Bleak economy affects telecom

A stark look at the economy this week by the financial firm UBS Warburg painted a bleak picture for telecom.

Looking at numbers about the economy in general, UBS telecom analyst John Hodulik notes these factors:

* 308,000 fewer jobs in February.

* A rise in unemployment to 5.8%.

* Indications that the service sector is cutting jobs.

* 40% of businesses have altered spending due to uncertainty of world events.

Nothing much encouraging there. These factors will affect telecommunications providers by slowing growth of consumer services. Fewer people with jobs means fewer people spending on phone services, he says.

Perhaps more troubling is the slowdown in the purchase of data services by businesses. Growth in the fourth quarter was 6.2% in 2001. A year later, at the end of 2002, that growth had plummeted to just .4%, Hodulik notes. And growth will continue to shrink and perhaps demand for data services will actually decline some by midyear, he says.

This spells bad news for providers. In general, data services, especially customer data services for the largest businesses, reap the largest profit margins.  “[If] data spending at large enterprises is slowing down then, well, you can do the math,” he says.

A separate study by PrisewaterhouseCoopers projects that there will be about 180 bankruptcies across all sectors of the economy this year, and that the telecom sector will be one of the hardest hit. CLECs in particular danger, says the firm’s analyst Carter Pate.

Financial forecasts now push economic upturn out to the third quarter of this year at the earliest, but it will likely be farther out for telecom, since it generally responds more slowly to  recovery than the rest of the economy.

Given that some providers are already suffering, and the prediction for more bankruptcies, when the turnaround does come, it will be a different telecom landscape. Expect fewer carriers to choose from, but the ones that remain will be battling for your business.