Disruptors on the horizon - Ep 10

Dipthi (Interviewer): Welcome to this episode of the Telco Talks podcast series focusing on topical issues in the telecommunications industry. I’m Dipthi Govind, a technical accounting senior manager in the PwC South African practice and I will be your host. Our aim is to keep you up to date on key accounting and business issues in the telecommunications industry.

In this episode, I am excited to introduce to the podcast Elmo Hildebrand a partner in our Telecommunication, Media and Technology division. We are living in a world that is constantly changing and evolving and in order to stay relevant, disruptions are necessary. Elmo is going to give us some insights on disruptors in the Telco industry as well as insights on 5G. 

Elmo: Thank you for having me on the podcast - looking forward to a very informative discussion!

Dipthi: Reflecting on the last year and a bit in the midst of a global pandemic, the services of the Telecommunications industry has become more relevant than ever. With remote working, data usage has soared, video streaming has increased and capacity on operators networks has increased. It is quite clear that COVID-19 has been a disruptive event for the industry. Elmo, what are your thoughts on this?

Elmo: Sure Dipthi. The pandemic has brought to light what a resilient industry the Telecommunications industry is. Our telecommunications clients were able to respond to the pandemic overnight in terms of increased data allowances and bandwidth. The services of the Telco operators are critical to enable remote working. The uptake on data traffic and working from home has had a positive impact on the Telco operators, both locally and in Africa, which is clear in their results.

Dipthi: I have to agree with you there Elmo. From an accounting and financial reporting perspective, we have seen positive revenue trends in particular with regards to service revenue and a low impact on impairments in comparison to other industries which have taken a huge knock.

On the flipside- what would you say are the possible issues that operators have faced and continue to face as a result of this disruptive event from a business perspective?

On the flipside- what would you say are the possible issues that operators have faced and continue to face as a result of this disruptive event from a business perspective?

Elmo: There are a few issues that come to mind here Dipthi. Firstly, the shift to remote working has    driven up the demand for connectivity. While this increased data traffic has had a positive impact for operators results, it has also placed a strain on the network and in some instances, has impacted the service quality of the network. Secondly, the Telco industry is a people-intensive industry, with people working in offices, out at base station sites and at retail stores. Remote working increases the security and infrastructure risk for consumers and operators as there are some elements of telecommunications work that cannot be easily done remotely, if not at all, for example critical maintenance of base stations and Telco infrastructure. Further, another impact to Telcos is the closure of retail stores which impacted sales and the productivity of front-line employees who regularly engage with customers.

Dipthi: I can already think of all the knock on accounting implications of this! Are there any other points that you would like to  touch on?

Elmo: From a supply chain perspective, even though operators have diversified their supply chains, we have still seen a slowdown with regards to handset suppliers. And whilst Telco’s may be trying to stockpile inventory, this approach has its limitations. The manufacture and delivery of network equipment was expected to be delayed and in some instances has been globally, slowing down the roll-out of 5G and fibre network builds. Fortunately, locally and within Africa, we have seen major operators roll-out 5G which is indeed another positive sign.

In the medium-term, challenges faced by operators will include cost-cutting, reduction of capex expenditure on infrastructure and being prepared for further uncertainty caused by the pandemic and state of the economy. We already see operators reducing data prices to remain competitive. However, if operators can continue to support remote working across all industries, while giving consumers a positive experience throughout the crisis, this will boost their brand.

Dipthi: Thanks for that Elmo. Keeping in mind the points you have just mentioned, we have seen that the financial reporting implications of the pandemic can indeed be pervasive. If I can unpack a few points: firstly, with regard to stockpiling of inventory - there is a risk that inventory may not be sold and become obsolete given the rapid movement in technology which leads to write downs. Cost cutting is a reality in this environment with operators looking for way to cut their operational costs. Many operators have leases, and the accounting treatment for leases, under IFRS 16, the leases standard, can often lead to complex accounting issues such as lease modifications, impairment of the right of use asset, terminations. And most recently the accounting for lease concessions that arise directly as a consequence of COVID-19, and for which there has also been an amendment to IFRS 16.  These are just to highlight a few financial implications.

Elmo: Yes, if I recall, there was a previous telco Talks podcast addressing the accounting implications of these rent concessions?

