> Study

Impact of the Financial Crisis on the

European Telecommunications Industry
Results of the Detecon Survey • 2009 / 2

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Table of Contents

1. Executive Summary 2

2. Key results 3

3. Methodology 4

4. Conclusion 10

5. The Company 12

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1. Executive Summary

The rapid intensification and global spread of the financial crisis that followed the bankruptcy of major US
banks in third quarter 2008 have significantly impacted the economic forecast in almost every part of the
world. The overall economic climate has worsened considerably as the financial crisis is increasingly affec-
ting the performance of the real economy1. GDP forecasts have been downgraded around the globe. Against
this background, Detecon interviewed 56 professionals across the European telecommunications sector in
November and December 2008 in order to learn more about the impact of the current financial crisis2 on the
telecommunications sector. The major findings of these interviews are outlined below.

Number of respondents: 0 1-3 4-6 7-9 >9

Number of respondents Number of respondents

by function by operator type

100% 100%
15% 13%
90% 90%
80% 80% 14%
70% 70%
60% 50% 60% 25%
50% 50%
40% 40%
30% 30%
48%
20% 35% 20%
10% 10%
0% 0%
Professionals Other
Line Managers Fixed & Mobile
Executives Mobile
Fixed

1) E.g. compare December 2008 and January 2009 economic forecasts of the IMF and World Bank.
2) Interviewee’s responses do not reflect the opinion of their company but are the opinions of individuals.

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2. Key results

• Nearly 60% of respondents believe that the current financial crisis already has an impact on the Euro-
pean Telecommunications industry. Eastern European respondents are more pessimistic about the
impact compared to the Western and Southern regions.

• 70% of respondents expect the crisis to last more than 1 year and to have an adverse effect on tele-
communications revenues in 2009.

• Most respondents expect the demand in the business segment to decrease due to redundancies and
tighter expense management measures currently being implemented by large business accounts.

• Most respondents do not expect a drastic decrease in demand in the consumer segment but pre-
pare themselves to increase retention and acquisition cost to meet the competition.

• More than 60% of respondents do not believe that price wars will be the way to combat revenue losses.
Instead, most expect that other revenue stabilization efforts will be deployed to reduce adverse reve-
nue impacts (e.g. optimized tariff bundles, more services at the same price).

• While 41% of respondents do not expect that shortage of cash liquidity in the market will adversely
impact their growth objectives in 2009, 64% plan to implement active measures to reduce OPEX in
the HR domain and 50% plan to cut CAPEX to save cash flows.

• More than 50% of respondents do not yet actively think about merging or acquiring other players
in the market as a result of the financial crisis.

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3. Methodology

Each interviewee was asked to estimate ten statements related to the financial crisis. Interviews were con-
ducted either by phone or in one-to-one meetings. Of those interviewed, 48% came from fixed line carriers,
25% from mobile carriers, 14% from fixed + mobile carriers and 13% from other telecommunications-related
companies (e.g. consulting, banking, vendors). The interviewees included 35% Executives, 50% Line Ma-
nagers and 15% Professionals. The responses of the interviewees were grouped into three regions in order
to take into consideration the different market environments. The regional grouping was done as follows:
Region West (Belgium, France, Germany, Luxembourg, Norway, Spain, and UK), Region East (Belarus,
Bulgaria, Czech Republic, Hungary, Romania, Russia, Slovakia, Ukraine, Uzbekistan) and Region South
(Croatia, Greece, Turkey).

Statement 1:
I agree that my main operating market is already impacted by the financial crunch / crisis.

Number of respondents

0 5 10 15 20 25 30

Strongly agree 1 1 2

Agree 12 3 10

Neither agree nor disagree 3 1 2

Disagree 4 2 10

Disagree very much 0 1 West

South
No comment 0 4
East

The majority of interviewees agree that the financial crisis has already impacted their main operating mar-
kets. However, the regional breakdown shows that interviewees from the Region East expect their markets
to be more adversely affected compared to those in Region West or South, which could also suggest that
the level of uncertainty about the future market developments are much higher in the East. Most respon-
dents from that region made side comments that it is very difficult to estimate how the overall economy will
be further impacted by the financial crisis in 2009 and 2010 and how strongly the spill-over effects on the
telecommunications sector will be.

