The European Telecoms market in 2020, Report 1: Evaluating 10 forces of change

Introduction

Telecoms – the times they are a changin’

The global telecoms market is experiencing change at an unprecedented pace.  As recently as 2012 , few would have predicted that consumer voice and messaging would be effectively ‘given away’ with data packages in 2015.  Yet today, the shift towards data as the ‘valuable’ part of the mobile bundle has been made in many European markets and, although many operators still allocate a large proportion of revenue to voice and messaging, the value proposition is clearly now ‘data-led’.

Europe, in particular, is facing great uncertainty

While returns on investment have steadily reduced in European telecoms, the market has remained structurally fragmented with a large number of disparate players – fixed-only; mobile-only; converged; wholesalers; enterprise-only; content-oriented players (cablecos); and so forth. Operators generally have continued to make steady economic returns for investors and have been considered ‘defensive stocks’ by the capital markets owing to an ability to generate strong dividend yields and withstand economic down-turns (although Telefonica’s woes in Spain will attest to the limitations of the telco business model to recession).

But the forces of change in Europe are growing and, as a company’s ‘Safe Harbor’ statement would put it, ‘past performance does not guarantee future results’. Strategists are puzzling over what the European telecoms industry might look like in 2020 (and how might that affect their own company) given the broad range of forces being exerted on it in 2015.

STL Partners believes there are 12 questions that need to be considered when considering what the European telecoms market might look like in 2020:

  1. How will regulation of national markets and the wider European Union progress?
  2. How will government policies and the new EC Digital Directive impact telecoms?
  3. How will competition among traditional telecoms players develop?
  4. How strong will new competitors be and how will they compete with operators?
  5. What is the revenue and margin outlook for telecoms core services?
  6. Will new technologies such as NFV, SDN, and eSIM, have a positive or negative effect on operators?
  7. How will the capital markets’ attitude towards telecoms operators change and how much capital will be available for investment by operators?
  8. How will the attitudes and behaviours of customers – consumer and enterprise – evolve and what bearing might this have on operators’ business models?
  9. How will the vision and aspirations of telecoms senior managers play out – will digital services become a greater focus or will the ‘data pipe’ model prevail? How important will content be for operators? What will be the relative importance of fixed vs mobile, consumer vs enterprise?
  10. Will telcos be able to develop the skills, assets and partnerships required to pursue a services strategy successfully or will capabilities fall short of aspirations?
  11. What M&A strategy will telco management pursue to support their strategies: buying other telcos vs buying into adjacent industries? Focus on existing countries only vs moves into other countries or even a pan-European play?
  12. How effective will the industry be in reducing its cost base – capex and opex – relative to the new competitors such as the internet players in consumer services and IT players in enterprise services?

Providing clear answers to each of these 12 questions and their combined effect on the industry is extremely challenging because:

  • Some forces are, to some extent at least, controllable by operators whereas other forces are largely outside their control;
  • Although some forces are reasonably well-established, many others are new and/or changing rapidly;
  • Establishing the interplay between forces and the ‘net effect’ of them together is complicated because some tend to create a domino effect (e.g. greater competition tends to result in lower revenues and margins which, in turn, means less capital being available for investment in networks and services) whereas other forces can negate each other (e.g. the margin impact of lower core service revenues could be – at least partially – offset by a lower cost base achieved through NFV).

The role of this report

In essence, strategists (and investors) are finding it very difficult to understand the many and varied forces affecting the telecoms industry (this report) and predict the structure of and returns from the European telecoms market in 2020 (Report 2). This, in turn, makes it challenging to determine how operators should seek to compete in the future (the focus of a STL Partners report in July, Four strategic pathways to Telco 2.0).

