attractive.

While it has been rightly assumed economies will take a material hit throughout the COVID-19 pandemic, some might have assumed the TMT industry would be slightly immune considering how integral technology is in today’s world. But the CTA is offering a reality check, which could have a detrimental impact to the telco industry, especially when it comes to upgrading consumers to 5G data tariffs.

“Unemployment and downward pressure on consumer spending caused by this pandemic will bring significant headwinds to the tech industry outlook this year,” said Gary Shapiro, CEO of the CTA.

“The tech industry has weathered many economic storms over the last few decades but as a whole the tech sector remains resilient and plays an indispensable role in our lives. Technology will be a catalyst for America’s comeback from crisis.”

Category 2020 Shipment Forecast Year-on-year Range
Smartphones 138-153 million -15% to -6%
TVs 34-37 million -14% to -8%
Laptops 46-51 million -12% to -4%

While the fortunes for devices and electronic goods might be dampened over the next twelve months, the CTA is forecasting profits elsewhere. Online streaming video services, for example, are expected to bring in revenues between $24-$25 billion which would represent an increase between 29-35% on 2019.

The upshot for the streaming segment might not be a surprise to many, as Netflix exceeded analyst expectations during its earnings call last week. Revenues for the three months ending March 31 stood at $5.768 billion, a 27% year-on-year increase, while subscriptions surged 22.8% globally to 182 million.

Walt Disney is another which is likely to profit from the outbreak with its Disney+ service. The numbers from the first few months have been very attractive, though we’ll have to wait until May 5, the Q2 2020 results, to see how the service has been received in European markets.

What is worth noting is that while an increase in broadband usage might sound beneficial to the telecoms industry, revenues in this segment rarely follow increases in data usage. With unlimited data packages becoming more common, some might upgrade though many will simply continue with the services currently in place. However, there will be a consequence for lower smartphone and laptop sales.

With connectivity being embedded in more devices and products nowadays, the introduction of SIM-embedded laptops would certainly add incremental growth to telco revenues. It would not be lifechanging by any mean, but every little counts. Dampened demand for smartphones is certainly something which should be a concern for the telcos, however.

2020 was supposed to be the year of 5G. Not only are there extortionately expensive flagships being launched throughout the industry, there are also more affordable devices from the likes of TCL and Lenovo-owned Motorola, to democratise 5G. With the launch of these devices, a refreshment cycle would have been expected. With a smartphone refreshment cycle, the telcos could have expected a material number of customers to upgrade to 5G data tariffs.

By migrating customers to 5G contracts, ROI could be realised on very expensive deployment projects, offsetting expenditure. These revenues are of course still on the horizon, being deferred not deleted, but for financial strained telcos where business models are balanced ROI, it is an uncomfortable truth.

The longer this outbreak persists, the less confident consumers will be in spending cash, especially as more employees face the prospect of unemployment. In the UK, the risk has been slightly offset by the furlough programme (The Coronavirus Job Retention Scheme), where the Government agrees to pay 80% of an employee salary up to £2,500 a month in an attempt to reduce redundancies, however such schemes are not available in the US where 26.453 million people (16.2% of workforce) have filed claims for unemployment benefit during the coronavirus outbreak.

The telecoms industry has been somewhat protected from the outbreak, thanks to work-from-home and remote learning pick-up, though the prospect of growing revenues and realising the potential of 5G is significantly weakened during this period. Revenues might be cut, but a strained telco industry will have to persevere for a bit longer.

Telco revenues forecast to contract 3.4% amid COVID-19 outbreak

Research firm Analysis Mason has forecast global revenues for telecoms operators to fall by 3.4% year-on-year as the coronavirus pandemic edges the world towards recession.

While there are certainly industries which are impacted much more severely than telecoms, the airline sector is currently in tatters, revenues are bound to decline. Unemployment and COVID-19 enforced shutdowns are trends which cannot be ignored, irrelevant to how many people view telecoms as a lifeline for remote working.

The result is potentially a year-on-year decline of 3.4% for worldwide revenues, some $40 billion which is not deferred, instead will be lost revenue.

“Consumer telecoms services, which account for the majority (68%) of telecoms revenue, tend to be relatively resilient during economic downturns,” said Stephen Sale, Research Director at IDC. “But large increases in unemployment, business closures and the overall decrease in economic activity will cause a sharp decline in business services revenue.”