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Statement 2:
I agree that the current crisis will last for more than 1 year.

Number of respondents

0 5 10 15 20 25 30

Strongly agree 5 1 8

Agree 6 5 18

Neither agree nor disagree 6 01

Disagree 3 1 2

Disagree very much 0 West

South
No comment 0 East

Interviewees from Region West and South seem to almost completely agree that the current crisis will last for
more than one year, while nearly 40% of those from Region East are not yet sure or disagree as to how long
this crisis is likely to last. The majority of the respondents’ state as additional comment an expected duration
between 1 – 2 years but also cleary state that they are uncertain whether the bottom-line of downturns and
negative findings in the financial industry is already visible or additional burden will occur.

Statement 3:
I agree that the current crisis is having a negative impact on our company‘s revenues in 2009.

Number of respondents

0 5 10 15 20 25 30

Strongly agree 4 0 5

Agree 4 2 15

Neither agree nor disagree 8 3 3

Disagree 3 1 5

Disagree very much 0 West

South
No comment 1 1 1
East

The great majority of interviewees from Region West expect a negative impact on their company’s revenues
in 2009. Participants from Region East do expect negative impacts too. However, a significant portion of
interviewees from this region also either disagree or are unsure.

The responses to this question are supported by Q3 and Q4 2008 financial statements of major European
operators3. As analysis of these reports reveals, many operators have had only limited or no revenue growth
in Q3 2008.

The reports suggest that consumers are still talking more compared to last year, but it seems that consumers
are using price reductions to save money and to talk more at the same time.

3) T-Mobile Germany, MTS, Vimpelcom, Telefonica, O2, Orange Q3 and Q4 2008 Financial Statements and explana-
tions to shareholders were retrieved from the operator’s Internet websites.

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Statement 4:
I agree that the current crisis will bring a price war into our market.

Number of respondents

0 5 10 15 20 25 30

Strongly agree 10 3

Agree 3 1 3

Neither agree nor disagree 7 3 12

Disagree 7 3 8

Disagree very much 2 0 West

South
No comment 0 3
East

Most respondents are unsure whether a price war is looming or disagree entirely. Although it seems to us
that consumers become more price conscious, no data could yet be found that would show operators ente-
ring into a pricing war beyond the usual market behavior. Instead, in some countries, like Germany, other-
wise strong competitors are actually thinking of collaborating more intensively in the joint roll-out and use of
new network infrastructure which suggest that operators are jointly trying to find solutions to avoid negative
backlashes of the financial crisis.

Statement 5:
I agree that the current crisis will force us to take measures to stabilize our revenues.

Number of respondents

0 5 10 15 20 25 30

Strongly agree 2 1 4

Agree 12 4 9

Neither agree nor disagree 1 2 0

Disagree 10 3

Disagree very much 0 West

South
No comment 4 0 13
East

Most respondents expect their companies to take revenue stabilization measures in 2009 in order to avoid
the negative fall-out from the crisis. However, nearly 30% of all respondents chose not to give any hints as
to whether and how they might be reacting.

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Statement 6:
I agree that the current crisis will lead to a reduction in personnel in the whole telco industry in our
main operating market.

Number of respondents

0 5 10 15 20 25 30

Strongly agree 2 1 8

Agree 12 5 12

Neither agree nor disagree 3 1 3

Disagree 2 0 5

Disagree very much 0 West

South
No comment 10 1
East

Independent of the region, most respondents expect that the crisis will lead to further reductions in head-
count. The view of one respondent expressed the feeling of many others: “In my company, we have focused
on revenue growth, gotten used to high profit margins and strong cash flows in the past 5 years.

Staff cost was never considered to be an issue, as it was felt to be only a marginal cost in the P&L. However,
now in the time of crisis, we realize that staff cost does present a significant portion of our total P&L cost and
that much of what we do is not related to revenue generation but internal administrative issues.

We have come to realize that while our revenues are shrinking and most of our costs are fixed, we still
have a considerable opportunity in downsizing our operations to a level more adequate to our revenue
development.”

Statement 7:
I agree that the current crisis will lead our company to lower capital expenditures in 2009.