In summary, the European Telecoms market in 2020 reports therefore seek to:

  • Identify the key forces of change in Europe and provide a useful means of classifying them within a simple and logical 2×2 framework (this report);
  • Help readers refine their thoughts on how Europe might develop by outlining four alternative ‘futures’ that are both sufficiently different from each other to be meaningful and internally consistent enough to be realistic (Report 2);
  • Provide a ‘prediction’ for the future European telecoms market based on the responses of two ‘wisdom of crowds’ votes conducted at a recent STL Partners event for senior managers from European telcos plus our STL Partners’ own viewpoint (Report 2).
  • Executive Summary
  • Introduction
  • Telecoms – the times they are a changin’
  • Europe, in particular, is facing great uncertainty
  • The role of this report
  • Understanding and classifying the forces of change
  • External (market) forces
  • Internal (telco) forces
  • Summary: The impact of internal and external forces over the next 5 years
  • STL Partners and Telco 2.0: Change the Game

 

  • Figure 1: O2’s SIM-only pay monthly tariffs – many with unlimited voice and messaging bundled in
  • Figure 2: A framework for classifying telco market forces: internal and external
  • Figure 3: Telefonica dividend yield vs Spanish 10-year bond yield
  • Figure 4: Customer attitudes to European telecoms brands – 2003 vs 2015
  • Figure 5: Summarising the key skills, partnerships, assets and culture needed to realise ambitions
  • Figure 6: SMS Price vs. penetration of Top OTT messaging apps in 2012
  • Figure 7: Summary of how internal and external forces could develop in the next 5 years

Full Article: Orange / T-Mobile UK Merger: An Investor’s View

Summary: Orange and T-Mobile UK are merging, thereby consolidating two of the UK’s five mobile operators. What are the likely benefits and consequences, and the implications from an investor’s viewpoint?

AreteThis is a Guest Briefing from Arete Research, a Telco 2.0™ partner specialising in investment analysis.

The views in this article are not intended to constitute investment advice from Telco 2.0™ or STL Partners. We are reprinting Arete’s Analysis to give our customers some additional insight into how some Investors see the Telecoms Market.

UK Wireless: Saucisse de Strasbourg

FT and DT cooked up their very own knackwurst with the planned merger of two (not very) hot dogs –Orange UK and T-Mobile UK. A deal — in fact, any deal — to consolidate the UK wireless market has to be applauded, given UK market EBITDA margins of only ~22% in ’08, now heading south again as a result of MTR cuts. DT should have exited the UK long ago (see DT: Turning a SuperTanker, Dec. ’06), but stubbornly hung on, believing in the potential for data growth.

If DT’s data thesis was flawed, at least it struck a favourable deal with FT, taking 50% of the new joint venture (less a balancing payment of £1.25bn). This values its future equity participation at ~ £5bn, far more than it could have achieved in a cash disposal (recently reported offers from Vodafone/TEF are in the £3.5bn to £4bn). For FT, the deal looks a little less sweet, but still accretive. Synergy estimates (gross cost savings of £550m p.a. by ’14) seem low-balled (unsurprising given both parents’ M&A synergy track record), leaving potential for a positive surprise. A Phase II EU merger control investigation is probable, leading to deal closure around mid-’10, once remedies (e.g., separate wholesale division, return of spectrum) are agreed.

The other large UK players — Vodafone and O2 (Telefonica) — should also benefit from market rationalisation longer term, although they seem likely to target the JV’s customer base in the near term to improve their own scale positions. The move should benefit the whole sector, just as consolidation in Holland caused a mini-rally. Speculation seems likely to flit towards the next in-market consolidation: Germany (e.g., TEF buying KPN) or a second UK deal (e.g., Vodafone-3). Our favoured plays on the consolidation trend are Vodafone or KPN, although we anticipate there may be a bit more life in the old hot dogs FT and DT.

Market Share Onions

Orange’s UK service revenue share was 22.4% at 2Q09, T-Mobile’s was 15.6%, leaving the combined entity with ~37% share after elimination of intercompany trading. In contrast, Telefonica has a 29.0% share, Vodafone 25.9%, and 3 just over 7%. Mobile is a scale game, and after cost reduction, the combined entity should easily be capable of exceeding O2’s market-leading 26% margins.

