Big ISP Risk Trends

BDO Global is an international firm that specializes in accounting, tax and financial services. They monitor a number of industries and recently published their 2018 Telecommunications Risk Factor Survey – their fourth annual survey. The survey asks the largest 60 worldwide telecom companies about issues that are decreasing or increasing their market risk.

While the issues identified in the report represent issues faced by the giant telecom companies (certainly would include AT&T, Comcast and Verizon), the findings are important because issues affecting the big telecom companies eventually filter downward to affect the rest of the industry.

There are areas where the big telecom companies are seeing less risk:

  • Reduced Regulatory Risk. Companies are seeing less regulation, something that is particularly true in this country. Since big telecom companies tend towards being monopolies, less regulation generally translates into higher prices and better financial performance.
  • Expansion of Markets. Big telecom companies worldwide are expanding into new product lines. Some are doing this by big mergers, such as Charter and Time Warner Cable. Others are moving into new fields – for example, all the large US ISPs have purchased companies to help them compete with Google for advertising revenues. The big US cable companies are now entering the cellular business. The quad play has now entered our vocabulary.

However, the big companies also see growing risk in some areas including:

  • Increased Competition. US cable companies becoming cellular providers is a great example, and they are putting downward price pressure on all US cellular providers. But competition is coming from many directions – companies like Netflix, Skype, VoIP providers and many others are chipping away at services traditionally provided by telcos.
  • Fast Arrival of New Technologies. The big telcos expressed concern about how quickly new competitive threats are able to make it to market. They see upcoming threats from new technologies like 5G and new satellite broadband networks. They see the proliferation of on-line content. They are generally concerned that new technologies are making it to the market more quickly than in the past and can quickly gain significant market share.
  • Interest Rates. Telecoms are expecting higher future interest rates. This is a big concern since telecoms generally carry a lot of debt and are more susceptible to interest rates than many other industries. Big telecoms have been borrowing heavily for mergers and acquisitions and often finance capital expansion – both which create long-term debt. The big telcos are worried that higher interest will restrict their capacity to grow.
  • Access to Financing. Big telcos see a tightening of the credit markets due to a general tightening of the banking industry, but also due to their own performance. Many telcos are seeing lower margins per customer due to cord cutting, the continued drop of landlines and increased cellular competition. They foresee bankers less willing to extend the same levels of debt they’ve had available in the recent past.
  • Foreign Currency Exchange Rates. Telcos that work in multiple countries, like AT&T, are concerned with fluctuating currency exchange rates which can quickly turn international profits upside down.

Overall the big global telecom companies are doing well today. These BDO risk assessment asks them to look out a few years into the future. The overall worries of the industry as a whole are a little lower in 2018 than in 2017. However, the industry is still far from being rosily optimistic and foresees some dark clouds looking over the future horizon.

If their fears become true, this represents both increased risk and increased opportunity for smaller competitive ISPs. Certainly a tightening of lending and higher interest rates hurt smaller companies even more than the big ones. However, anything that forces the big companies to slow down or retract opens up more competitive options for small companies who compete against them.

This is an interesting look into the near future and is something that is not much publicly discussed. Once has to assume that the big telcos have their own internal economic forecasts – although I’ve never seen a lot of evidence that they look forward much past the next few quarterly Wall Street earnings announcements.