Number of respondents

0 5 10 15 20 25 30

Strongly agree 9 1 6

Agree 5 1 9

Neither agree nor disagree 1 3 8

Disagree 4 1 4

Disagree very much 0 West

South
No comment 1 1 2
East

Most respondents expect a reduction in capital expenditures in 2009 as a result of the crisis. As many of the
respondents suggested, 3G network infrastructure will not be rolled out as aggressively as initially planed.

Also, vendor harmonization projects will likely be postponed until 2010.

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Due to great uncertainty in the general economic development, Eastern European operators seem to be
particularly careful when it comes to capital expenditures and have also publicly announced the postpone-
ment or cancellation of major infrastructure projects4.

Statement 8:
I agree that that lacking liquidity in the market is a problem for the telco industry in our main
operating market.

Number of respondents

0 5 10 15 20 25 30

Strongly agree 1 1 5

Agree 9 3 6

Neither agree nor disagree 6 1 9

Disagree 3 2 7

Disagree very much 10 West

South
No comment 0 2 East

The opinion of respondents is divided on whether the lacking liquidity is a problem to main operating mar-
kets. Roughly 45% believe that it is not, the other 45% are not sure or disagree. This sentiment is shared by
all three regions.

Statement 9:
I agree that lacking liquidity will prohibit our company from growing further in 2009.

Number of respondents

0 5 10 15 20 25 30

Strongly agree 0 5

Agree 2 1 2

Neither agree nor disagree 10 0 6

Disagree 6 4 10

Disagree very much 1 1 2 West

South
No comment 1 1 4
East

Although nearly half of the respondents believed that a lack of liquidity in the market might become a pro-
blem for their main operating markets, the great majority of respondents does not expect this problem to
threaten their own growth. However, the result of this question is different when comparing the answers by
work function.

Most respondents working in a Finance Department saw the access to affordable liquidity as a key concern
for sustainable growth, which could suggest that the financial impact of the crisis to cash flows and profit and
loss are not yet fully understood or agreed to by all functions in the business in the same way.

4) E.g. IHS Global Insight, 29.12.2008, „Svyazinvest Halves 2009 Investment Programme, Pledges Not to Cut Jobs”

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Statement 10:
I agree that our company will use the current crisis to consolidate the market by taking over com-
petitors.

Number of respondents

0 5 10 15 20 25 30

Strongly agree 1

Agree 3 3 4

Neither agree nor disagree 9 0 6

Disagree 1 2 3

Disagree very much 0 1 1 West

South
No comment 6 1 15
East

Most respondents declined to comment on whether they will use the current market situation to merge or
acquire other players. The option might be particularly attractive to those players that have a solid balance
sheet and sufficient capital reserves5.

5) See also www.tagesschau.de, „Gut verbunden mit den Telekoms?“, 07.01.2009

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4. Conclusion
Based on the results of this survey, major concerns of telecommunications operators are to:

• forecast the spill-over effects of the general economic development on the telecommunications sector
and to get a higher level of certainty for planning and budgeting.

• if and how to more closely collaborate within the telecommunications industry to jointly work
against the negative impacts of the crisis.

• Most respondents expect the demand in the business segment to decrease due to redundancies and
tighter expense management measures currently being implemented by large business accounts.

• adjust OPEX (especially personnel related cost) to lower revenue growth for the coming two years.

• identify and prioritize those investment areas that will bring the highest positive returns in the
long run and to more closely monitor actual performance of project implementation.

Surely, not all operators are in exactly the same situation or share the same concerns. Currently, it seems
that Western European respondents acknowledge more the negative impacts and are more prepared to take
serious actions in 2009 whereas in Eastern and Southern Europe a number of respondents are still unclear
as to what to expect from 2009 and how to respond.

Our point of view is that operators in all regions are well advised to seriously think what the challenges
in 2009 onwards could be and how best to deal with them. Detecon’s project experience shows that
operators that identify the strategic challenges, build adequate contingency plans, create a company wide
awareness for these issues and take conscious decisions are usually also those to come out first from any
crisis and mostly even stronger.