Distribution Mustard

Although five operators make for a difficult environment, it is the UK’s reliance on third-party distribution that causes serious margin drag. Both Carphone Warehouse (the Best Buy Europe 50:50 JV) and Phones4U have significant market share in distribution and have traditionally managed to play operators off against each other, resulting in a high-churn, high-subsidy environment and consequently expensive SAC/SRCs (Vodafone customer costs were 36% of sales in FY08/09). Despite JV management claims of deep relationships with third-party distributors, the independent channel seems likely to be squeezed over time, which would be negative for Best Buy Europe’s UK returns (i.e., negative for CPW).

saucisse-1.png

Synergy Ketchup

DT and FT estimate gross opex synergies of £445m by ’14 (7% of combined opex in ’08) and £100m in capex (15% of combined ’08 capex). Other in-market consolidations have achieved greater cost reduction, nearer 15% of combined opex. In part, the seeming shortfall is due to the cost reduction efforts already undertaken by both sides in a difficult market, but more likely represents the parent companies’ desire not to over-promise given their synergy and deal track records (Orange-Amena, T-Mobile Austria, FT-TeliaSonera promises, etc., etc.). Capex synergies of only £100m would leave the combined entity spending £550m+ p.a.), probably reflecting the need for catch-up of T-Mobile’s historic lowly 3G spend. The JV seems positioned to attempt to maintain market leadership rather than to maximise cost reduction.

JV/Capital Structure Chips

JVs are always difficult, especially in telcoland, but the proposed management structure and safeguards seem logical. What is less easy to comprehend is the financial leverage of the new venture: on a pro forma basis, the £1.25bn of debt from the balancing payment implies ’08 JV leverage of 0.7x (probably 0.9x in ’10E). This is substantially below the leverage ratios of the two parent companies (~2x), so it seems strange that the proposed dividend policy of 90% of FCF implies further deleverage. We wonder whether some headroom has been left to allow for future deals, spectrum purchases, or even expansion of the JV into Europe. We also disagree with DT’s assertion that the deal will be net debt-neutral: DT will likely wind up lending £625m to an unconsolidated equity participation, implying consolidated net debt rises by this amount.

FCF Fizzy Pop

Even taking into account a 90% dividend payout, the £550m of gross synergies and substantial tax assets are likely to imply cash flow accretion in the low-mid single digits for each parent. In addition, fears of further significant declines in UK profitability are likely to wane, probably implying an even greater long-term uplift to longer-term FCF estimates. Our own forecasts, which take a rosier view of synergies than DT/FT (especially in terms of Distribution savings), are shown in Table 1.

Competition Clearance Bunfight

The proposed deal is likely to be subject to EU merger control. Once the parties file a Form CO (likely before end Oct. ’09), the clock starts ticking on a Phase I investigation (25-35 working days). If, as we expect, this results in DG COMP deciding that the concentration raises “serious doubts as to its compatibility with the Common Market,” then there would be a Phase II investigation lasting 90-105 working days (with a “stop the clock” provision of 20 days). Given Christmas holidays, in all probability a final ruling would be made around mid-’10. We imagine the EU will require remedies to absolve the competition concerns, and see that a return of some of the spectrum and the formation of an arms-length wholesale division are among the most likely remedies. It is difficult to judge whether the companies will find these too onerous, though given the fragile state of the UK wireless market, we imagine there will be considerable pressure to continue with the deal unless proposed remedies are unimaginably severe.

Valuation Hiccup

Our first stab at the valuation of the new venture suggests an end ’10E EV of £12.3bn, equivalent to 8.6x ’11E EBITDA (after integration costs), falling to 6x EBITDA by ’14E. On an eFCF yield basis, this is equivalent to 8% in ’11E, but 13% by ’14E as integration costs drop away. These FCF yield estimates are on the basis of the venture being unlikely to pay tax before around ’20. We then value DT’s share of the equity in the venture at ~£5.5bn, substantially higher than our no deal value (£2bn) — i.e., adding an underlying ~90c/share to our DT DCF valuation. For FT to judge the deal against the previous valuation, we must also take account the £1.25bn balancing payment, implying a fair value of £6.8bn vs. our prior £5.1bn EV (i.e., adding ~75c to our underlying DCF valuation). Taking account of these changes and further (rather overdue) adjustments to forecasts, our new ’10E price targets (note that they are rolled forward a year, so are not compatible with previous targets) for FT (FTE FP-€18.4) and DT (DTE GR-€9.6) are €21.9 and €11.0, respectively. FT and DT now trade in the teens in terms of FCF yields.

