Telecom has been one of the few uplifting notes in this week's morbid chorus of COVID-19 news. Defying the worriers, networks have coped admirably with a surge in consumption as Europeans have sheltered in their homes.
Only today, the UK's BT was trumpeting statistics about the resilience of its largely copper-based network. Europe's networks have also withstood the assault. "We are not currently seeing any major congestion problems," said Dan Sjöbolm, the chairman of BEREC, a club of European telecom regulators.
Contrast that with the market for groceries and essential household items, where supermarkets have not been able to handle the soaring demand triggered by panic buyers. In the first few days of this crisis, the telecom sector has looked better prepared than just about any other part of society.
Broadband is suddenly an essential lifeline to the rest of the world, rather than just a convenient way to book holidays, post Facebook messages and watch movies. Parts of the analyst community are even calling out the telecom sector as a potentially safe bet in uncertain times. Yet investors should tread as cautiously as they would in a COVID-19 hospital ward.
The bull case is based on the more critical need for residential telecom services now that offices are closed and people are confined to their homes. Howard Watson, the chief technology and information officer of BT, today revealed that normal daytime usage on the network runs at about 5 Tbit/s. Since Tuesday, it has soared to about 7.5 Tbit/s, and the figure is likely to be even higher next week after school closures.
With the network apparently built to withstand about 17.5 Tbit/s, this increase sounds like a boon for BT. In a research note about the wider implications of COVID-19 for European telcos, Jefferies emphasizes "the obvious point that demand should be resilient." In the mobile market, rates of churn to other service providers should fall, because these switches usually happen in retail outlets, it says. Capital expenditure on networks might also drop due to supply chain constraints, boosting free cash flow.
Another possibility is that as households become more dependent on broadband, and the applications it provides, consumers will upgrade to higher-speed and pricier services. Indeed, as children are forced into online classes, and former office workers are urged to use videoconferencing applications in place of face-to-face meetings, even homes that previously saw limited need for broadband will turn into heavy users. This could pay off for telcos in the form of increased sales.
But there are a couple of big caveats. First, without government intervention on a scale not witnessed since the Second World War, unemployment could soar. The world is already heading for its first major recession since the 2008 financial crash. Cash-strapped households may not have the money for a broadband upgrade or a mobile service they regard as a luxury. That is bad news for operators trying to promote new 5G services that – to many observers – already seemed like a solution in search of a problem.
Second, while supply chain disruption might free up cash, it will inevitably slow down the rollout of higher-speed networks, with long-term implications for companies partway through ambitious upgrades. That includes BT, which is trying to reach 4 million properties with a full-fiber network by March next year, up from about 2.2 million last December. This might seem a low priority in the current chaos. But when the world recovers with a more digital mindset, the UK could be at even bigger connectivity disadvantage to fiber-rich countries like Portugal and Spain.
Meanwhile, for the suppliers facing a squeeze, COVID-19 could drive customers to look even more seriously than they already are at alternatives. Although no part of the world can avoid disruption, service providers are bound to look closer to home as governments shut borders and international trade becomes even harder. Security concerns have already spurred interest in the development of homegrown network suppliers. COVID-19 may provide a further boost.
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— Iain Morris, International Editor, Light Reading