Dipthi: That’s spot-on Elmo! It’s great to see that you have kept up to date with our Telco Talks episodes! Thank you for the business insights on how COVID-19 has disrupted the Telcos space. From my understanding, whilst the Telco industry is being disrupted by various technologies, it is also causing some disruptions, particularly in emerging sectors. Would you perhaps unpack this for our listeners a bit more?

Elmo: Yes, certainly Dipthi.  There is disruption coming from non-traditional communications service providers like satellite companies. 

Dipthi: Wow - I am now intrigued! Satellites have always been there - could you tell us what these satellites are and how it is leading to disruption?

Elmo: This is really exciting and something I am quite passionate about. And yes Dipthi, you are correct, satellites have been around for many years. Lately the sector has attracted investment from big-tech companies all vying to connect more people to the internet over non-terrestrial networks. These satellites orbit the earth in low/medium and high altitudes and allow connectivity back to any internet-ready device, be that a mobile phone in a cosmopolitan city or a tracking device on a container ship in the middle of the ocean. This will practically allow coverage wherever you go.

Dipthi: Could you expand a bit more on what you mean by non-terrestrial networks?

Elmo: Sure, a non-terrestrial network refers to a network that uses an air-borne or spaceborne vehicle or equipment for transmission such as a satellite. The technology is already available that allows you to make a satellite-based call from your existing mobile phone. All of this is dependent on the availability of the satellite signal which increases as more and more satellites get deployed to blanket the earth.

Dipthi: So, as you mentioned earlier, ‘coverage wherever you go’, does this mean that there doesn’t have to be a mobile phone tower in the vicinity to make that connection?

Elmo: That is a spot on Dipthi! With satellite internet, you need not worry about having a specialised device and getting connected to a tower which is situated a distance away. It will be available wherever you are! But it is only recently that this technology is being adapted for widespread consumer adoption. Mobile and other terrestrial networks have been in consumers hands for many years and the technology has been fine-tuned so to say. Satellite technology still has some obstacles to overcome such as the time-delay of the signal that has to travel between the satellite in space and your device, which is known as latency. What operators aim to achieve with satellite technology is low latency, that is high volumes of data transmission with minimal delay.

Dipthi: This is really exciting Elmo - and particularly in other territories in Africa, this technology may be a major disruptor. How are the Telco operators responding to this technology?

Elmo: Telcos have been in partnership with satellite companies for many years but this trend of satellite companies starting to offer consumer-based services is relatively new. Operators are responding to this trend in a number of ways. Some operators see this as an opportunity to partner with satellite providers, looking to offer enhanced connectivity solutions to their own customers. Some operators are interested in using satellite technology to expand their network reach into remote parts of the world, where they become co-owners in these satellites.

Dipthi: Given what you’ve just said, there are so many possible accounting implications for such arrangements racing through my mind, for example an operator could lease a satellite or numerous satellites so a consideration could be if the definition of a lease is met in terms of IFRS16 (which can get quite complex) or even co-own the satellite, which may be similar to a joint venture, where decisions, output and profits are jointly shared by the parties to the arrangement. Such interesting issues!

I also understand that in certain territories the air space is owned and is highly regulated which could impact lease considerations - so what are the implications of operators having satellites in these areas?

Elmo:  That is an excellent question, Dipthi. The regulators in those specific territories would need to provide permission before operators may use the satellites. This would mean that regulators would need to open up air space above each country. Australia has already started to open up their air space and in all likelihood, it seems that France and the US will follow.

Dipthi: Very interesting - and where is South Africa with regards to this?

Elmo: Here in South Africa, satellite internet disruption in the telco space is still a bit of an unknown due to pricing, equipment uncertainty and the heavily regulated space industry. However, ICASA has started having those conversations so we should be watching out for the rollout of Elon Musk’s Starlink internet service to operate in South Africa once that approval is obtained. 

Dipthi: Could you perhaps explain how Starlink would work?

Elmo: Sure, Starlink was launched in 2015, and Starlink uses a constellation of thousands of small, low earth orbit satellites to beam internet services to customers using its dish antennas. So basically, connecting customers to satellites, rather than towers without impeding quality and speed. Starlink would be considered an internet service provider in South Africa, whose main distinction is that it uses satellite as its access network. However, to provide Internet services in South Africa, it would have to receive regulatory approval from ICASA. But as we wait it is good to know that Starlink has opened up pre-orders for South Africa in February this year which is expected to go live in 2022.

Dipthi: Perfect, thanks for joining me on this podcast for an interesting discussion Elmo. 

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