Hot Dogs All Round

In-market consolidation tends to boost the telecoms sector (e.g., KPN-Telfort sparked a rally). In the case of UK market repair, this transaction should lift the margins of the least profitable market in Europe, making it harder for those arguing for perpetual structural declines in the industry to point to the UK example. T0068is seems likely to spur a further rally in EU telecoms stocks (EuroStoxx telecoms are up 19% in three months), before speculation shifts as to the most likely next consolidation candidate. Although the competition issues are far tougher, in our view, we see calls for consolidation of the German mobile market and investor speculation as to whether 3UK will also sell out. The stocks most exposed to this likely thinking are Vodafone (VOD LN-137p; Best Idea Long; ’09E target price 190p) as the general play on European wireless and KPN (KPN NA-€10.7; Best Idea Long; ’09E target price €12) as owner of E-Plus in Germany, and therefore seen as possible consolidation targets by Telefonica (TEF SM-€17.9; Best Idea Short; ’09E target price €13.3). Conversely, we see increased worries about the value of Best Buy Europe within Carphone Warehouse (CPW LN-187p; N; ’09E target price under revision).

Table with data on the merger

 

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Full Article: Credit crunch – silver lining for telcos, part 2

Two weeks ago we presented a very gloomy picture of the developing stress in the financial markets, and its likely implications (positive and otherwise) for telcos. Two weeks is an awfully long time in today’s markets, and while it hardly gives us pleasure to acknowledge that much of what we previously envisaged is now playing out before our eyes, it probably makes sense to revisit the topic.

In short, things have gotten much, much worse since our original post only two weeks ago. Unless you’ve been hiding in a cave in Afghanistan, you have probably noticed the fitful attempts in the US to pass an economic stabilization package, to the tune of $700bn, with a lot of enhanced corporate governance provisions and regulation attached. The independent investment banks once known as the “Bulge Bracket��? no longer exist, and the stagnation of the credit markets is now resulting in a wave of nationalisations, quasi-nationalisations, and government-orchestrated private sector bailouts in Europe, as well as in the US. Business confidence in Europe is at its lowest ebb since the shock and awe of 9/11, and investor concern over the health of commercial banks, as reflected in a flight of capital into Treasuries, is at its greatest point since the Great Depression.

As the Western governments trudge through a multi-trillion dollar rescue exercise in the banking sector, from which they themselves will emerge as highly leveraged stakeholders in the financial markets, the alternative sources of liquidity on which companies have often relied in the past, namely hedge funds and private equity, are both under increasing pressure.

Beyond the direct effects of the banking crisis on private equity, the voices predicting an implosion of PE financing structures from the most aggressive vintages are growing in number and volume. The hedge fund industry, which is down by 10% overall year-to-date, is now grappling with a ban on short-selling of financial stocks, with talk in some circles of wider restrictions on short-selling if the market deteriorates further. This is hardly welcome news, as short-bias funds are one of the few bright points in the industry, up 9.4% year-to-date at the end of August. These additional constraints merely fan the flames of investor discontent, which manifests itself in rising redemptions.

The asset sales under duress which look likely to end up in the alternative investment space will place additional pressure on the currently healthier participants in the market, leading to intensified asset price deflation. The popular mood in the current climate means that few on Main Street will cry for Wall Street; however, as the current financial crisis shows, failures in complex systems often have far-reaching and unforeseen consequences, and ancillary industries (legal and transaction support, professional services, consulting, corporate advisory, IT, commercial property, corporate entertainment, catering, travel) are going to be directly affected, as are pension funds exposed to alternative asset classes.

