Capex Forecasts Suggest Expectations of Slow Revenue Growth

Global connectivity supplier capital investment (mobile and fixed) is projected to grow at a one percent compound annual growth rate between 2019 and 2022, according to the Dell’Oro Group. Other forecasts call for a decline in capex after 2022, as 5G and fiber investments to support 5G and fixed network broadband projects are completed. 

As a rule, capex budgets for service providers in developed markets are relatively fixed, year over year, with some ebbs and flows largely related to construction of each new next-generation network. 

source: Orange

As always, mobile investment is higher than fixed network investment, for one simple reason: mobility is where the bulk of revenue growth is expected. 

source: Dell'Oro Group

There also are regional differences, as Latin America and Asia are where growth will be higher, compared to Western Europe and North America, where growth will be lower, according to Standard & Poors.  

Still, mobile capex often grows when a new next-generation network has to be built, and then tapers off as construction moderates. So there is some chance that even mobile capex might not grow too much as 5G networks are built. 

In fact, fears that mobile operators could not afford 5G are proving incorrect. Just a few years ago, projections of 5G infrastructure cost were so high that many argued the networks could not be built. In fact, some speculated that 5G networks would cost 10 times that of 4G.  Others only expected 5G costs to double or triple. 

Capital investment levels, though, seem not to be skyrocketing, even as 5G is built. In fact, there is growing evidence that 5G can be built within existing capex budgets. 

There are several reasons. First, mobile operators are being deliberate in their spending and build rates. Also, capital expense is shifted from 4G to 5G, as always happens when a next-generation network is under construction. 

Also, network architects, working with better radios, have found that 5G mid-band signal coverage is almost identical to that of 4G, meaning less physical infrastructure actually turns out to be necessary. Also, low-band spectrum is being used for 5G rollouts, limiting capacity growth, but also requiring fewer new tower or radio sites and backhaul construction.

Better technology, allowing lower cost builds, also is at work. 

The bottom line is that mobile and fixed network capex reflects assumptions about revenue growth, as capex typically is set as a percentage of expected revenue. 

Current capex assumptions suggest connectivity suppliers generally expect slow revenue growth in Europe, North America, South Korea, Japan and Taiwan, with faster growth expected generally in wider Asia and Latin America.

Google Shows Value of Location Data, Also Spotlights Why Much Telco Data has Little Value

Google Maps now is being used to produce Community Mobility Reports, using anonymous data, showing how busy retail locations are, in the wake of pandemic-driven stay-at-home policies. 

In Canada, for example, visits to retail and recreation sites are down 59 percent, while visits to transit stations are down 66 percent. Visits to workplaces are down 44 percent. In France, trips to retail and recreation locations are down 88 percent, visits to grocery stores are down 72 percent, while trips to parks are down 82 percent. Transit station trips are down 87 percent. 

source: Google

One observation: Location data has been touted as one data source mobile service providers possess that has value in a commercial sense. In the internet era, it also is clear that app providers have reasonable approximations to that same data store. 

So what entity ends up creating a useful information service for health planners and governments that actually uses location data to show whether citizens are obeying the shelter in place rules? Google, not any single telco, collection of telcos, or non-profit entities funded by telcos. 

Connectivity providers seem to insist they are not just dumb pipes, but perhaps reality suggests they truly are. There is a business model for access and transport, to be absolutely certain. 

But legitimate questions can be raised about the revenues which can be generated by that function in the ecosystem. Moreover, legitimate questions also can be raised about telco roles in creating apps, as well. 

To the claim that “we have lots of valuable data stores, such as location data.” one might well retort that “so do many app providers.” And at least in this case, Google has shown the ability to create useful value from such data stores, where no telco apparently has been able to replicate. 

That is not a new story. Most observers who do not work for telcos have argued in the past that telcos are not good at innovation. Worse, the “data stores” they often claim are potentially so valuable might be just that: “potentially” valuable. 

Put another way, maybe not so valuable, after all.

North American Retail and Restaurant Visits Dropped 100% in March 2020

These bits of data from Prodco Analytics and OpenTable, reported by the Wall Street Journal, graphically illustrate the effects of Covid-related retail shuttering. Retail visits in North America fell off a cliff in March 2020, reaching a negative 100 percent by the end of the month, while visits to restaurants likewise fell 100 percent about the third week of March 2020. 

