The Credit Crisis & Wireless
Although I'm an optimist by nature, a long-ago degree in economics and 25 years of working life leaves me concerned. I'm going to lay out a few "macro" scenarios below. I'm not an economist, I'm not a project finance guy, but it's probably time to begin an industry dialogue around the impacts of this credit mess. So feel free to debate this in the comments or amongst yourselves.
This weekend I had a call with a client in Asia. Among a list of questions, the final one stuck in my head: "What does the credit turmoil mean for wireless?"
It means a lot. In my opinion, there is both bad news and good news. The bad news is predicated on "connecting the dots" from the credit markets to wireless. The good news is based on my belief in the income inelasticity of wireless demand, i.e., the fact that we all love wireless and nobody's gonna give up his wireless phone. And then there is the "question mark."
First the bad news: Building wireless networks costs a lot of money, billions and billions, in fact. For new, greenfield operators that's hundreds of millions or billions of dollars (or euros or yen), spent on putting equipment on the ground and in central offices in a relatively short period of time, being paid for by a revenue base that starts at zero with subscriber No. 1 and builds from there. That means huge amounts of risk capital, which in turn means two things as a result of the turmoil in the credit markets: One, less risk capital is available, both for spectrum purchases and infrastructure, meaning marginal projects will not get the cash or capital they need; and two, the cost of credit will raise the cost of debt service, meaning higher costs for the operator, and commensurately reduced profits.
The bad news will cause challenges for many operators around the world, large or small, that need to go to the credit markets to fund new operations or expansion of existing businesses or M&A activity. However, the larger incumbent operators can use their profits and cashflows from existing operations to help fund/offset capital expenditures. As long as they can continue to demonstrate that people are still using their phones and mobile broadband devices, they can use those cashflows to help obtain capital for planned rollouts and expansions. What does this all mean to so-called "next-gen" services such as WiMax and long-term evolution (LTE) networks? In my opinion, it certainly does not speed them up.
Greenfield operators like Clearwire LLC (Nasdaq: CLWR) and others will have additional challenges and costs in finding funding for, not only the infrastructure, but also the funding of the SG&A (sales, general, and administrative) costs of deploying, marketing, and selling (DM&S?) a new service. On the other hand, established 3G operators such as AT&T Inc. (NYSE: T) and Verizon Wireless may decide to make do with what they have for longer, meaning a longer productive runway for high-speed packet access (HSPA) evolution – and to a lesser extent, evolution-data only (EV-DO) CDMA networks – as well a more cautious timeline for the development of LTE. Although, as I've written previously, I've been skeptical of the public lockstep of "January 2010" for LTE launches for a long time. (See Wireless Standards 101.)
To Page 2: The Good News