Telecom Industry Retrenches in Response to Macroeconomic Pressures
2024 Predictions is a series of special reports examining market trends and business changes TBR’s analysts expect in the coming year. In the telecom edition, our team looks at expectations for communication service providers and their vendor partners as the macroeconomic and telecom industry-specific challenges of 2023 continue in 2024.
Top 3 Predictions for Telecom in 2024
- New round of M&A and bolder combinations are likely to be allowed by regulators
- Cash flow management becomes priority due to increase in cost of capital and other headwinds
- Open RAN will not be ready for mainstream adoption in 2024
CSPs and Telecom-centric Vendors Will Have to Adjust to Headwinds in Their Industry and the Wider Economy
Macroeconomic and telecom industry-specific challenges that manifested in 2023 — for example, rising interest rates, inflation, lack of 5G ROI, technological complexity, and the end of key stimulus programs and various other economic support mechanisms instituted by governments during the COVID-19 pandemic — are expected to persist through 2024, prompting a response from communication service providers (CSPs) and their vendor partners.
The most impactful and pervasive issue confronting the telecom industry is the rising cost of capital, which has been increasing due to central bankers’ shift from quantitative easing (QE) to quantitative tightening (QT) in an attempt to tamp down inflation. The result thus far is companies are now paying on average two to three (or more) times the interest rates they had grown accustomed to since the Great Recession, when central banks began holding interest rates at close to zero. This relatively abrupt change in monetary and fiscal policy has created a concerning situation for entities that are heavily levered with debt, which encompasses nearly all CSPs and many telecom vendors.
CSPs with the weakest financial positions began changing their behavior in 2023, primarily in response to the rising cost of capital, evidenced by fiber build targets being scaled back, assets being revalued and written down, and overall capex budgets being reduced. Some CSPs have also had to layer on more onerous covenants, such as pledging assets as collateral, to secure new debt issuances and partially offset the rise in interest rates.
TBR expects many CSPs with relatively stronger financial positions to also change their behavior in 2024. Changed behavior typically occurs after a reassessment of capital structure and capital allocation, which can lead to a variety of outcomes ranging from dividend cuts to capex reduction to M&A events. Said differently, CSP CFOs worldwide will be under an unusual amount of pressure to meet their objectives in 2024 and they are highly likely to place greater emphasis on cost optimization and cash flow management.
TBR maintains its belief that the telecom industry will look very different by the end of this decade as current events and entrenched challenges push the industry through an evolution.
To read the entire 2024 Telecom Predictions special report, request your free copy today!
