Inability to generate and forecast revenues among top risks to telecoms industry, says Ernst and Young

Failure to generate sustainable cash flows from new business models and the inability to accurately forecast revenues top the risk charts of major telecom operators across the world.

This was revealed in the 2009 Ernst & Young Telecoms business risk report, the annual top ten ranking by leading sector analysts, published in conjunction with Oxford Analytica. The 2009 top 10 global risk rankings according to the survey respondents are:

1- Losing ownership of the client
2- Regulation and compliance
3- Inaccuracy in forecasting returns from technology and infrastructure investments
4- Failure to generate sustainable cash flows from new business models
5- Inability to manage consolidation and mergers & acquisitions
6- Attracting and managing talent and intellectual capital
7- Inappropriate processes and systems to support new business strategies
8- Poorly-managed strategic partnerships
9- Privacy and security risks
10- Inability to contain and reduce costs

Generating and forecasting returns is a challenge

According to Waddah Salah, Ernst & Young's Middle East Telecoms leader, the study has shown that telecom companies across the world are all facing the same risks. However, he feels that the region's sector may actually see these risks in a different order of priority. "The inability to generate sustainable revenues, which came in fourth globally, will actually be one of the top primary risks for Middle East operators. Ironically, this used to be a challenge that until the recent past, only mature markets had to struggle with. Now, the scarcity of funding and the growing complexity of new offerings have seen even local players go through this difficult phase," says Waddah. This is especially true with smaller players and fairly new market entrants.

Compounding the challenge above is the risk of failure to accurately forecast returns from technology and infrastructure investments. Business forecasting for telecoms companies is in itself an inherently uncertain exercise. The complexity arises because it requires long-term planning in a fast paced environment with short-term usage, an attribute unique to the sector.

Waddah adds:

"Inaccurate forecasting is also among the top risks for Middle East telcos. Most forecasts were based on earlier market conditions, when the effects of the downturn were yet to be truly felt in the Middle East. Highly positive market sentiments have contributed to aggressive expansion and investment plans which many operators had committed to. Current uncertainty may now prompt revisiting of investment decisions."

Managing consolidations is a higher risk for Middle Eastern telecoms

The report also shows that the telecoms industry is likely to continue to witness a great deal of
consolidation over the medium-term. While an M&A may become a tool for generating growth or improving operational efficiency, failure to make the right strategic choices can have adverse implications. The inability to manage consolidations came in at the fifth position globally. However this risk would rank even higher on the list for Middle Eastern operators.

According to Waddah, GCC telecom operators, who have shown a remarkable resilience to the economic downturn, continue to seriously contemplate aggressive expansion plans in emerging markets. "We expect telecom operator appetites for expansion to accelerate, especially among large, cash rich players," he says. Acquisitions can offer these companies the chance to grow into market leaders, by investing in new geographies or complementary technologies, or through inclusive service offerings.

But it also brings with it cultural, operational and compliance challenges. Part of the problem lies in the difficulty of managing a regional or global business model and having enough skilled resources to manage the move into new markets. This is a major obstacle for quick post-merger integration.

Global trends redrawing industry structure, competitive landscape and technology quotients

A notable development globally is the fact that internet companies, cable providers and equipment manufacturers have become new partners and competitors. This has led to a peculiar scenario where they are battling to control the same clients as traditional telecom operators. This in turn, is creating competition that is both intensifying and becoming much more complex. However, the region seems to have resisted this trend for now.

Many risks the sector face worldwide are linked to balancing the need to remain competitive through new service offerings, strategic partnerships and cost cutting - whilst fighting the economic perils of a downturn and new players entering the market all at the same time.

The current slowdown is expected to bring about a certain decline in overall telecoms services, especially for the latest high-tech services. Also, a growing threat is posed in some emerging markets where telecom operators who provide high quality services face increasing competition from companies with new, low-cost business models. This is a scenario that looms over the region's telecom landscape.