Higher Mobile Capex for 5G is Expected; Permanently Higher Capex is an Issue

Mobility has been for a couple of decades the revenue driver for the global telecom industry, in some cases representing as much as 100 percent of revenue growth overall. But growth rates are slowing, everywhere, as more consumers become customers in every country and region, choking off the "grow by adding subscribers" business model.

Increasingly, the issue is convincing existing customers to buy mobile data services and other products, spending more in the process. Since we are at the beginning of the 5G era, we should expect capex to grow. The issue is whether this is a cyclical trend, or something more permanent. And, of so, what mobile operators will have to do to keep their business models in sustainable mode.

S&P Global expects mobile operators to boost capital investment levels as new 5G networks are built. Some acceleration of capex to build a next-generation network is not unusual. The issue is whether this is less cyclical, and more permanent an issue. 

source: Alepo 

The companion issue is financial return from such capex. Mobile operators are going to be challenged to earn returns on the higher capex, S&P Global notes. The long standing issue is that although customer data consumption climbs as much as 50 percent a year, forcing networks to invest, revenue earned from providing those services is relatively flat. Buyers are not going to pay twice as much for twice as much speed, for example. 

Also, average revenue per account or user is dropping globally, while global revenue growth is flat, and is projected to have zero to one-percent growth for the foreseeable future.  

All that makes higher capital investment an issue.

Verizon and AT&T Dominate C-Band Auction Winnings

The Federal Communications Commission has released the names of firms that were winners of spectrum in the recent C-band auctions, and to nobody’s surprise, Verizon was a top buyer, as was AT&T.

In fact, it appears all the spectrum that is available soonest was acquired by those two firms. 

T-Mobile, already possessing a trove of mid-band spectrum, won licenses covering 72 markets. 

Cellco Partnership, doing business as Verizon Wireless, won nearly 62 percent of the A block licenses, with AT&T buying 28.5 percent of the A block licenses. The A block was favored because it can be put to commercial use the fastest, with the least amount of spectrum clearing and time delay to do so. 

Most observers expect the A block spectrum to be commercially deployable by the end of 2021, while the other blocks will take longer to clear. Still, with the A block representing at least 80 percent of total C-band spectrum auctioned, it is clear that most of the C-band spectrum will be available for use quickly. 

Verizon paid more than $45 billion, while AT&T committed $23.4 billion. It appears both AT&T and Verizon acquired licenses in the same 406 markets, essentially blanketing the entire continental United States. 

Perhaps surprisingly, Comcast and Charter Communications, the largest U.S. cable operators, did not bid at all. 

source: Sasha Javid 

To give you some idea of the huge amount of mid-band coverage spectrum Verizon and At&T acquired, consider that Verizon gained an average of 160 MHz nationwide in the C-band auctio, while AT&T got about 80 MHz coverage of about 95 percent of the land mass in the same auction. 

Prior to the C-band and 2020 Citizens Broadband Radio Service auctions, Verizon had less than 125 MHz of low-band mid-band spectrum in total. AT&T had less than 150 MHz in total spectrum assets in the low-band and mid-band ranges. 

Verizon more than doubled its trove of low-band and mid-band spectrum in a single auction. AT&T increased its low-band and mid-band assets by about 50 percent. 

source: Sasha Javid 

Virtualization Means Cloud and Edge Computing, Abstracted IT

A half decade ago, many mobile operator executives might have named Google as their "greatest competitor," not other service providers. Competition from outside the industry, in other words, was a greater threat than competition from inside the industry. Product substitutes including over the top messaging, voice, video streaming, conferencing and so forth provide key examples.

The nature of the perceived threat is clear enough: OTT app providers can give away what you sell. These days, such product substitution, while still a challenge, is simply a part of the business environment.

Also, as enterprises and application suppliers shift to cloud computing, essentially virtualizing their information technology operations, telcos are doing the same thing.

One big change telecom operator core networks are making is virtualization: the functional separation of applications and software from hardware platforms. 

That allows use of commercial, off the shelf hardware, which provides capital investment and operating cost advantages and sometimes greater simplicity. Increasingly, it also is possible to abstract the hardware platforms as well, using cloud computing supplied by third parties. 

