Twenty years ago, telecom was riding high on a surge of telco capital investment and influx of cash from venture capitalists eager to ride the dotcom boom. There were already signs that market hype wouldn’t last, and indeed it didn’t – valuations and growth outlooks came crashing down a year later.
Ten years ago, telecom was at the other end of a crisis, mired in the aftermath of a stark global recession, which forced steep cutbacks in spending and headcounts. The sector survived without severe changes in basic structure, though, and most telcos would soon benefit from widespread adoption of mobile broadband and the now ubiquitous smartphones.
Now in early 2020, global economic stability has been hit by U.S.-China trade disputes, the Huawei problem, an unsettled EU, global warming’s growing impact, and other factors such as the rise of authoritarianism. But market sentiment around networks and the industry’s key players is relatively strong. Even if this market situation persists, some significant changes in industry structure, technology, consumer adoption and public policy are underway. Here’s a brief glimpse at a few of the things MTN Consulting expects for 2020.
The network has new owners
Starting with the basics, over the last few years webscale providers like Facebook and carrier-neutrals like Equinix have built enormous networks. The global telecom sector still owns most network infrastructure with roughly $700 billion worth of net property, plant, and equipment (PP&E) in 2018, but the webscale sector’s total is now over $300 billion, and carrier-neutral providers just over $150 billion (including China Tower). The webscale sector has been an important driver of innovation across the broader economy, driving the cloud’s growth and giving users something to do on their phones on all day. As much as telcos envy the webscale sector’s margins, growth rates, and cash hordes, telcos are at least benefiting from the smartphone addiction that all these apps have enabled.
Webscale capex has slowed down recently, and growth rates will stay moderate in 2020-21 even as capacity is absorbed and key players find new reasons to build, such as pushing data centers further out to the edge to support 5G and latency-sensitive IoT business models. The webscale sector’s capital intensity will edge closer to 10%, from the current 8-9% average. Moreover the carrier-neutral sector has emerged as an important piece part in the overall network space, renting space, capacity, and other assets to the big players in need of neutral access. Nobody can build it all on their own. Telcos, who are faced with steep spending bills to deploy 5G (and buy the underlying spectrum), will rely more on carrier-neutral network operators (CNNOs) and look for other ways to cut infrastructure costs along the way, just as China Unicom and China Telecom are teaming up on their 5G RAN buildout.
Webscale sector aims to make cloud investments pay off with telco partnerships
When the webscale sector emerged years ago, one consideration was whether they would compete directly with telcos’ core business of providing last mile access. That hasn’t happened much. Google Fiber remains a niche player, for instance, and when it did launch a mobile service it did so via an MVNO. Facebook’s Terragraph 60GHz multi-node wireless system is limited to specific geographic areas and problems. What’s more important is the growing potential for webscale-telco collaboration, where webscale players function more as suppliers than rivals.
Webscale providers have proven themselves crafty in building massive networks designed to function with limited human oversight. Some now rent fiber on a wholesale basis to telcos, for instance AWS and Facebook in the U.S. More broadly, the rise of cloud-based options can allow telcos to shift workloads to the cloud, and benefit from both the scale and software expertise of webscale. By moving work to the cloud, Amazon Web Services (AWS) said that "telcos not only accelerate their data center consolidation and migration to the cloud, but monetize their path to 5G by offering customers next-generation capabilities in mobile edge computing and IoT."
New service development is a major area of telco-webscale collaboration. For instance, Google Cloud's Apigee platform has been adopted by a number of telcos for API development. Google Cloud Project pitches its work with NTT DoCoMo explicitly as both "reducing costs and improving development efficiency."
The exception: Satellite
While webscale players generally have struggled to enter last mile access markets, that’s not because of a concern for not hurting telcos’ bottom lines. They simply haven’t yet found a technology that fits the financial bill. That may be changing with satellite. Several webscale players are developing broadband satellite platforms, including AWS, Facebook, Microsoft, and Google/Alphabet. Elon Musk’s SpaceX is also a player, with its Starlink broadband service slated for release in mid-2020. Given Musk’s involvement, whether or not the service works affordably, we are bound to hear plenty about it this year.
The biggest telcos will start to see the value of R&D
All network operators need to invest to grow, but invest in what? Simplistically, operators have to choose among three buckets for growth investments: acquisitions, R&D, and capex. Webscale providers spend an average of over 10% of revenues on R&D, while most telcos spend virtually nothing. This has made telcos more reliant on vendors for knowledge and technical support, and even rudimentary design. This tends to benefit incumbent vendors and their preferred product roadmaps.
A few forward-thinking telcos – who also happen to have the deepest pockets – have invested proactively in internal R&D. AT&T is one case. Its modest R&D budget of ~1% of revenues (plus an acquisition or two, notably of Brocade’s Vyatta division) has allowed it to push fast into open networking. AT&T’s capital intensity is also among the lowest of large telcos, even when adding in the cost of software investments. Whether AT&T specifically will be successful in its push is unclear, but more of the globe’s biggest telcos will likely beef up their R&D divisions in 2020-21 to support 5G, cloud, and IoT business models, and to better cope with a bifurcating supply chain given the Huawei mess.
China’s desire for expansion in telecom and tech markets will not fade
Which brings us to Huawei. Those waiting for a grand resolution to U.S.-China disputes surrounding Huawei will be disappointed—the company’s problems did not arise with Trump and his trade war. Concerns about Huawei’s dependence on the Chinese state are fairly bipartisan in the U.S., and shared by a number of European and Asian governments. The fact that telco execs occasionally say nice things about Huawei should not be a surprise. The politically-connected among them want compensation from regulators if they’re forced to rip and replace Huawei gear.
Yet, Huawei certainly isn’t going anywhere; it has the broadest portfolio of products in the industry, and its 22% market share in telco network infrastructure is just a bit lower than the sum of Ericsson and Nokia combined. Since its CFO's arrest, the vendor has hardly backed away from its ambitions, and the Chinese government has made clear its support for Huawei’s long term growth. (Grooming a local chip sector able to circumvent U.S. industry is also important, but has been going on in the background for a decade.)
The now clear connection between the Chinese state and Huawei opens up opportunities for competing vendors, including those with open RAN solutions. Most private telcos are reluctant to rely on a technology supplier beholden to a state sponsor, whether the technology is appealing or not. For vendors to leverage this reluctance, though, now is not the time to mince words. Expect lots more straight talk in 2020 out of the tech industry.
Matt Walker is the founder and Chief Analyst of MTN Consulting, LLC, an independent market research firm. He has over 20 years of experience in telecom industry analysis, consulting and research program management. Based in Asia for most of his career, Matt currently lives in Chandler, Arizona. He can be reached by email at [email protected]. Follow him @mattwtelecom, or LinkedIn
Industry Voices are opinion columns written by outside contributors—often industry experts or analysts—who are invited to the conversation by Fierce staff. They do not represent the opinions of Fierce.