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Sun 29 Mar 2009 11:26 PM

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Mideast telcos face potential revenue issues, says survey

Scarcer funding and the complexity of new offerings may impact some telecoms firms.

The severe credit crunch, coupled with poor market sentiment, are seen as the major risks facing the global telecoms industry this year, according to the 2009 Ernst & Young Telecoms business risk report.

However, Waddah Salah, E&Y's Middle East telecoms leader, notes that while telecom companies across the world essentially face the same risks, in the Mideast specifically the inability to generate sustainable revenues will be one of the major risks for telco operators, going forward.

''Ironically, this used to be a challenge that until the recent past, only mature markets had to struggle with. Now, the scarcity of funding and the growing complexity of new offerings have seen even local players go through this difficult phase," says Salah.

''This is especially true with smaller players and fairly new market entrants,'' he adds.

Compounding this challenge, according to the study, is the risk of failure to accurately forecast returns from technology and infrastructure investment.

Business forecasting for telecoms companies is in itself an inherently uncertain exercise. The complexity arises because it requires long-term planning in a fast paced environment with short-term usage, an attribute unique to the sector.

Salah adds: "Inaccurate forecasting is also among the top risks for Middle East telcos. Most forecasts were based on earlier market conditions, when the effects of the downturn were yet to be truly felt in the Middle East.

''Highly positive market sentiments have contributed to aggressive expansion and investment plans which many operators had committed to. Current uncertainty may now prompt the revisiting of investment decisions."

The report also shows that the telecoms industry is likely to continue to witness a great deal of consolidation over the medium-term. While an M&A may become a tool for generating growth or improving operational efficiency, failure to make the right strategic choices can have adverse implications.

According to Salah, GCC telecom operators, who have shown a remarkable resilience to the economic downturn, continue to seriously contemplate aggressive expansion plans in emerging markets.

"We expect telecom operator appetites for expansion to accelerate, especially among large, cash rich players," he says.

Acquisitions can offer these companies the chance to grow into market leaders, by investing in new geographies or complementary technologies, or through inclusive service offerings.

But it also brings with it cultural, operational and compliance challenges. Part of the problem lies in the difficulty of managing a regional or global business model and having enough skilled resources to manage the move into new markets. This is a major obstacle for quick post-merger integration.

The survey, compiled in conjunction with Oxford Analytica, interviewed more than 100 analysts, representing 11 industrial sectors and more than 20 academic disciplines.

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