And, ironically enough, virtualization now means telcos can abstract core information technology processes, using cloud computing the same way enterprises do.

Since March 2020, Google Cloud has been developing a 5G strategy for mobile operator networks, aiming to sell Google Cloud computing as the fabric for virtualized 5G network operations. 

Google Cloud and Intel now have announced they have a platform for supporting virtual radio access networks or open RAN operations. 

 

You might think of this as one way edge computing is going to develop with 5G, or a way virtualized network processes will be supported, computationally. 

One might also see this as another example of telco or enterprise computing virtualization, open network standards and use of commercial off-the-shelf hardware, open source and abstracted functions using application programming interfaces. 

The collaboration uses Google Cloud's Anthos application platform and Intel cloud-native platforms and solutions, including Intel's cloud-native Open Network Edge Service Software (OpenNESS) deployment model. 

Google already had created mechanisms to support application operation at the edge, using Anthos.

Such abstraction of the computing functions supporting core networks illustrates the way telcos themselves will be potential customers of cloud computing service providers. 

But it also is, at the same time, part of the adoption of edge computing.

Mobile Substitution Will Displace Much of the Home Broadband Business

"Speeds and feeds" historically have lost their differentiating power. That clearly has been true for personal computers, and should be the case for cloud computing, edge computing and internet access generally.

In the connectivity business, the "mobile substitution" trend has occurred in phases, and affected a wider range of products over time.

Mobile voice supplanted fixed voice as the preferred consumer use case. Mobile messaging displaced voice. Mobile social media displaced fixed modes. Mobile turn-by-turn navigation displaced dedicated GPS devices and maps.

Mobile phones displaced watches, cameras, music players and flashlights. Mobile entertainment video is encroaching on fixed modes of viewing (TV sets, PC or tablet screens).

Mobile internet access, which began to find niches in the 3G era, found many more use cases in the 4G era (both for home broadband replacement and on-the-go access). In developing regions, mobile internet access is the preferred form of access.

In the 5G era, we will see a big test of fixed wireless and mobile wireless as a substitute for fixed network access in a wider range of settings. No later than 6G, we might routinely be using mobile access as a substitute for home broadband. The key enabling trends are higher routine speeds and some shifts of pricing plans and consumer behavior.

We can assume every consumer will want their own mobile device. That also means per-device charges. Consider the price of using mobility as a necessary sunk cost. At some point, the issue will become "do we still need to buy home broadband if every single supported device has fast-enough speeds and performance?"

It will be the same question people asked themselves when pondering the purchase of home phone service. When every adult or teen in the family already has their own phone, what is the value of a home phone?

To be sure, fixed internet speeds are going to be mind-gobbling in coming decades.

How fast will the headline speed be in most countries by 2050? Terabits per second is the logical conclusion. Though the average or typical consumer does not buy the “fastest possible” tier of service, the steady growth of headline tier speed since the time of dial-up access is quite linear. 

And the growth trend--50 percent per year speed increases--known as Nielsen’s Law--has operated since the days of dial-up internet access. Even if the “typical” consumer buys speeds an order of magnitude less than the headline speed, that still suggests the typical consumer--at a time when the fastest-possible speed is 100 Gbps to 1,000 Gbps--still will be buying service operating at speeds not less than 1 Gbps to 10 Gbps. 

Though typical internet access speeds in Europe and other regions at the moment are not yet routinely in the 300-Mbps range, gigabit per second speeds eventually will be the norm, globally, as crazy as that might seem, by perhaps 2050. 

The reason is simply that the historical growth of retail internet bandwidth suggests that will happen. Over any decade period, internet speeds have grown 57 times. Since 2050 is three decades off, headline speeds of tens to hundreds of terabits per second are easy to predict. 

source: FuturistSpeaker 

Some will argue that Nielsen’s Law cannot continue indefinitely, as most would agree Moore’s Law cannot continue unchanged, either. Even with some significant tapering of the rate of progress, the point is that headline speeds in the hundreds of gigabits per second still are feasible by 2050. And if the typical buyer still prefers services an order of magnitude less fast, that still indicates typical speeds of 10 Gbps 30 Gbps or so. 

