Global Telco Revenue Growth and Capex Roughly in Balance in 2016

Global telecom service revenue declined four percent year-over-year in 2015 and likely will grow about one percent in 2016, according to  Stéphane Téral, IHS Markit senior research director, mobile infrastructure and carrier economics. The good news is that revenue growth and capex are roughly in balance, at least on an aggregate global level.

Total global revenue of US$1.93 trillion will be drive by the Asia Pacific region, the world’s single biggest region, followed by North America, he says. Earnings (EBITDA) for smaller telcos often are less than one percent. For tier one telcos, EBITDA can reach 15 percent. Applying the higher 15 percent level produces global EBITDA of something less than $300 billion, compared to capex of about $340 billion.

Global telecom capital investment will be mostly flat in 2016, with significant regional differences.

Low-digit growth in North America, Europe, the Middle East and Africa (EMEA) and the Caribbean and Latin America (CALA) will have been offset by a China-driven decline in the Asia Pacific region.

Asia Pacific, though, has become the world’s largest telecom spender and revenue contributor, says Téral.  

Asia Pacific will drive 42 percent of global spending, while North America stays roughly even, followed by EMEA and CALA.

Global service provider capex will grow 0.7 percent to US$341 billion in 2016, with a significant boost in European fixed network investment.

Spending on every type of hardware equipment except wireless and time-division multiplexing (TDM) voice will grow in 2016. Software, on the other hand, will expand in double digits.

Australian NBN Gets Government Loan to Finish Build

Rare is the major capital construction project that finishes on schedule and on budget. The Australian National Broadband Network (NBN) apparently is not exempt. The NBN is getting a loan of A$19.5 billion ($14.3 billion) to finish up the wholesale access network.

The loan is expected to be repaid upon the planned future privatization of NBN Co after 2020.

The NBN expects to provide wholesale access to 11.9 million premises, and also expects its retail customers to actually connect eight million homes and businesses, generating annual revenue of $5 billion.

The NBN is investing in a number of access platforms, ranging from satellite to fixed wireless, hybrid fiber coax and fiber to home. That is not an unusual choice, as there always is debate about which platforms are sustainable for different customers in different settings.

To be sure, fiber to the home is touted as future proof, and that arguably is true, where the investment is feasible (urban and dense areas). The big problem is that there are many scenarios where that investment is quite risky (lots of competitors, including facilities-based competitors)  or physically impossible (oceans, mountains, very rural areas).

That will not be the key issue for the NBN, which essentially is a monopoly wholesale provider of access capabilities. So take rates should not be a major issue.

Instead, the issue is the level of services consumers decide to buy. Some argue that unless large numbers of consumers choose to buy higher speed services that generate more gross revenue, the business model will suffer.  

Will Higher Bandwidth and Data Consumption be Matched by Revenue?

Internet access prices always fall, over time, history suggests, just as the cost of computing or storage falls, over time. Since 1998, to note just one example, internet transit prices have fallen by four orders of magnitude. In the retail internet access  business, it also is possible to predict that prices are poised to fall further. That has been true, globally, since at least 2010, according to International Telecommunications Union figures.

The issue: what are the implications for the service provider business model. In the voice business, lower prices lead to higher usage, so lower price-per-unit was offset, to a large extent, by higher consumption.

That also is true of internet access services. As prices fall, consumption increases. But there arguably is a difference. Supplying voice services required some tweaks and some investment, but not wholesale upgrading of the networks on a continual basis. And that is precisely what internet access historically has required.

So the fundamental problem is not that unit prices fall, or that demand fails to increase, but that the supply increases faster than revenue at the new levels of consumption, while investment likewise has to grow substantially to support the new levels of consumption.

In simple terms, usage grows faster than revenue, while investment requirements also remain high. That is a crucial problem for legacy service providers with legacy cost structures, less a problem for new providers without such cost burdens.

Even Google Fiber seems not to have had as much success as expected. Cable TV operators have fared far better.

source: strategyand

http://drpeering.net/white-papers/Internet-Transit-Pricing-Historical-And-Projected.php

Virtually all studies of U.S. residential internet access services show declining “cost per megabit per second” trends, nearly matching the pricing and performance trends one would expect from any business driven by Moore’s Law.

Such radical revenue-per-unit declines arguably must be accompanied by other moves to reduce the cost of supplying bandwidth.

And that is precisely the challenge to be faced by many service providers.

Surprised that Gigabit and Competition Lead to Lower Prices for Legacy Products?

Would you be surprised--at all--if a study of internet access pricing finds that competition leads to lower costs? Would you be surprised if a study finds that new services and new competitors offering products sold at higher prices--but higher potential value--lead to lower prices?

Would you be surprised if new competitors, offering better value, for lower prices, take market share away from providers offering “inferior” products at higher prices than the new products?

Probably the only statement that might find even a bit of disagreement is that new products sold at higher prices lead to lower prices for legacy services.

“Broadband Competition Helps to Drive Lower Prices and Faster Download Speeds for U.S. Residential Consumers” is the title of a study by Dan Mahoney, associate, and Greg Rafert, VP of the Analysis Group. The study finds that when a new gigabit service is offered in a market, prices for slower speed offers decline.