Although these figures are limited to the operators, the pain will of course be passed on elsewhere. With the telcos making less money, less will be passed onto expensive projects, while currently there are limitations being placed on the telcos thanks to lockdowns and self-isolation; less work can be done.

What is currently appearing is a self-fulfilling prophecy, a series of events which will gradually slicing slithers off profits.

With businesses throughout the world under pressure, enterprise customers will be prioritising investments. Unfortunately, this means less money flowing into innovation projects, some of which will be investigating how to better use connectivity throughout operations. Slowing down these projects cuts off a revenue supply to the telcos today, but also delays the 5G fortunes of tomorrow.

If less money is coming in from the enterprise customers, it is likely telcos will push-back some of the more expensive projects themselves; the 5G core could certainly be one of those which is placed in the backseat. This in turn will mean next-generation services (such as those which require low-latency features) will see a delay in launch as well.

These are all the negatives, but there is a silver-lining to the storm clouds; the world is now appreciated how important connectivity is to a smoothly functioning society and economy.

Taking connectivity for granted is something which everyone does. It is just assumed mobile signal will be available, broadband networks will function without falter or a Netflix series can be downloaded in minutes. Telecoms is something people are aware of but give little credit to.

On average, Analysis Mason estimates the telecoms industry counts for 2% of a country’s Gross Domestic Product (GDP). This might seem a lot or not much depending on who you are, but with attitudes towards telecoms changing, it could certainly increase quite dramatically over the next few years.

If digital transformation is a buzzword the telco industry has gotten sick of, the rest of the economy is waking up today. Businesses are adapting to a world where mobility and connectivity are building blocks in the foundations. Traditional industries, such as healthcare, are being forced through a digital transformation programme which has been resisted for years.

Telcos will have to weather the storm, as will every industry in these difficult economic conditions, but forced digital transformation programmes and a new appreciation for the value of connectivity could see a new world order once the COVID-19 pandemic has passed.

A prolonged outbreak presents significant problems to telcos

While the telco industry might be getting well-deserved attention and praise today, the longer the coronavirus outbreak plagues society, the greater the risk of penalties for the telcos.

In the short-term, the risks which have been presented to the telcos could well be mitigated by the delay of some spectrum auctions, as well as more residential customers upgraded services. There is likely to be an incremental gain from the residential business, while fewer spectrum auctions mean significant less outward investments.

These might seem like attractive numbers, though what is worth noting is that the residential upgrades are highly unlikely to result in a significant increase in revenues, as increases in internet traffic is not a linear relationship with cash rewards, especially with upper limits on contracts being relaxed.

“This increase in traffic will not lead to any significant increase in revenues for telecom operators as most consumer offers for consumers products are based on flat-rate fees for broadband, mobile data traffic as long as consumption caps are not reached,” said Jacques de Greling, an analyst for the Scope research group.

“The real question is more on the longevity and depth of this crisis. A deep and prolonged recession in Europe could nevertheless put some, if limited, pressure on telecom operators’ revenues.”

The enterprise customer revenues are the ones which are under immediate threat, though should a recession take hold of society, consumer markets could feel the pinch also. Right now, there does not seem to be an immediate need to panic, China reopening for business is a very encouraging sign, but with more people working from home the threat to enterprise revenues is very real.

On the most basic level, the less people in the office, the smaller the connectivity contract which can be won from the corporate customers. Moving up a level, this might force companies through a digital transformation project to encourage more flexible and remote working. And finally, ambitious projects are generally being put on hold. This will include the trials and initiatives to further embed connectivity in the business, a trend telcos were hoping would lead to increased revenues.

Alongside the potential dampening enthusiasm from enterprise customers, revenues derived from roaming traffic is also disappearing.

As you can see from the Juniper Research forecasts above, individuals are travelling less. Should governments be less successful than some would hope in combatting COVID-19, this could lead to 653 million trips being cancelled over the next nine months.

Although this challenge is primarily directed towards the travel industry, some telcos might feel the pinch also, most notably those who operate in nations which are popular tourist destinations. The UK, Spain, France, Italy and Portugal might suffer quite considerably, as you can see from the Juniper Research estimates below:

Cumulative loss telco roaming revenues
Next three months Next six months Next nine months
Medium impact $4.807 billion $16.529 billion $20.779 billion
High impact $6.42 billion $19.306 billion $25.832 billion

The medium impact scenario which has been outlined above is based on the assumption that travel plans would be materially impacted through to December. 65% of travel will be cancelled over the next nine months in this scenario, though in the high impact scenario, additional travel bans would be introduced, more trips cancelled, a longer period of impact and thus a much more notable impact.