So, in short, the picture is not pretty, and unravelling somewhat faster than we had expected. However, as we argued two weeks back, this grim background actually highlights the relative strength of telecom, a view seemingly shared by the stock market. Over the past week of turmoil, the telecom sector in Europe, as captured in the DowJones STOXX 600 definition, is at the bottom of the first quartile of industry groups in terms of performance – albeit not in positive territory.

enck-post-1.png

At a time when investor concerns are tightly focused on ‘leverage’, telcos also look relatively conservative, certainly in comparison to the previous market downturn. Analyst consensus forecasts show leverage (defined as the ratio of net debt-to-EBITDA) at well below 2.0x for the vast majority of major telcos over the next two years, and in some cases (e.g., China Mobile), companies are sitting on significant net cash positions. Forecast leverage profiles are set to decline, or remain flat, even without the aggressive capex cuts and dividend haircuts which the companies could invoke should things turn really nasty. The contrast with private equity-backed cable companies, some of which carry 4.0x or more in leverage, could not be more striking.

enck-post-2.png

Even taking for granted that current analyst estimates may be too optimistic, and that the cost of refinancing the not-inconsiderable debt maturities of the next three years (€76.8bn combined for AT&T, DT, FT, TI, Vodafone, Telefonica, Verizon, KPN and BT) might pose headwinds in de-leveraging, it is exceedingly difficult to picture any of these companies actually going bust – which makes them highly attractive in an era of rampant risk-aversion.

enck-post-3.png

So, overall, things could certainly be worse for telcos. As we stated in our previous post, the sector possesses the financial flexibility to step up to emerging investment opportunities as we work our way through this crisis, be they distressed assets, stranded venture investments, or organic development programs. We think there are several important points to hold in mind to ensure that telcos emerge stronger once the storm is over:

1. Don’t be in a hurry. We are nowhere near the bottom of the current downturn – the systemic issues are profound and will take time to flow through the broader economy. Valuations will compress much further as levels of distress increase. However, potential opportunities should be firmly on telco radar screens and drawing boards.

2. Expect the unthinkable. We may be on the verge of widespread business failures, high unemployment, and a significant level of mortgage defaults. If telcos haven’t drafted a doomsday scenario, then it’s time to rally the troops and do so, and to be prepared to be frank with the capital markets about what might lie ahead. Certainly the financial sector itself serves as a salutary example of how nervous markets are inclined to punish companies which are less than forthcoming on the realities of their situations, or which don’t understand them.

3. Don’t unnecessarily give customers an excuse to leave. Economic forces will hit the customer base, it’s inevitable. However, when customers are already feeling vulnerable, there is no point in further frustrating them to the point of capitulation. Redouble efforts on improving customer care – voluntary churn due to dissatisfaction should be anathema like never before.

4. Pitch the proposition carefully. Abandon silly, frivolous and aspirational marketing campaigns, in favour of a more down-to-earth message: telco services offer good value for money (little white lies are permissible in an economic crisis), cheap entertainment, empowerment through access to information, and are as essential as electricity and water.

5. Most of all…Take the chance to change. Crisis has a unique power to focus minds. There is no downside in being open to some new approaches when in uncharted territory. In our previous post, we suggested that telcos could take the opportunity to diversify their DNA, create better structures (here is an interesting example) for interfacing with small, innovative companies, possibly even including equity participation – and we stand by that view. There is also now an opportunity to take a long, hard look at current areas of activity, and to reassess whether they actually make sense in this changed climate.

Where to start?…We believe of course that the Telco 2.0 Manifesto provides the direction. The tangible next step towards this is to pilot one or two two-sided business model concepts (see our Use Case project here). Here’s a tip for readers of this blog: our analysis suggests that supporting enterprise Customer Care processes offers the best new opportunity…

We’ll be demonstrating why at the Telco 2.0 event on 4-5 November (details here).

Full Article: Credit crunch – silver lining for telcos?

We’re delighted to welcome James Enck onto the Telco team. Reknowned financial analyst, hedge funder and blogger James will be helping us to make the Telco 2.0 vision more tangible for senior execs, specifically in the near term via a series of ‘use cases’ that show in more detail how Telco 2.0 thinking can work in practice. He’ll also help us engage more with the finance community.