That could hardly be anything but the case after all restaurants, bars and nearly all retail locations were ordered shut by government order in March 2020, in most jurisdictions. 

source: Wall Street Journal

Small businesses will be severely challenged to come out the other side, and many will likely not make it at all. Unprecedented.

Post-Pandemic Service Provider Growth Rates Might Vary

Nobody yet can predict how consumer behavior could change after the end of the Covid pandemic. If past behavior in the aftermath of major global recessions applies, connectivity providers will see revenue impact based on underlying growth trends in each market.

Developing markets might make a relatively-swift rebound after a modest dip, might see flat revenue or possibly even grow, but only at a slower rate. Service providers in developed markets arguably face more risk, in some regions. 

“From 2007 to 2009, many European operators’ average revenue per user dipped by more than 15 percent, and churn rates rose by the same amount for operators in both North America and Europe,” say consultants at McKinsey. 

Revenue and profits in North America are stronger, so there might be relatively slight impact. 

source: McKinsey

The Organization for Economic Cooperation and Development countries, on the other hand, saw only a one-year flattening of growth in the wake of the internet bubble in 2001, but saw sustained, multi-year drops in revenue after the great recession of 2008, likely for reasons not related directly to the economy. 

source: OECD

But some data suggests global revenue after 2008 was buoyed by growth in developing markets, even if some developed markets did not recover as quickly. - 

source: IDATE

Smartphone sales are likely to suffer in the near term, however.

It could hardly be otherwise when major parts of the economy are simply shut down, supply chains have been disrupted and on top of that we must work through an unprecedented planned effort by governments to throw economies into recession.

Smartphone sales globally dropped 40 percent in February 2020, for example. CCS Insight now predicts that phone sales worldwide will drop to a ten-year low in 2020 overall. 

Sales of 1.26 billion smartphones sold globally in 2020 would represent the lowest sales in a decade. The global mobile phone market is expected to slow by 13 percent in 2020, with shipments in the second quarter of the year predicted to fall by 29 percent, CCS Insights predicts. 

source: CCS Insight

Will Pandemic Behaviors Persist?

It is to be expected that consumer behavior in unprecedented times will feature at least temporary aberrations. It could hardly be otherwise with much of the economy shut down and people living through a pandemic.

The big issue is whether--and to what extent--those behaviors might persist, on a permanent basis. Some would argue the great recession of 2008 caused permanent changes of behavior, and we might see greater changes for health reasons after the Covid-19 pandemic. 

Looking at U.S. consumer spending about seven years after the start of the 2008 recession, Macy’s executives noted a “permanent” shift to automobiles, housing, health care and digital experiences. 

Leisure travel, dining out and attending events (experiences) also gained favor. A general increase in buying based on “value” also arguably occurred. A decade later, many of those trends of spending caution still seemed to be in effect. 

To be sure, there are other trends not directly related to post-recession thinking: a shift of retail to digital channels, environmental, “buy local,” socially-responsible behavior and organic product trends. Many have noted the preference for experiences rather than goods.  

Looking only at content consumption, the pandemic has boosted use of, and interest in, media of all types. 

source: Nativo

Daytime viewing is overtaking primetime for ratings numbers, according to Samba TV. Daytime viewing numbers are up 121 percent year over year and total viewing time is up 85 percent. Viewing of cable news has also seen a sharp uptick between the hours of 9 a,m, and 4 p.m. as well.

Nobody expects those trends to persist once people go back to work and school. Virtually everybody seems to expect a permanently higher level of online shopping. Some believe a permanent shift in remote work is possible, with a shift of significant higher education to online delivery as well.

A reasonable baseline case is that underlying trends in place before the pandemic become stronger. Even the hard-hit activities that involve larger gatherings of people, travel and lodging are going to recover, albeit with interaction precautions likely persisting in some ways. 

Supply chains already were changing, prior to the pandemic. That likely is a permanent shift. But that trend was underway before the pandemic. Disaster preparedness will improve, though. History suggests many far-reaching potential changes are unlikely to happen. But pre-pandemic trends are likely to accelerate. 

Nokia Argues 4th Industrial Revolution Will Lift Productivity

Nokia argues that the fourth industrial revolution will boost industrial productivity, which Nokia rightly notes has been less than one percent per year since 1980. Nokia argues that industry 4.0 is going to boost productivity, built on “connecting everything” and using the internet of things. 

Private networks using 4G can help firms get a head start, Nokia argues, even before native 5G is available. One would expect Nokia to say that. 

