Incipient Telecom Opportunity For IT Services Firms

There has been a lot of press about how the capital-intensive telecom industry has been going through paroxysms. In India, we have seen a powerful market play by an entrant with very deep pockets, which has changed the market completely. While revenue per user has plummeted, India has gone from being a market with low penetration to one with ever increasing mobile usage. Some statistics now even place India at the top when it comes to mobile data consumption. There has been market consolidation among industry players and relentless price competition, which has eviscerated some incumbent telecom firms.

Elsewhere in the world, the advent of 5G networks is on the horizon. I admit that we have spent a long time waiting for this horizon to light up, but light up it shall, and once prevalent in western markets, will make its way to markets like India and China, where the bulk of the world’s market lies. This network deployment will see another cycle of intense capital investment.

In my experience, these telecom ‘boom and bust’ cycles run in seven-year intervals. Two or so years of intense capital investment, followed by three years of harvest, during which several other players mushroom—only to wither when the end of the cycle, characterized by two years of decline, presents itself.

But there is one more macro cycle within telecom that isn’t understood quite as well by industry watchers. And that is the fact that the regulatory environment—especially in the US—changes around every 21 years or so. Therefore, every fourth seven-year cycle is greatly enhanced by the regulatory changes in addition to the technology changes that spur capital spending.

While responsible for IBM’s (International Business Machines Corp.’s) consulting and services businesses in the US and later in Europe during the late 1990s, I happily found myself at the beginning of the investment cycle which was the cusp of both a 21-year cycle and 7-year mini-cycle.

The Telecom Act of 1996 had just been passed, opening up the US market for competition across all realms— local services, long-distance services, and most saliently, digital cellular and data services. Prior to that, the last regulatory move had been about 21 years before, in 1974, when the US Department of Justice filed an antitrust lawsuit against AT&T Inc. and pushed it to divest itself of local operating companies. The divestiture was completed by a ‘consent decree’ some years later.

The amount of throw-off spending that ensued after 1996 was a bonanza for many players. Companies such as Cisco Systems Inc. were greatly benefitted, as were IT outsourcing services providers such as IBM, Accenture, and Indian firms such as Infosys Ltd, Tata Consultancy Services Ltd, Wipro Ltd, and the precursor of today’s Tech Mahindra.

As we stand at the cusp of the 5G investment cycle, US regulation has raised its head again. The Federal Communications Commission, under its chairman Ajit Pai (not related to me), has put paid to net-neutrality in the US. The deregulation of net neutrality essentially means that content providers who are willing to pay telecom providers will enjoy quick, lightning fast access to their websites or e-commerce store front ends, while mom and pop enterprises will see access to their sites throttled.

I am not a fan of Pai’s move, but nonetheless have to concede that this new regulatory change will result in tremendous additional spending by the sector. Setting up appropriate billing systems and pricing tables for content providers takes a lot of effort by computer programmers and maintenance engineers, almost all of whom will come from the ranks of IT outsourcing service providers.

Separately, we will also see merger and acquisition activity among content providers and telecom providers. Telecom providers will seek vertical integration by controlling content that is delivered to you and me as a user. This is activity that is motivated by deregulation, and not technology. We have already seen this manifest in Verizon’s acquisition of Yahoo and AT&T’s attempt to acquire Time Warner. These mergers mean more spending going to IT service providers in order to integrate computer systems between the acquirer and the acquired. 5G adoption and merger integration opportunity at the same time. If you are invested in an IT service provider with exposure to telecom, hold on for the ride.

Siddharth Pai is founder of Siana Capital, a venture fund management company focused on deep science and tech in India. – Live Mint