The dot-com bubble is associated with internet stocks, but it could equally have been called the telecom bubble. Some $2 trillion was wiped off technology stocks afterwards, which is about half of the total.

Telecoms was the sexiest industry of the time. Telecom companies were expected to be the gatekeepers to the information age. Before the bubble burst, telcos raised $2.2 trillion from investors, and invested it in deep sea cables and other infrastructure.

22 years later, things have not turned out the way 1990s telecoms investors expected. Telecom companies are not the gatekeepers to the Internet. They are a basic utility – and one with very high capex bills.

Addressing a room of Caribbean telecom industry bigwigs at the CANTO conference in Miami this week, Denis O’Brien said it was time for a “reality check”. 

His presentation was called “fixing the broken investment model in telecoms”. 

The industry has a problem, his slide said. It’s incredibly capital-intensive — requiring more capex as a percentage of sales than any other European industry. 

Big capex requirements are no fun for investors, but at least they usually keep out the competition, resulting in high margins and high returns on invested capital. But telecoms don’t see the benefit of those either. According to O’Brien’s presentation, the telecoms industry has the second-lowest return on capital of the 16 surveyed.

O’Brien laid out the case for why telecoms is not a good industry at the moment. First, he said revenues are static and in some cases declining. So growth isn’t coming to the rescue.

Second, telecom companies don’t have strong enough pricing power. O’Brien said prices were falling in real terms, as costs were rising. Alongside rising costs, he said, taxes and licencing fees were rising too. 

The next challenge for international telcos, and particularly for Digicel, is that the dollar is strengthening. This is important because telecom companies tend to take on quite a lot of debt, and the cheapest way to borrow money is to borrow in dollars. Therefore, emerging market telcos are structurally short on the dollar. If the dollar rises relative to the currencies the companies earn in, that effectively increases their leverage. And that’s exactly what’s happened — since April 2021, the dollar has appreciated by 17 per cent against a trade-weighted basket of currencies. 

And as a capital-hungry industry, telcos are particularly sensitive to their cost of capital. Cost of capital is very much a function of interest rates, which are going up. 

All in all, O’Brien painted a grim picture of his industry. What does he want to do about it?

O’Brien pointed to a 2021 UN report on broadband with recommendations for a new business model for the industry.

They included a broadband levy on all businesses; less competition among providers; lower taxes for telcos, and taxes on big tech. 

“OTT Freeloading”

O’Brien saved most of his ire for big tech: “freeloading… and paying nobody”.

It turns out that the gateway to the information superhighway isn’t the company that owns the network. It’s the company that owns the search engine, and the biggest social network, and the e-commerce business. Under a slide titled “OTT freeloading”, O’Brien pointed out that the biggest six technology companies accounted for 60 per cent of all Internet traffic, or 62 per cent of digital traffic. In Europe, he said that Facebook and Google alone took up 52 per cent of network capacity.

These companies depend on the telcos’ broadband networks. But they don’t pay for them.

It must be particularly galling since voice calls were at one time the telcos’ main source of revenue. But now, all the technology companies offer their own “over the top” (hence OTT) voice calling service. 

So not alone must the telco haul data around the world on behalf of the big tech companies, at great cost. The same tech companies also gobble up their revenues.

But the technology companies are powerful. They’re not easy to push around. 

O’Brien wants a new regulatory setup in the Caribbean, modelled on the European one, in which there’s a single telecoms regulatory entity for the Caribbean’s many countries. There is, he says, no business case for the investment that would be required to build a 5G network in the Caribbean. 

The industry has turned out to be more difficult than most expected. Digicel’s still-awkward pile of debt is proof of that.