How carriers will weather the recession

Although Verizon and AT&T have continued to post solid earnings over the past year, they are unlikely to emerge from the current recession unscathed.

As Yankee Group analyst Josh Holbrook notes, carriers often lag behind the economic times because they sign their customers to contracts of a year or longer and because demand for voice services is fairly stable. Thus, even if consumers and enterprises are hurting financially, they are unlikely to change their telecom spending habits until well after a recession is already under way.

So when the telcos do start to feel the pinch from the current recession, how will they adapt? Carriers this year have already employed one of the most obvious strategies to save money by cutting jobs. Sprint, for instance, last week said that it was going to lay off 8,000 employees, while AT&T has decided to cut 12,000 workers from its payrolls throughout 2009.

Gartner analyst Tole Hart says that the majority of cuts within the telecom industry are likely to come from telcos' wireline businesses as more consumers switch permanently over to wireless services. Looking at AT&T and Verizon's income statements for 2008 lends support to this view, as both companies experienced significant drops in their wireline operating revenue while showing continued growth in their wireless operating revenue.

Looking beyond layoffs, carriers could also slow planned upgrades to their networks and other big capital projects. For instance, both AT&T and T-Mobile last week said that they were planning to focus on upgrading the performance of their 3G High-Speed Packet Access wireless data networks before making a big push to switch over to 4G Long Term Evolution technology. Both companies previously stated that they planned to begin deploying LTE in 2010 with a commercial launch slated for 2011. Even so, Hart says that unless the recession gets significantly worse, he expects the carriers will begin rolling out their 4G systems more or less on schedule, with Verizon leading the way by launching its LTE network commercially in 2010.

“It seems like AT&T might be pushing their commercial deployments back a bit, but Verizon seems to be on track,” he says. “LTE networks were always going to start out in big cities and then gradually be built out to more rural areas, so it leaves them with some room to tweak their plans.”

Hart and Holbrook also see carriers pushing more low-cost services to consumers and enterprise customers. On the enterprise side, Holbrook thinks that carriers will aggressively promote services that require little capital investment or upgrade.

“Think about an enterprise service such as mobile device management that has no capital expenditure and it's a service with very little capital outlay for the customer,” he says. “Carriers can look at that and other managed services that are designed to save organizations money but that don't require any special in-house expertise.”

On the consumer side, Hart predicts that more users will gravitate toward prepaid plans that allow them to purchase pay-as-you-go minutes that can be refilled over the Internet and that offer unlimited mobile-to-mobile minutes with users on the same network. Hart says that AT&T has already started pushing this type of service with its GoPhone service and he says that smaller wireless providers such as Metro PCS and Boost will also stand to gain from promoting their unlimited prepaid plans that charge a flat rate for minutes on their networks and only charge extra for roaming minutes.

But while carriers will try to cut their costs through less network investment and by offering less capital-intensive services, both Hart and Holbrook expect carriers to continue spending lavishly on smartphone subsidies. Although carriers are taking big initial hits by offering consumers devices such as the Apple iPhone and the BlackBerry Storm for $200 a piece, Hart and Holbrook say they are making up for it with growth in their wireless data revenues. Indeed, since telcos' wireless services are by far their fastest-growing business segment, it makes sense for them to try to maximize their earning power by hooking users onto both voice and data plans.

“I do see these generous subsidies lasting because wireless right now is the only thing that's driving growth,” says Holbrook. “We're in a climate where no ship is safe and carriers are battening down the hatches for the tumultuous times ahead.”