From what we have seen in recent years in many European operator projects, especially in Eastern and
Southern Europe, there is a significant potential to increase profit and cash flow by optimizing in-
ternal efficiencies (e.g. compare FTE/lines or active SIM cards as a basis or EBITDA/FTE). For these
operators, the obvious next step might be to push through structural efficiency improvements in order to
strengthen operating cash flows in the long-run. The pretext of the financial crisis might be a good faci-
litator for Executives to find enough support to successfully execute decisive actions. Those operators who
have already set-up efficiency programs need to accelerate the execution and robustness of the programs
in order to achieve the maximum potential.

On the other side, some operators are already reaching an efficiency level beyond which further improve-
ments become increasingly costly to achieve. For them to continue to focus on internal optimization would
be a waste of resource. Instead, these operators might want to think more about how they can use the
operating weaknesses of the other players in order to change the market place to their advantage, for
instance, by acquiring smaller players, forming new alliances, investing in new coverage areas or simply
investing in a new blue ocean strategy within their home market. No matter what the answer might be, the
idea is the same: outrun your competitors while they are busy with operational restructuring.

The challenges and possible solutions can be quite different for every operator. Betting on the wrong sce-
nario can become a costly mistake. To avoid these mistakes, Detecon recommends the following steps to
those operators that are still struggling to decide on how to respond to the crisis:

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Identify strategic options:

• Review existing strategic plans

• Determine vulnerability of own operations and capabilities

• Determine regulatory and technological constraints

• Review competitors’ reactions and changes in customer behaviour

• Assess most feasible strategic options and targets

Elaborate detailed measures underlying each option:

• Define measures to achieve the strategic options

• Set up tools to assess the financial impact of measures

• Determine related risks to the business

• Agree ownership for the measures

• Adjust existing business plan with agreed measures

Implement and closely monitor measures:

• Set up detailed measure implementation plans

• Set up related project teams

• Assure executive approval

• Project manage implementation of measures

Naturally, no one knows exactly in which way the financial crisis will hit the European telecommunications
industry in 2009. However, being prepared for the unlikely in order to reduce the level of uncertainty is defi-
nitely a step in the right direction.

We hope this survey was useful to you and provided you with further thought material. Please do not hesitate
to contact your Detecon Contact Person if you would like to discuss the potential challenges and Detecon’s
solution ideas or if you require further assistance.

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5. The Company
Detecon International GmbH

Detecon International is a leading worldwide company for integrated management and technology consul-
ting founded in 2002 from the merger of consulting firms DETECON and Diebold. Based on its comprehen-
sive expertise in information and communication technology (ICT), Detecon provides consulting services
to customers from all key industries. The company’s focus is on the development of new business models,
optimization of existing strategies and increase of corporate efficiency through strategy, organization and
process improvements. This combined with Detecon’s exceptional technological expertise enables us to
provide consulting services along our customers’ entire value-added chain.. The industry know-how of our
consultants and the knowledge we have gained from successful management and ICT projects in over 100
countries forms the foundation of our services. Detecon is a subsidiary of T-Systems, the business custo-
mers brand of Deutsche Telekom.

Integrated Management and Technology Competence

We possess an excellent capability to translate our technological expertise and comprehensive industry and
procedural knowledge into concrete strategies and solutions. From analysis to design and implementation,
we use integrated, systematic and customer-oriented consulting approaches. These entail, among other
things, the evaluation of core competencies, modular design of services, value-oriented client management
and the development of efficient structures in order to be able to distinguish oneself on the market with inno-
vative products. All of this makes companies in the global era more flexible and faster – at lower costs.
Detecon offers both horizontal services that are oriented towards all industries and can entail architecture,
marketing or purchasing strategies, for example, as well as vertical consulting services that presuppose
extensive industry knowledge. Detecon’s particular strength in the ICT industry is documented by numerous
domestic and international projects for telecommunications providers, mobile operators and regulatory aut-
horities that focused on the development of networks and markets, evaluation of technologies and standards
or support during the merger and acquisition process.

For further information please contact:

Carsten Schröder
Managing Partner Corporate Finance
Mobile: 0049 175 932 3583
eMail: Carsten.Schroeder@detecon.com

Christian Barte
Team Leader Performance Engineering
Mobile: 0049 160 989 42969
eMail: Christian.Barte@detecon.com

Detecon International GmbH

Oberkasselerstr. 2
53227 Bonn
Internet: www.detecon.com

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53227 Bonn
info@detecon.com
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