Much service provider strategy in mobile and fixed network domains is fueled by revenue and profit issues: slow revenue growth; declining legacy revenues; low returns on invested capital with high demands for investment in 5G and home broadband and constrained free cash flow.
Probably nobody will be surprised that S&P Global Market Intelligence expects faster connectivity service provider revenue growth in Asia and Latin America and low-single-digit growth in the United States and Europe in 2022. That has been the trend for a decade or so.
There are some clear implications, including a shift to non-traditional funding of access networks.
“We believe telcos worldwide will continue considering alternate means to fund their capex, including network and spectrum sharing (some of which are arguably regulatory driven). A new trend is the possible trend to create joint ventures to fund access networks, as Virgin Media O2 is considering.
Investment capital also will be raised by the sale of non-core legacy, or lower-scaled telecom operations and media assets; and monetization of tower and fiber networks, S&P says. That trend has been underway for a decade.
In large part, such asset sales are intended to raise capital either for debt reduction or deployment of capital elsewhere in the business. They are advantageous because high capital investment for both fixed network broadband and 5G, plus shareholder payouts will likely constrain discretionary free cash flow available for debt repayment in 2022, S&P says.
Globally, secular industry declines from legacy products, coupled with significant competition from cable broadband and lost subsidy revenue, will likely constrain fixed network topline revenue growth and profitability. In fact, S&P Global Market Intelligence expects a high-single-digit revenue decline in 2022.
Shrinking and low returns on invested capital remain an issue as well. “The low return on capital across rated telcos has generally been declining, to less than six percent in 2021 from a bit more than seven percent in 2011, S&P notes.
That has fueled a search for new revenue sources. Many operators (in Europe) are diversifying from voice and connectivity services to value-added digital services covering a wide range of IT-related, cyber security, IoT, or cloud-based services, S&P notes.
That move “up the stack” or “across the value chain” is driven by a search for new growth drivers as legacy services become lower-margin products with little--if any--growth potential.
Also, many operators are seeking to bolster revenue by investing more heavily in fiber-to-home facilities. But monetization of fixed broadband upgrades has been unequal between regions.
There has been higher revenue growth in the United States than Europe or Latin America, for example.
5G monetization is uneven between regions as well. Service providers in Asia-Pacific have seen a lift in average revenue per unit (ARPU) from 5G, largely from moving consumers to higher-priced service plans.
U.S. mobile service provider revenue also grew in 2021, largely by moving customers to higher-priced plans.
“We expect U.S. wireless service revenue to have increased 3.5 percent to four percent in 2021, and slowing to around 2% in 2022,” S&P says.
source: S&P Global Market Intelligence
Gains are more muted in other regions such as Europe, S&P says.
In the U.S. market, a key trend is higher investment in fiber-to-home by telcos, which will limit cable operator subscriber growth and market share gains.
“We expect U.S. telco capital spending to increase to 13 percent to 15 percent in 2022 as carriers deploy spectrum licenses acquired in recent auctions and for FTTH builds,” says S&P. “We expect increased spending to remain elevated over the next couple of years,” largely to support the 5G mid-band networks.
source: S&P Global Market Intelligence
“We estimate that U.S. telco FTTH coverage will be around 35 percent in 2022, up from 31 percent in 2021,” the firm says. “We expect FTTH to cover 50 percent to 55 percent of U.S. households by 2028.
“For 2022 and 2023, we expect wireline capex to increase to 10 percent to 15 percent annually, reflecting the accelerated investments in fiber,” S&P says.
Still, says S&P, “we forecast total U.S. wireline revenue will decline five percent to seven percent in 2022.”
S&P does not believe 5G will drive high revenue growth. “The wireless industry is mature with limited growth opportunities in the traditional retail market.” Though internet of things offers upside, those “IoT opportunities are likely several years away.”
In Europe, the firm expects revenue growth will be modest, although up from 2021 levels as roaming and equipment sales continue to recover and because of the gradual benefit of accretive fixed-line broadband upgrades.
Most telecom operators in the Asia-Pacific region will maintain steady operating performance in 2022, fueled largely by customer data plan spending.
In Latin America, higher growth will be fueled by data demand and 4G, the firm says.
Many operators are therefore diversifying--mainly through partnership or mergers and acquisitions--from more traditional voice and connectivity services to value-added digital services covering a wide range of IT-related, cyber security, IoT, or cloud-based services. This strategy also seeks to find alternative paths for growth while traditional services are becoming more and more utility-like.
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