Although these are only two of the areas which could see strain due to the COVID-19 pandemic, there are certainly many others. Supply chains will certainly be strained over the coming weeks and months, both for devices and network infrastructure equipment, while the closure of retail outlets will also see sales of existing stock plummet and new device launches could be delayed. All of these elements together could postpone the anticipated rewards from 5G embedding in society.

Should governments be able to combat the coronavirus, the impact to the telecoms industry is minor, but as the weeks turn into months, the consequences could compound to some serious damage for operators.

Uber is much more than a taxi firm

To most people, Uber is just a cheap and convenient way to get home after a few drinks, but the scope of the business is extraordinary.

While the inclusion of Uber at a broadband conference might have raised a few eyebrows, the overview given by Global Head of Connectivity Rahul Vijay demonstrated the creativity, innovation and stubborn drive which has ensured Silicon Valley and its residents are some of the most influential in the world.

First and foremost, no-one should consider Uber as a taxi company anymore, at least not in the traditional sense. The taxi’s might still account for the majority of annual revenues, but the team is expanding into so many different areas it is difficult to sum up the business in a single sentence.

Aside from the taxi business we all know and love, Uber has a commercial business working with the travel teams at large corporations, the food delivery business unit is solidly position in a fast-growing segment, the team also work with insurance companies to make sure patients make it to their hospital appointments and it is also making promising moves into the freight world. In markets in south east Asia, the team has launched a 2G-compatible app and is also applying the same business model to mopeds and scooters. In Croatia, Uber has launched a boat taxi service.

These are the ideas which are up-and-running or currently being live trialled, though the R&D unit is also playing around with some interesting ideas. Autonomous vehicles, flying taxis and drone delivery initiatives are just some of the blue-thinking projects. This is a company where a lot is going on.

The interesting aspect of the autonomous vehicles is not just the technology but the supporting connectivity landscape.

“Without mobility there is no Uber,” Vijay said at Broadband World Forum in Amsterdam.

Some have suggested that Uber will never be profitable until autonomous vehicles are commonplace through the fleet, though it doesn’t seem to be the technology which is worrying Vijay; connectivity is too expensive today.

The test vehicles which are currently purring around the highways of North America transmit as much as 2 TB of data a day. This is not only a monstrous amount of information to store and analyse, but the economics of taking this data from the car to the data centres is not there. Vijay said it is still by far and away cheaper to transmit this data through optical cables than over the air, which is not practical. Until 5G arrives, and is scaled throughout the transportation infrastructure, autonomous vehicles are not a commercially viable concept for Uber.

This also opens the door up to another very useful revenue stream for Uber. With more than 110 million users around the world, 200 new trips are started every second. These vehicles are travelling through cities, countryside’s and down highways. The amount of information on mobile signal strength or the performance of mobile handoff between cell sites is boggling. These are only two areas, but Vijay suggested there could be hordes of valuable information which could be collected by the vehicles as they fulfil the core primary business objective.

For telcos, regulators, governments or cloud companies, this insight could be incredibly valuable. It could inform investment strategies or encourage policy changes. If data is the new oil, Uber is sitting on a very significant reserve.

As it stands, the company brings in a lot of money, but the prospect of profits are questionable. In the three months ending June 30, Uber revenues attributable to bookings stood at $15.756 billion. The loss from these operations was $5.485 billion. The transportation game operates on very fine margins. Share price has declined by 28% since this earnings call, though there is hope on the horizon.

If Uber can gain traction in the new markets it is pushing aggressively into there will be increased revenues, though in monetizing assets which it creates organically, the data collected from taxi trips, there could be some interesting developments.

Altice still under pressure to make Europe work

Revenues are down across the continent, but telecoms group Altice is pointing to healthy mobile acquisitions in France as a glimmer of hope.

With France accounting for almost 2/3 of total revenues across the now separated European business, Altice could use some good news. Promotions might have taken a bite out of the spreadsheets, but with 1.3 million subscription gains in 2018, the management team is suggesting there might be an end to the gloom.