We asked him to give his thoughts on what the credit crunch means for telcos:

Each passing day seems to bring some dire new revelation about the poor state of the financial markets. While life remains tough in Telcoland, in relative terms the financial strength of the industry generally remains enviable.

The current liquidity crisis in the financial markets may provide telcos with some unique opportunities for enhancement and transformation of business models, if they are open to deploying their capital in a manner consistent with Telco 2.0 thinking. Some of those are explored below, but there are no doubt others, and we’d be interested to hear of further examples from readers.

The U.S. government has clarified its stance on “moral hazard��? by allowing Lehman Bros, a major investment bank, to fail. The International Swaps and Derivatives Association is so focused on orchestrating an orderly unwind of Lehman’s positions that it held a special trading session on Sunday and has even canceled its own members conference, which should have taken place yesterday (perhaps they were afraid that the offer of a free lunch might trigger a riot).

AIG, which yesterday appeared to be on its knees, has been effectively nationalized. Apart from the human consequences for its 100,000 employees and consumers of its more conventional insurance and re-insurance products, its demise would have made the credit derivatives market significantly more complicated.

Sparing readers the tedious technical details, this is significant because: a) the market is huge – Moody’s estimated credit default swaps (CDS) at $62 trillion back in May (that’s the nominal, but replacement cost, which they think is more relevant, was a mere $2 trillion – in any event, as CDS has evolved to be a speculative trading, rather than commercial hedging, instrument, the contracts outstanding outstrip the underlying assets many times over, which may bring some problems of its own in time), and b) transactions are off-market, with limited visibility as to who’s doing what, and with whom.

So it’s only when the music stops that we learn which counterparties are exposed, and I assume an AIG implosion would have cascaded through similarly positioned insurers, hedge funds, and the remaining prop desks in a very ugly fashion. That nationalization was the final outcome is a symptom of just how dire things are, and does not fundamentally change the dynamic in the market, in my view. We dodged a bullet this time, but there will be more similar situations which do end badly, and my central thesis still holds.

We’re now more than $500bn down the road in the inappropriately named “credit crunch.��? I say inappropriately named because, to me, “crunch��? implies a sharp, ephemeral episode of pain or distress, but this is more akin to a pandemic wasting disease, and I think it represents a fundamental realignment of the way capital will be sourced and allocated in future.

Why should the denizens of Telcoland care? Well, because, as with most crises, there will be huge challenges and opportunities ahead.

First, the challenges.

1) Confidence, be it within the corporates (as we can see in the spike in inter-bank lending rates) or among consumers, is firmly in the toilet, ready to be flushed. Prepare for an aversion to spending, and for some of your customers to disappear.

2) Liquidity, where it exists at all, is going to be more scarce and costly. Given where LIBOR is at the moment, this could get very ugly indeed – in desperate cases, say where the margin over LIBOR is 1000 basis points or more, companies will be staring down the barrel of 17% annual interest rates. For the more creditworthy, things won’t be so dire, but it still will be a noticeable uptick.

Trawling through some Bloomberg data on debt maturities for six telcos (Vodafone, DT, FT, Telefonica, BT, and Telecom Italia), it is interesting to note that the average fixed coupon for this group’s current debt is just over 6%, i.e., below the level where banks are currently willing to lend to one another, let alone anyone else. However, these six companies combined have EUR37.5bn in debt maturing in 2009 – 2010. It will get refinanced, but every 100 basis point increment above where coupons are now adds EUR375m in interest payments. Not crippling, but not trivial either. Do you grow dividends at the expense of capex?

