The coronavirus risk has moved the world’s stock markets into an unchartered territory. Some panic after a decade-long stock market rally is perhaps not so surprising. What may be interesting though is that many big telecom companies are failing to show material defensive qualities in market routs like this. Let’s consider the following. If the coronavirus infection is not entirely contained, which is what the stock market is now beginning to assume, the health advice will likely encourage fewer person-to-person contacts and hence more reliance on data and communication technologies.

This would in medium-term boost demand for secure cloud/edge computing solutions and possibly even 5G (barring some so far seemingly baseless online opinions that 5G itself could somehow fuel the disease by impacting human immunity). So it is likely that telecoms are in a uniquely favorable position to help the challenged societies and economies by playing a crucial role in bringing about new digital products and markets. Do the stock markets see this?

Unfortunately, they do not. Let me explain. To explore genuinely new digital service opportunities and to help with reshaping the economy, telecoms would have to genuinely innovate. This is however a challenge for most telecom companies. Most of them have abandoned the culture of big leaders, who willingly support carefully chosen progressively minded visionaries, allow them to repeatedly fail (and hence lose some money) before they finally make their big transformational impact. Instead, telecoms have adopted a rent/yield centered approach. The bulk of top managers’ focus is on short-term measures to optimize returns on network and spectrum investments. Activities that may lead to dilution of short-term returns are generally suppressed. Hence the market has a rational basis for not expecting much of innovative growth from telecoms, but what about expecting solid defensive yield stories?

Unfortunately, uncertain times like this show that investors are not prepared to see telecoms as very strong defensive yield stories either. Telecom assets are much different from prime properties, for example, where scarcity and limited need for innovation are ideal for the rent-based business model. Telecoms own national networks and spectrum. The networks are subject to substantial technological innovations and shifts in regulatory preferences. In addition, telecom assets are subject to different kinds of security issues and in the future perhaps also health concerns (rational or not) around radiation. Meanwhile, spectrum allocation processes have often been opaque (https://www.digiteccs.world/why-spectrum-allocation-matters/), leading to uncertainties about costs, obligations, future spectrum entitlements etc.

Overall, telecoms in their current form basically do not have ‘long-term agreements with the societies’, which would give them comfort for long-term business and infrastructure investment planning. The absence of such agreements is particularly inconvenient at times of crises and technological change. To complicate things further, legacy telecom operators also tend to have significant cost bases linked to legacy technologies.

This leads to the main point of this article. I have always believed that stock markets have consistently overestimated the yield nature of telecoms and underappreciated their option value, both positive and negative. The negative option value among others involves technological disruption and adverse regulatory decisions. The positive option value, on the other hand entails the opportunity to pursue innovative models in infrastructure, leading to consolidation, higher utilization and more efficient operations. In addition, telecoms could significantly expand their digital service business in many areas including secure handling of consumer data (https://www.digiteccs.world/how-to-bring-value-to-telecoms/). All this can potentially lead to win-win arrangements with the policymakers.

CEOs and boards of telecom companies should in my view spend a considerable amount of time assessing the positive and negative option value of their businesses, and devising a clear strategy how to maximize the former and minimize the latter. This would entail something that many telecoms have so far been quite reluctant to do – taking risks and incurring initial losses when deploying genuinely innovative models during economically challenged and uncertain times. The upside is however significant – in terms of new services opportunity, transformation of infrastructure as well as win-win regulatory solutions. Timing of the opportunities is quite unique as well. Many telecoms are in a fortunate position of generating solid cash flows, so they can technically fund innovation. As long as the option-value-driven plan is sound and credible, telecom investors should appreciate it, which would lead to value creation. At DIGITECCS Associates we are particularly focused on assessing such option value and devising credible plans how to materialise it.

Is there an alternative to telecom innovation? If the industry does not innovate and hence fundamentally change from within, it is likely to continue facing regulatory and disruptive pressures. Moreover, it will lose its opportunity to take a leadership role in structural changes of the digital markets, giving other industries and ultimately also the policy-makers far greater say. This would push telecoms into an increasingly defensive position. We know from the past that mainly defensive strategies by the telecoms were not particularly effective for value creation.

Dalibor Vavruska
Fouder, DIGITECCS Associates

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