Start Here: The Economy is Worse Than Almost Anyone Believes

China phone sales 2019-2020

2008-2009, the worst economic crisis in almost a century, saw a fall of US GDP of ~4%. This time will almost certain be worse, with many predicting a drop of ~10%. That’s uncertain, but a severe drop has already occured and 2021 also looks weak.

Any analysis, including my work on 5G and telecom, has to begin with that assumption. Car sales are down 25% or more; hotels and airlines will continue half empty or worse; the major banks are looking at over $100 billion in immediate bad debt. No magic will repair the economy, even if health improves.

Despite the news, most of us believe things will start to “return to normal.” An “optimism bias” is part of human nature, particularly strong when surrounded by negative news. The 20% increase in stock prices appears a symptom of over-confidence.*

Some inferences for telecom

To my surprise, it appears 5G in 2020 will be only modestly affected.

I’ve lowered my 2020 subscriber estimate from 210 million to 190-205 million. The 5G builds are gaining momentum. The Politburo made 5G a crucial part of the massive “New Infrastructure” stimulus. The carriers are bringing 5G to 600,000 cells in 2020, about 600 million people. Verizon restored a $billion of its capex cut, to keep up with T-Mobile’s rapid deployment in the golden 2.5 GHz Sprint spectrum.

Phone sales are collapsing, even in China. (Chart above.) Something like 100 million phone sales are gone. Even when the stores reopen, the rest of the year will see low sales. A new phone is not that important.
5G phone prices are now mostly $350-600 and falling. Xiaomi is selling a decent 5G phone for US$285. Some of the phone makers will be gone in 12 months. The $399 iPhone SE is the only likely hit.

Telco profits will be hit by poor sales and customers who can’t pay their bills. Verizon is particularly worried about businesses going bankrupt. CenturyLink/Level 3 says almost no customers are signing expanded contracts. Networks have high fixed costs so suffer when sales drop.

* Stock prices, if rational, would be based on the strength of the economy and the share going to profits. It’s certainly possible that investors think Trump will further increase the share of profits even if the economy sucks. On the other hand, stock prices mostly aren’t rational. If you haven’t read A Random Walk Down Wall Street by Burt Malkiel, pick it up. 20 years of scholarship has found few exceptions.

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