Speeds of a gigabit per second might be the “economy” tier as early as 2030, when headline speed might be 100 Gbps and the typical consumer buys a 10-Gbps service. 

source: Nielsen Norman Group 

If consumers on every continent purchased service at equivalent rates, in 2050 one would expect Asia to represent nearly 60 percent of demand, Africa nearly 20 percent. Europe would represent seven percent of demand, South America nine percent, North America four percent. 

source: Chegg 

Most observers would guess Asia will do about that well, while Africa lags. Europe and North America likely will over index, while South America might do about what the population alone would predict. 

Though the correlation might be less than one might expect, fiber to home deployment should correlate with terabit take rates in 2050. The wild card is 8G mobile access. As mobile speeds likewise continue to increase, most consumers might prefer wireless access to any fixed connection. 

But mobile network speeds will increase at high rates as well. The rule of thumb is an order of magnitude increase every 10 years.

In mobility as in the fixed network, the theoretical headline speed is not matched by mass market commercial experience. Still, the pattern has been that each next-generation mobile network features data speeds an order of magnitude higher than the prior generation. 

source: Voyager8 

Assume that in its last release, 5G offers a top speed of 20 Gbps. The last iteration of 6G should support 200 Gbps. The last upgrade of 7G should support 2 Tbps. The last version of 8G should run at a top speed of 20 Tbps.

At that point, the whole rationale of fixed network access will have been challenged, in many use cases, by mobility, as early as 6G. By about that point, average mobile speeds might be so high that most users can easily substitute mobile for fixed access.

So among the big strategic questions for fixed network service providers is what to do if and when mobile broadband becomes an effective substitute for fixed network home broadband, as was the case for voice, messaging, social media, most web and app experiences, gaming and so forth.

The fixed network "always" will be necessary for wide area data transport, radio backhaul and enterprise site access. Whether it is so important for access use cases increasingly will be in doubt.

Ultimately, the enduring value of the fixed network is backhaul, enterprise access and WAN transport. Everything else could change.

Lower Roaming Revenues an Obvious Headwind for Mobile Revenue in 2021

Travel behavior has had a significant impact on mobile revenues globally, primarily in the form of reduced roaming revenues, though some reduced upgrade or new account activity might also be an issue. By definition, a return to pre-pandemic travel is key to restoring roaming revenue volume. 

Some believe full recovery to pre-pandemic levels will take a few years. 

Global spending on business travel is expected to show a 52 percent decrease for all of 2020 (to $694 billion), down from $1.4 trillion in 2019, according to the Global Business Travel Association, an “unprecedented” decline. 

“The magnitude of these losses and their impact on travel suppliers is unprecedented: the 2020 business travel spending losses are expected to be 10 times larger than the impact of either 9/11 or the Great Recession of 2008,” says GBTA. 

More significantly, GBTA expects a 21-percent increase in business travel spending is projected in 2021, mostly at the end of 2021. A full recovery to pre-pandemic levels is not expected until 2025.

Consumer travel demand also matters. In that regard, one analysis suggests travel tops the list of things U.S. residents want to do after they get vaccinated, a survey by Ipsos finds. And there appears to be significant pent-up demand. 

About 40 percent of respondents say they’re saving more now than they were before the pandemic, and most people who have plans for the money say they’re saving it for travel.

About 19 percent of survey respondents say they’re saving for a domestic trip by plane, while 16 percent say they’re saving for a domestic road trip. About 15 percent say they’re saving for an international trip.

 

source: Ipsos 

So 2021 might still be a challenging year for mobile operators, in terms of revenue growth, as roaming revenues might remain depressed for most of the year.

Private 5G Forecast by Vertical

Private 5G networks are expected to be a growth industry, but the issue remains “who gains” and “how much?” As with past private networks, such as local area networks, revenue gained by connectivity service providers is one thing; revenue for others in the ecosystem is quite another matter. 

Private networks create direct markets for devices, Wi-Fi chipset suppliers and router suppliers; system integrators and distributors. Connectivity providers gain indirectly, from some positive impact on broadband access accounts or the spending on such accounts.

source: 5G Americas 

In the case of 5G private networks, much of the revenue will be gained by infrastructure suppliers, though some incremental revenue also will be earned by suppliers of 5G public network connections or broadband access services. 

