Since the 2008 collapse of Lehman Brothers, governments and pundits have struggled with the question of which financial institutions should be considered too big to fail. It’s a worthwhile debate, but its fixation on financial institutions ignores the equally important role that other industries play in national and global economies.
For example, what if the largest telco in a major country suddenly underwent a Lehman-style implosion? That possibility isn’t as far-fetched as it might sound, considering how many tier-1 operators are in precarious financial situations.
In 2011, Telecom Italia posted a net loss of €4.73 billion ($6.03 billion). In 3Q11, Telefónica posted its first quarterly loss in nine years. State-run operators also are struggling. For example, India’s BSNL reported a 2011 loss of nearly $1.25 billion.
All three operators, along with their peers, are under enormous margin pressure due to fierce competition in their home markets and the global recession. According to Emeka Obiodu, Ovum principal telco analyst, European operators used to offset losses in their home markets with revenue from emerging markets, but now those gains are no longer sufficient to compensate for poor performance at home.
Can any economy – developed or developing – literally afford to lose the services that are provided by any of the large telecom operators?
One way to answer that question is to look at how much tier-1 operators contribute in terms of spending and jobs, both in their home countries and foreign markets. For example, AT&T has more than 242,000 employees worldwide – at least eight times what Lehman had when it went bankrupt. In the first six months of 2012, AT&T spent nearly $9 billion (€7 billion) just on network upgrades, such as LTE.
Another way to quantify the role that tier-1 operators play in the economy is to look at how their services are catalysts for growth. For example, a 2010 World Bank study found that a 10% increase in mobile penetration increased per-person GDP by 0.8%.
One might argue that telecommunications is a free market where alternative operators can easily step in and take over the role of a tier-1 player. This is not true because the incumbent operators usually occupy an exceptional position in the national telecom markets, owning a substantial part of the fixed network resources.