The key issue, though, is whether more information technology--private 5G, private 4G or public 5G, is going to show early productivity results when 40 years of IT investments have failed to move the needle. 

If you have worked on the supplier side of the business, you know buyers almost never believe such claims, in terms of magnitude of benefit. 

Historical data since at least 1971 helps explain that skepticism. Though other forces are at work, it is hard to quantify the benefits of IT deployments, and probably also will be true of other promising “digital business transformation” efforts as well. 

Since 1971, for example, productivity has generally been dropping in developed nations, for example. There are mitigating issues, many will argue.

Cloud Giants, ISPs, IXPs Collaborate for Routing Security

Amazon, Google, Facebook, Microsoft, Akamai, and Netflix and more than 100 Internet service providers and internet exchange points  have joined the Mutually Agreed Norms for Routing Security (MANRS) initiative, designed to reduce the most common routing threats, such as traffic hijacking and spoofing. 

Microsoft Sees 775% Increase in Cloud Services Demand

Microsoft says there has been  a 775 percent increase in demand for its cloud services in regions enforcing social distancing and/or shelter-in place due to the COVID-19 coronavirus. Use of the collaboration tool Teams spiked up to 900 million meeting and calling minutes daily in a single week, for example. Windows Virtual Desktop usage has grown more than three times. .

Government use of public Power BI data visualization software to share COVID-19 dashboards with citizens has surged by 42 percent in a week, Microsoft says. So how are global access networks holding up? 

Despite significant increases in internet access demand caused by stay-at-home policies forced by the Covid-19 pandemic, global internet access performance is holding up. There are some speed reductions, but average speeds arguably are higher than four months ago, in many markets, including Australia.

Speeds are flat in Canada, the United States, Mexico, Japan and Malaysia; slower in India; higher in China. 

source: Ookla

Why IT Buyers Almost Never Believe Seller Claims

Every supplier of an information technology solution argues that deploying those solutions will boost productivity. Sometimes revenue gains are the claim. Perhaps more often operating cost savings are the bait. If you have worked with sales teams, you know that buyers always are skeptical of such claims. 

Historical data since at least 1971 helps explain that skepticism. Though other forces are at work, it is hard to quantify the benefits of IT deployments, and probably also will be true of other promising “digital business transformation” efforts as well. 

Since 1971, for example, productivity has generally been dropping in developed nations, for example. There are mitigating issues, many will argue. 

The hype might have exaggerated real-world impact. Reaping rewards takes longer than we think. Others argue that we cannot measure productivity boosts when it is “quality” that changes (more output from machines that cost the same, or perhaps less, but have higher performance). 

Other forces might counteract the productivity gains, perhaps because more work happens that is essentially overhead, without direct productive effect (tax, regulatory, compliance efforts, for example) or workers might be shifting from high-productivity to sectors of the economy with lower productivity. 

source: Dezernatzukunft

The point is that buyers almost never actually believe the more-spectacular seller claims.

Will Remote Work Trend Change Dramatically, After Covid?

One of the biggest cautions in investing is to be wary of claims that “it is different this time” when an un-historic or atypical valuation trend happens in equity markets. A good example was the valuation of firms with no revenue in the leadup to the internet bubble around 2000. 

To extend the argument just a bit, we are going to be hearing all sorts of predictions that the Covid-19 pandemic is going to substantially or radically reshape business, government, education and consumer behavior on a permanent basis.

That is perhaps a different argument than saying some underlying trends might get a boost. More bandwidth, diversified supply chains,  more remote work capabilities, more use of collaboration tools, better security, network resilience, use of food or meal delivery services, online shopping and more work from home are examples. 

It is logical to suppose that, having become more acquainted with doing things a different way, there will be a lower threshold to maintaining some of those behaviors, post-pandemic. 

But we might maintain some skepticism about how much behavior will change on a permanent basis. Consider the obvious case of remote work. Some of us have heard about the obvious value of telework or remote work for our entire professional careers. 

And yet the percentage of U.S. employees working at home 50 percent of the time or more in 2020 is estimated at five million, representing 3.6 percent of the workforce, according to Global Workplace Analytics. And that is after 40 years of evangelization that some of us are personally aware of. 

Predictions about the extent of telecommuting have routinely been far in excess of those figures. Definitions are likely an issue. In the past, “telecommuting” has generally been thought of as employees working “at home” sometimes--or full time--instead of at the office, campus or plant. 