“In 2018, we have completed the reorganization and simplification of Altice Europe’s structure, with the separation of Altice USA from Altice NV effective on June 8 and a drastic management change,” said Patrick Drahi, founder of Altice. “Altice Europe has achieved all of its FY 2018 guidance, with the successful operational turnaround leading to very strong subscriber trends.

“The significant and continued investments in both fixed and mobile networks, as well as the consistent improvements in customer care, led to a material reduction in complaints from customers and significantly lower churn rates on all technologies. We already see a tangible inflection in Portugal and France, paving the way for growth in 2019, underpinned by our strategy in infrastructure and content.”

While Altice is still not out of the woods, the 1.3 million adds across 2018 surpasses the customer churn the business has been swallowing since its acquisition of SFR in 2015. The management team is also bragging about a 30% reduction in churn, Q4 2018 vs. Q4 2017, and an improvement in network quality metrics, customer satisfaction increased 20% year-on-year for the final quarter.

The company does seem to be heading in the right direction, but you have to place some context on the situation. Debt currently stands at €28.8 billion, more than double the annual revenues of the business, suggesting there might be a few divestment quests over the short- to medium-term future.

Huawei enters 2019 swinging with $108.5 billion revenues

To say 2018 was a rollercoaster ride for Huawei would be somewhat of an understatement, but the New Year’s message from Rotating Chairman Guo Ping is one of defiance.

Ping has proudly stated the business has reached record sales revenues in 2018, $108.5 billion, signed 26 5G commercial contracts with telcos, shipped more than 10,000 5G base stations, tempted 160 cities and 211 Fortune Global 500 companies into digital transformation contracts and shipped more than 200 million smartphones.

The company might have been the antagonist in the Great Security Saga of 2018, but it is still moving in the right direction. That is, for the moment at least. This message from Ping is one of reassurance. Huawei is proactively seeking to engagement the community, promising everything is above board and legitmate. This is a business which is scrapping for its reputation.

“It has been an eventful year, to say the least,” said Ping. “But we have never stopped pushing forward, and as a result our 2018 sales revenue is expected to reach 108.5 billion US dollars, up 21% year-on-year.”

Reading between the lines you have to wonder whether the business is worried about its dependence on the US. Prior to Christmas, Rotating CEO Ken Hu promised the company’s supply chain was in a stronger position than ZTE, and there was no chance a ban from using US components and IP would create the same disaster zone. Ping seems to be reiterating this message.

“In 2019, we will focus on strategic businesses and strategic opportunities and build a more resilient business structure,” said Ping. “We will continue to optimize our product investment portfolio to achieve end-to-end strategic leadership. As part of this, we need to retain products that are competitive and appealing and phase out those that aren’t.”

Huawei are in a worrying position right now, teetering on a knifes edge. On one side, you have an incredibly successful and innovative business, with a proven track record of delivering results and a culture of account management rivalled by few. This is a vendor a lot of telcos will want to work with. However, with the echoes of accusation getting louder, governments excluding it from 5G bonanzas and the possibility of being banned from using any US goods in its supply chain, some will naturally be nervous about entering into any commercial contract.

The security concerns which plagued Huawei for the majority of 2018, accelerating in the final quarter, look like they will continue over the next couple of months but there hasn’t been an immediate impact on the business just yet. With numerous contracts already secured, Huawei is certainly not going to disappear from the connectivity landscape, but in choosing not to mention any financial predictions for 2019, Huawei has effectively stated what we are all thinking; its dominance is coming to an end.

Looking at the major vendors across the 4G era, the story was relatively clear; Huawei freely counted the cash at the expense of others, most notably Ericsson and Nokia. This will not be the story for 5G as more telcos look for greater diversity in the supply chain and governments place more scrutiny on Huawei, as well as Chinese vendors in general. Perhaps there will not be such a clear winner in the 5G era, with the bounties being more evenly spread throughout the ecosystem.

Huawei is promising to be more secure, more transparent and more innovative than competitors, and it needs to be. But we suspect the damage has already been inflicted. Success seems to have been the downfall for Huawei, forcing the company into the limelight and raising its profile so much questions were bound to be asked. Huawei will certainly continue to be a heavyweight in the connectivity industry, but its era of such spectacular dominance seems to be over.