3) Speaking of capex, an industry contact yesterday described it as “the elephant in the room��?. If we assume that the industry globally needs a $1 trillion access overhaul, as some are already under competitive pressure to provide, then something’s got to give. Do you play “squeeze the vendor��? as your only card, defer certain projects, or find creative alternative structures to keep it off your balance sheet in the near term? Do you suddenly find that the municipal broadband “hippies��? are worth talking to afterall? Some of them might have access to cheaper finance…

4) Back to liquidity more generally. It seems clear that those investment banks which do survive are likely to be constrained by commercial and financial realities, and possibly by regulation, to a narrower mandate in future. So those with a business falling outside the “suitable for widows and orphans��? category probably won’t be able to reach out to the principal investing units of Wall Street nearly as easily as they could before.

Hedge funds with dry powder can always fill that gap, but it won’t be cheap money. And the hedge funds themselves aren’t exactly setting the world on fire as a group (keep in mind that this table may look different depending on when you read it, but at this writing, the Credit Suisse/Tremont AllHedge Index is down 6.07% year-to-date as of the week ending 8th September, i.e., before the most recent round of carnage).

There’s always private equity, but as per this analysis yesterday, we might actually find a bias towards disposal of assets here in some cases, and in any event, with the markets in the state they’re in currently, it is inconceivable that PE firms will achieve the kind of exit IRRs they might have envisaged two or three years back (I’m thinking here of some of the European cable deals which got done at eye-watering multiples – in some cases they’re very decent companies, but I can’t see an easy exit for any of them.).

And it’s probably really bad if you’re an early-stage company. There is not that much happening in early stage among the VC community, particularly in Europe, and those who are active can be extremely selective. We can expect a good number of the later-stage venture-backed companies may also struggle to attract fresh capital, especially if their funding is premised upon the promise of a traditional exit.

It ain’t gonna happen, at least not at 10x revenues, unless you’ve got something really special. The outlook is particularly poor for companies created to speculatively build large communities of users, in the hope of finding a revenue model down the road. These sites certainly create value and user benefit, but in a time of severe capital constraints, it’s going to be a hard story to sell. That pretty much leaves sovereign wealth funds ($3 trillion is a lot of money) and family offices, but they will know that they are in the driver’s seat and can be highly selective.

So, that’s a sufficient dose of pain on the challenges side. What about the opportunities?

Times may also seem hard in Telcoland, but let’s face it, telco margins are still at a level other industries would kill for, and it is not uncommon for even relatively small companies to produce EUR2 – 3bn in free cash flow annually. In the land of the broke, the man with one euro is king, so how might telcos deploy some of their relative wealth in a way that might really make a difference?

1) People – The collective stupidity of Wall Street should not obscure the real talent and intellect that rests with some of its individuals. As these firms implode, they will release some very bright people, some of whom have an intimate knowledge of their own industry and industries they have covered/invested in/done business with. Take this chance to diversify your telco DNA, particularly if you really have aspirations of competing with the likes of IBM.

2) Assets – Clearly, there is going to be a lot of distressed selling of assets. Fancy a Bulgarian incumbent or a Dutch cable company? There are deals available right now. But it won’t just be big iron assets. A lot of venture-backed companies are going to end up in distress, and some of them may possess technology platforms and/or communities that you as a telco actually can monetize.

However, you may need an outside perspective to do this (going back to the previous point), or you may need to radically change the way you think about where to take your business and how to get there. There will be huge opportunities, but it will require something other than conventional telco thinking, because the best answers will not be the obvious ones.

3) Engagement – Rather than simply waiting for companies to end up here before acting, why not partially fill the void left by the capital markets? This is not to suggest that telcos should play the pure VC role, but there is a great case for aligning strategic development goals with equity investment in companies that have something you can’t (or don’t want to) create yourself.

There is some of this going on in the industry, but not nearly enough today. Some of the companies which can help telcos reposition themselves are too small and young to be considered as suppliers – they typically can’t get in the door of corporate HQ. What might you be overlooking?

Encourage your workforce and your customers to find and evangelize interesting companies, and create a framework for vetting them, finding operational sponsorship for the suitable ones, and create a side-pocket for equity investments to let them develop.

All the evidence suggests that we’re all in for a fairly brutal couple of years, with the possible exception of talented distressed investors. Next spring may be short on roses, but they will come in time. Now go and start planting your garden.