But some analysts might consider employees taking work home at the end of the day as “telecommuting.” That probably is not what most people have in mind when they think of remote work on a substantial basis. 

Others say remote work includes any employees routinely working at home one day a week. That is telecommuting, to be sure. But it might not be what many have in mind when they think of remote work: working from home 50 percent to 100 percent of the time. 

Another caveat is that those figures do not include the self-employed. 

Still, it is undeniable that remote work is growing. Regular work-at-home has grown 173 percent since 2005, 11 percent faster than the rest of the workforce, which grew 15 percent, according to  Global Workplace Analytics. 

Remote work also grew almost 47 times faster than the self-employed population, which increased by four percent. 

The point is that remote work trends--aside from people taking some work home from the office--have been in place for some time; were growing before the pandemic and will grow after the pandemic. 

So the relevant issue might be whether the rate of change increases in a non-linear way. At least some believe that will happen. "We believe the COVID-19 pandemic has accelerated society's transition to broadband and digitization by at least a decade,” say analysts at MKM Partners. 

But it is reasonable to expect that the gap between employee desire to work at home and the low percentage doing so has other explanations. 

Global Workplace Analytics argues that 56 percent of employees have a job where at least some of what they do could be done remotely; 62 percent of employees say they could work remotely and desks are vacant 50 percent to 60 percent of the time. At yet only 3.6 percent of employees presently do so. 

That suggests--as often is the case with new technology--that some major retooling of business processes or organizational culture or both are holding back much-higher rates of remote work. Only seven percent of U.S. firms make remote work available to most or all of their employees, Global Workplace Analytics says. 

In makes sense that remote work happens most often when there are clear benefits for employers or employees, when the work tasks are amenable to remote work and when the relative isolation fits the emotional needs of the workers. 

Sales, customer service,marketing, programming, health claims analysis and radiology are use cases where remote work is possible. Not all roles are that amenable.  

But one also has to keep in mind that what most would consider routine “remote work,” happening 50 percent to 100 percent of the time, remains relatively rare. With the caveat that rates of change can hit inflection points, and that the pandemic might trigger an inflection point, remote work is not a technology issue. 

Work processes and work cultures apparently have to change in significant ways before substantial remote work makes sense, and works. 

Beyond that, the assumption that remote work always improves productivity is questionable. The productivity paradox (also the Solow computer paradox) is the counterintuitive observation that, as more investment is made in information technology, worker productivity may go down instead of up. 

The existence of the productivity paradox has been noted since the 1970s. Before investment in information technology became widespread, the expected return on investment in terms of productivity was three percent to four percent.

Instead, we have tended to see improvements that are undetectable to perhaps one percent, in the 1970s to 1990s. Nor is there much evidence that matters in the United States, for example, have changed between 2000 and 2018, either. 

source: Conference Board

Likewise, in the 20th century, gross domestic product growth was mainly driven by total factor productivity growth. Since the mid-2000s, however, productivity growth has been in decline, according to one analysis by researchers working with the Centre for Economic Policy Research. 

source: CEPR

None of that means a dramatic change in remote work is impossible. But it does seem unlikely.

56% of U.S. Cities See No Service Degradation from "Stay at Home" Policies

For the week of March 15 to March 21, 2020, internet access services in 200 U.S. cities are maintaining service levels, though 13.5 percent of cities have seen average speed dips of 20 percent of typical ranges, according to Broadband Now. 

source: BroadbandNow

About 44 percent  of the 200 cities have experienced some degree of network degradation over the past week compared to the 10 weeks prior. Fully 56 percent of cities have seen no slowdowns. 

Three cities--Austin, Texas, Winston Salem, North Carolina, and Oxnard, California have experienced significant degradations, falling out of their ten-week range by more than 40 percent.

Roaming Revenue Logically is at Some Risk When Travel is Down

The Covid-19 pandemic could cost communications service providers over $25 billion in lost revenue during the next nine months, mostly from lower roaming revenues, according to Juniper Research.

The research assumes that over half of all roaming revenue for the year will be affected, amounting to $25 billion in lost revenue. The research also highlighted the period between June and August as of particular significance when the demand for international travel is high. It forecast that operators could lose up to $12 billion in roaming revenue alone in these three months.

In terms of the overall impact on operators, it must be noted however that global roaming revenue only accounts for approximately 6% of total operator-billed revenue per year, limiting the hit on the industry.