Much of the connectivity revenue is possibly going to be earned by dedicated low-power-wide-area service providers, as well. Some 5G service providers will be more active as system integrators. 

And it remains possible that some 5G service providers will be significant application providers in a few industry verticals, such as the automotive industry and autonomous vehicles, terrestrial and aerial. 

India Telecom Subscriptions Fall, Spending Rises

In December 2019 the Telecom Regulatory Authority of India reported 1.2 billion communications accounts in service, including 1.18 billion mobile accounts. In December 2020 TRAI reported 1.17 billion accounts in service and 1.15 billion active mobile accounts. There also are indications that active users have declined as well. 

Spending, on the other hand, seems to have climbed, driven mostly by increased spending on data services. 

Do Mobile Service Providers Ignore Small Business Customers?

Will mobile operators really fail to meet the 5G needs of small business customers, as some suggest? Or is the asking of the question simply a way of pointing out how 5G value will be created for small business?

Since perhaps 99 percent of global businesses are “small,” many would note,  while the enterprise market is the “one percent,” it sounds logical enough that small business effort would pay off. Or not. 

The traditional problem connectivity providers have serving the small and mid-sized business market (depending on which definitions are used) is profitability. No retail service provider serving the mass market can afford to sell using the same channels as dedicated to an enterprise account.

In the case of 5G, one also has to ask how much personalization or customization service providers actually can provide, and how much customers actually want, and are willing to pay for, as well.

To use one example, we might wonder why the mobile equivalent of hosted PBX services has never taken off as a mobile service that might appeal to small business. Since such services are cloud based, one might think it would be a natural offering. But they never have gotten much traction. One suspects there are both demand and supply issues.

Perhaps most small business owners simply are not persuaded that the concept makes enough sense to buy and learn to operate. And most suppliers might find the training and set-up issues are labor intensive enough that there is no profit to doing so.

The other issue is simply that the value of a mobile PBX service hinges at least in part on calling between employees. Most small businesses have zero to a few employees, so even if there are savings, the savings are not great.

Also, a fixed network PBX service (cloud or premises) saves money by multiplexing lines. The customer buys one trunk connection and creates virtual lines. With mobile services each device has its own line, so there are no savings on access bandwidth.

In PBX parlance, there are as many lines as there are stations, so there is no chance to consolidate trunking bandwidth and thereby save on buying lines.

Most U.S. “small” businesses, for example, also have zero employees. So the advantage of "calling between employees" does not exist.

A small percentage of firms have between 20 and 499 employees. At the high end, many would consider an organization to be “mid size.”

source: Small Business Trends 

In Canada, for example, any organization with 100 to 499 employees is considered a “medium-sized” business. About 70 percent of businesses have one to 99 employees. 

source: Govt. of Canada

Of some 5.7 million U.S. companies in 2012, 90 percent had fewer than 20 employees

 

source: U.S. Census, DB Global Markets 

U.S. firms with at least 500 employees, which we might all agree is the lower end of the enterprise market, represent a fraction of one percent of all firms. Even including firms with 100 to 499 employees, such firms represent just 1.6 percent of U.S. establishments. 

The point is that the enterprise market is highly concentrated and operates at a scale vastly different than the typical firm. 

source: Census Bureau, Advance Iowa 

That is why channel partners--interconnects for enterprise phone systems; system integrators for local area networks; managed service providers for apps; distributors for LAN gear--historically have served the needs of smaller businesses and organizations. 

In the same way, specialized business phone companies have served the needs of business and organization customers who want to “create their own voice services” using phone switches or key systems. 

In other words, connectivity providers are never so good at serving the needs of either enterprise, mid-market or small business customers. That is why all the other channel organizations exist. 

source: U.S. Census Bureau, The Conversation

The phrase “mass  markets” illustrates the issue. As a practical matter, a retail connectivity provider cannot afford to market and sell to a small business in any way too different from the way it markets and sells to consumers, because the gross revenue and profit constraints are quite similar. 

Enterprises are supported by a direct sales force. Other mid-sized organizations are supported indirectly, using channel partners. Consumers are reached using advertising and retail stores. And small business is supported the same way as the consumer segment. 

As service providers have sought on-demand control for decades, so customers will benefit from on-demand provisioning and configuration, if possible. 

