Fibre, 5G and innovation: the likely winners of the Covid recession

12 August 2020 | Melanie Mingas

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As the world enters the worst recession on record, lynchpin global industries are facing collapse.

But for telecoms and tech – which have consistently bucked negative trends on global stock markets – the outlook is very different.

The IMF is bracing for a 4.9% decline in global growth in 2020 and in response, pension and investment funds are likely to leverage telecoms infrastructure and innovation projects to shore up their returns.

Founder and investor Mike Harris (pictured left), said: “Investment into fibre optic communication systems with fibre to the home and business along with mobile 5G, will almost certainly be the winners of this recession. In fact, fibre is probably the number one asset sought by the pension and investment funds around the world at this moment in time.”

Among his ventures, Harris founded Total Network Solutions, sold to BT in 2005, and more recently the US-based fibre firm SiFi Networks Ltd.

“An investment into telecoms is always seen as a safe haven during a recession because, regardless of the economic climate, access to the network is a necessity for the majority of businesses and consumers,” Harris added.

In fact, IT and tech stocks have been some of the best performing across all markets. Despite the world hanging its hopes of recovery on a Covid-19 vaccine, healthcare has yet to see the same gains.

In the first “rich list” to analyse the impact of Covid-19 on personal wealth, seven of the top 10 places were occupied by entrepreneurs and execs from tech and telecoms.

And in the first full quarter financial results since the pandemic began, Europe’s telcos largely averted disaster. Ericsson, Telia and Nokia were just some of the firms to focus on the positives and even Orange, with near flat growth, saw the silver lining in its cloudy skies.

According to Harris it is unlikely service providers will want to fund their own infrastructure upgrades but it is likely that “they’ll be looking for ways to operate over a common infrastructure that allows them to offer the high speeds required today”.

And there could be an even stronger opportunity for upcoming service providers.

“Now, access to higher bandwidth is becoming a necessity. While this isn’t great news for many incumbent service providers with legacy networks that are unfit for purpose, it gives upcoming service providers the opportunity to control the market if they invest in high speed fibre infrastructure. This is where the opportunity lies for investors,” said Harris.

In the countries where basic communications infrastructure is still a work in progress, investments are likely to focus on networks that support economic recovery.

James Gray, managing director at Graystone Strategy, said: “In less developed countries, where people had less opportunity to access the digital tools that smoothed the impact of the pandemic, I would expect to see investment that focuses on extending digital networks to make the economy more resilient.

“This is likely to be done using tower companies rather than through individual operator infrastructure investments. We have seen some interesting collaborations to increase coverage both at an operator and government level, for example relaxing some regulations.”

The outlook for innovation

There are certainly green shoots in the outlook, but the industry is far from unscathed and the Covid-19 pandemic has interrupted many things from 5G auctions to the launch of the iPhone 12. However, Gray (pictured right) said it is unlikely that the resulting recession will interrupt innovation.

“If anything, I would expect a global upturn in innovation,” he said.

“If you had told a COO that they had to move all of their call centres to work from home in a matter of weeks it would have been tabled as an 18 month transformation project, yet everyone did it within a few weeks when the pandemic hit and service levels, after an initial blip, were largely maintained.

“A huge amount of innovation and digital transformation happened and the ‘why wait?’ or 'why can’t this be done in a fraction of the time?' will be prevailing questions,” he continued.

This level of agility has provided a lifeline for other businesses and, according to Gray, the telecoms industry is also proving to be a source of inspiration for others.

“As subscription businesses telcos are quite resilient, as the majority of the revenues are not dramatically changed by new acquisitions – at least not for the established players,” Gray explained.

“What’s interesting is that this has sparked some retailers to think about subscriptions too. Look at Argos, it now sells SIMs to customers with the credit checking built in. It adopted clever plug-in APIs from CTech and Experian to do this and I think it’s a trend we’ll see continue.

“You no longer have to be an MVNO to get regular income. You can get a slice of the operator revenue and improve margin on the handset sale,” he added.

Although there are positives in the outlook, there will be those unable to weather the current storm, particularly mobile network operators who were over-reliant on enterprise revenues generated by industries such industries as retail or hospitality.

“We may see that margins decline slightly or are flat, as spend may have reduced as companies furlough and cut back on marketing. Plus, they don’t have the high acquisition costs as the shiny new smartphones are in shorter supply with many anticipated launches being delayed,” Gray said.

Assuming the pandemic “fades in the second half of 2020”, the IMF outlook for next year projects a rebound with 5.8% growth, which will be welcomed across all industries. And if the virus is still with us then, those who connect the world could be called upon to innovate further.

Gray said:We have seen innovative IoT solutions come about and be adopted on much larger than anticipated scales, like security gates that check your temperature and so on. It’s true that necessity is the mother of invention.”