NEW YORK-Deloitte Consulting announced it has developed an evaluation system to help
telecommunications carriers and equipment vendors think like portfolio managers before jumping at cross-border
opportunities in the burgeoning but risky international telecommunications marketplace.
“There is a need to
assemble a portfolio so that if one area has a downturn on the roller coaster, that will be balanced by an upturn
somewhere else to even out cash flow and make shareholders more comfortable,” said David Roddy, chief
telecommunications economist for Deloitte Research, part of Deloitte & Touche Consulting Group,
Atlanta.
Deloitte’s new report, “Worldwide Demand for Telephone Service: A Post-Crash Guide for
Global Telecom Super Carriers,” said its “efficient frontier” model borrowed a page from Nobel
Prize winner Harry Markowitz. The economist developed a quantitative approach to mutual fund portfolio
diversification “whose fundamental concept is that for any given expected rate of return, there exists a properly
chosen portfolio of diverse assets that will minimize the riskiness of the entire combination,” the study
said.
“It should be emphasized that the interpretation of the efficient frontier is not necessarily return on
investment. Rather, it is exposure to real [gross domestic product] around the world … given the strong relationship
between GDP growth and telecom access line development … Our fundamental focus, the implicit tradeoff between
risk and return, is certainly important, as many investors no doubt concluded during the fall 1998
downturn.”
Developing nations with the largest populations and the least teledensity offer the greatest
opportunity, but also the greatest risk, for carriers and vendors over the next decade.
“The need … and the
economic growth (potential) outside the United States and Western Europe are substantial, but it is a jungle out there,
with many countries experiencing financial difficulties,” Roddy said.
Wireless is key to the
telecommunications revolution at home and abroad, and Deloitte projects it will grow from 2 percent of all telephone
traffic to 30 percent during the next 10 years. More than one-third of the telephone “lines” added
worldwide last year alone were wireless, a growth rate of 52 percent that resulted in 226 million wireless customers
overall. The advent of satellite-based telecommunications systems is expected to accelerate this trend.
“Even
as these developments proceed, however, waiting lists for landline and wireless telephone service still exceed a year in
many emerging markets,” according to Deloitte Research.
Even in the United States, with its high teledensity,
the past three years have witnessed wireless subscriber growth rates of 40 percent to 50 percent due to the availability
of new radio-frequency spectrum coupled with declining handset and service prices.
The “efficient
frontier” model takes into account the three principal motivators behind communications industry mergers and
acquisitions and joint ventures, which are product and geographic diversification and economies of scale.
In Europe,
where privatization of telecommunications carriers is a driving force, the Olivetti Spa bid for Telecom Italia Spa is just
one recent example of an acquisition and joint venture market that is heating up, Roddy said.
“I wouldn’t be
surprised if some other international carrier provides equity to Olivetti, although every country worries quite a bit about
who controls the landline infrastructure, and Telecom Italia owns a large share of it in Italy.”
China is a good
opportunity today for telecommunications equipment vendors, and its entry into the World Trade Organization would
facilitate the ownership opportunities for non-native telecommunications carriers, Roddy said. Already, MCI
WorldCom has invested heavily there, “and British Telecom is reportedly looking for opportunities,” he
said.
Japan also provides “good bargain hunting opportunities for U.S. companies,” Roddy
added.
Although the situation varies by country, governments in the Asia-Pacific and Latin American regions,
which are experiencing “astounding growth,” generally “have a more liberal attitude toward second
and third carriers for foreign- equity participation and interconnection agreements,” he said.
A product and
service mix that takes into account local conditions and demand also is an important part of the risk-benefit analysis
process, Roddy said.
While data traffic in both wireline and wireless environments is a growth opportunity for
carriers and equipment manufacturers in developed nations, voice telephony is the main priority in developing
countries. Today, mobile wireless voice communications services are tapping the high-income users, but fixed wireless
likely will come into its own “over the next five to 10 years as we drift down the economic ladder,” Roddy
said.
During that same period, wireless local loop will grow to dominate local telephone traffic, which is a landline
stronghold today, he added.
Voice over Internet Protocol is “worth a PhD dissertation,” Roddy said. In
his view, it is likely to take off first in countries with a well-developed landline infrastructure. In these markets, its first
play likely will be for delayed transmissions of radio and television programming content.
“Real-time voice
over IP will take a bit of time to develop and may be a bit smaller of a market because of [local exchange carrier]
bypass concerns,” Roddy said.
Over the longer haul, wireless voice over IP likely will make its strongest
debut in markets abroad where wireless infrastructure was built first as a landline substitute, he said.