Still, most of the value small businesses will seek is provided by apps, not connections. The ability to order, provision and change bandwidth levels on demand, while helpful, is not as helpful as the ability to add, drop and reconfigure apps. 

Yes, there are many small firms, but the cost of marketing, selling and fulfillment does not leave very much room for personalized attention or customization, at least not the traditional way. 

Beyond that, connectivity providers typically do not own the actual business apps customers want to buy. 

The “small business opportunity, in other words, is smaller than many would hope.

Infrastructure Sharing Could Reduce Cell Site Requirements 80%

Mobile infrastructure sharing or outsourcing of cell towers, high rooftop sites and some backhaul connectivity might reduce cell site requirements by 80 percent, Rethink Research suggests. 

Mobile operators expect to deploy 2.9 million net additional macro and micro base stations (4G, 5G and multi-technology) in the period from 2021 to 2026, increasing the 2020 total of just over nine million to 11.9 million globally. 

source: Rethink Research 

Those base stations will be mounted on some 820,000 new radio sites. If operators made no changes in their current patterns of site sharing, that expansion of the network would require them to find and invest in at least 550,000 of those new site locations, Rethink Research

Using infrastructure sharing and outsourcing, they might need to deploy only 110,000 new sites.

Enterprises, Small Businesses Have Different Expectations about 5G

It likely will come as no surprise to most of you that small businesses expect to rely on service providers for their 5G strategies, while many professionals at enterprises say they plan to rely on hyperscale cloud service providers, do it themselves or use system integrators. 

source: Omdia 

That pattern--enterprises can create their own infrastructure--has been in place as long as any of us can remember. Small businesses--essentially in the same position as consumers--cannot generally affordably create their own services. 

At the same time, mobile service provider executives tend to believe enterprise customers will generate twice as much 5G revenue as do consumer services. 

source: Omdia 

That is almost certainly a contextual answer. Given the certain displacement of existing 4G revenues by 5G replacements, and given that consumers generate perhaps 70 percent of 4G revenue, the belief that enterprises will generate twice as much revenue as consumers cannot apply to phone services.

Consumer revenues in Europe, for example, are stable at about 68 percent of total revenue (mobile and fixed). In some markets, business revenues could range from 30 percent to 40 percent of total. Smaller providers might generate only about 15 percent of total revenue from business segments. 

The sense that enterprises will drive “new use cases” is what survey respondents likely have in mind. The obvious example is that most revenue-generating new use cases based on 5G, or edge computing or IoT using 5G, will happen in the business user segment of the business. 

Most consumer IoT applications will rely on existing connections--most often the home broadband connection. Eventually, artificial intelligence or virtual reality apps could rely primarily on the 5G connection. 

The European Telecom Network Operators association (ETNO) expects connectivity provider IoT revenues to represent about 2.7 percent of total revenue by about 2027, for example. 

Connectivity alone generally represents less than 10 percent of total revenue from an IoT application, ETNO notes. In 2019, total IoT connectivity revenue in the ETNO countries reached EUR1.1 billion, about 0.4 percent of total telco revenues in the region and 1.2 percent of business segment connectivity revenues. 

Revenues might grow steadily to reach EUR2.9 billion by 2027. In 2019, IoT accounted for 0.9 percent of mobile service revenue in Europe, and by 2027 this is forecast to have risen to just 2.6 percent. 

Vehicle communications will likely provide the single biggest industry vertical revenue, ETNO says. 

Still, the belief that new 5G use cases will be created in the business-to-business space are logical. Most of the big new use cases will happen in the enterprise segments of the 5G market, though incremental connectivity revenue might not be as significant as some hope. 

Significantly, compared to all prior mobile generations, 5G is designed around connecting sensors and servers, not people using phones. So there is reason for hope about incremental new use cases and revenue.

Enterprises Less Likely than Small Businesses to Rely on Mobile Operators for 5G Strategy

It likely will come as no surprise to most of you that small businesses expect to rely on service providers for their 5G strategies, while many professionals at enterprises say they plan to rely on hyperscale cloud service providers, do it themselves or use system integrators. 

That has been the pattern for decades. 

At the same time, mobile service providers believe enterprise customers will generate twice as much 5G revenue as do 5G services for consumers. 

source: Omdia 

source: Omdia