The study of high speed internet access pricing by the Analysis Group was funded by the Fiber to Home Council.

“The presence of gigabit service in a Designated Market Area (“DMA”) is associated with a $27 per month decrease in the average monthly price of broadband plans with speeds greater than 100 Mbps and less than 1 Gbps,” the study says. “This is equal to a reduction of approximately 25 percent of the monthly standard price.”

In an area with two gigabit access providers, “we estimate that the standard monthly price for gigabit internet will decline by approximately $57 to $62, which is equal to a reduction in price of between 34 and 37 percent.”

When gigabit internet is available, prices of “slower” speed services also decline. The authors estimate that prices for plans of 25 Mbps, but less than a gigabit, drop about $13 to $18 a month, representing a cost decline of about 14 percent to 19 percent.

None of those developments should be surprising. Competition tends to lead to lower prices, which is why policymakers and lawmakers often prefer it, why studies of markets with new competition often confirm the dynamics and why it is possible to note that new competition--lead by gigabit offers--tends to reduce prices of existing access services.

Perhaps the basic point is simply that competition leads to lower prices across the board. Nor should be surprising that new offers lead to lower prices for legacy offers. As the launch of the latest model of a smartphone leads to lower prices for the model being replaced, so a new “lead” offer offering more value will tend to devalue legacy offers offering what now is “less value.”

5G Apps Might Require Order of Magnitude to 100 Times More Mobile Bandwidth

Even if relatively few industry professionals think “speed” will be a key use case for 5G, it probably is useful to understand what speeds are expected to needed. Of some 800 industry professionals polled about 5G by Telecoms.com, though there was no clear consensus, the range of 5G speeds expected to be required ranged from less than 100 Mbps (10 percent of responses) up to greater than 2 Gbps (15 percent of respondents).

Some 25 percent of respondents guessed apps would require 500 Mbps to 1 Gbps.

For networks that have in the past struggled to supply 50 Mbps to every device, most of the time, that is a big stretch.

5G Really is "Build it and They Will Come"

Though it always is possible that 800 industry professionals polled about 5G by Telecoms.com, on behalf of Mitel, are wrong, the consensus is that 5G will be in commercial operation, on a substantial basis, by 2020 (some doubt--or perhaps hope--that will happen). Fully 86 percent of respondents estimated that 5G will be in operation by 2020, with 21 percent believing that would happen in 2018, and 30 percent estimating commercial 5G operations by 2019.

And despite notable improvements in internet access speed, massive support for consumer internet of things is expected to be the key use case, 43 percent of respondents said. Another 39 percent suggested industrial IoT would be the most important use case.

Perhaps ironically, some 46 percent also believe that the industry has not yet figured out “what to do” with 5G.

Some 19 percent of respondents said increased download speed was a key use case, and another 19 percent suggested low latency would be an important use case.

At least so far, there is significant sentiment that what will make 5G so different from all other earlier generations of mobile networks is the role of new applications, use cases, revenue and business models, not sheer increases in speed.

That might seem a huge risk, with huge amounts of capital essentially being invested in “hope” that key new revenue sources will develop.

That is not unusual. The same uncertainty--or hope--was present when 3G and 4G networks were launched. Rarely have industry professionals accurately predicted what important new apps would develop, or how revenue upside would be created.

Some 85 percent of respondents agreed that “5G will be defined by its use-cases and what the end-user requires of it.” In fact, about 75 percent of respondents acknowledged that a “build it and they will come” approach will also drive 5G development.

What arguably is new is the business context within which 5G will be deployed.  “It is a generally accepted belief that operators are in need of updating their revenue streams to ensure they stay relevant in an age of competing communications providers in the form of OTT players or rival IoT network suppliers such as Sigfox,” the report notes.

In other words, such high hopes are pinned on IoT apps enabled by 5G because, if that does not happen, tier one service providers are going to encounter even-worse trouble with their business models.

Will History Repeat for IoT Platforms?

One of the recurring themes in the communications and computing businesses is the deployment trajectory of new platforms.

And there are two big contradictory trends. More common in the computing or application sphere is the winner take all ” shape of new markets. That might not always imply that the “first mover” is the eventual winner, simply that outcomes now seem uneven or unequal. Somehow, in most app markets, scale is grabbed disproportionately by one firm, as in the tendency for the market leader to have market share as high as 90 percent.

The access or communication business never has behaved that way. Instead, communications markets tend to develop into oligopoly structures (two dominant providers), though many markets seem to have a total of three to five providers, albeit with markedly-different shares of market.

The question is what tends to happen when new platforms or technologies develop. And in that area, there arguably have been some similarities between computing and communications, at least in pre-internet eras. At least historically, the first mover has not necessarily risen to dominate a market. That can be seen in personal computer operating systems and mobile operating systems.

We now will see how platforms for Internet of Things communications will develop. As often happens, early contenders have stolen a march on traditional mobile platforms (LoRaWAN and others). But mobile operators are developing rival solutions based on existing 4G platforms, for example (narrowband LTE and others).

One possible path of development is that dedicated IoT platforms gain early share, but that leadership eventually is captured by incumbents. Early in the development of digital subscriber line (DSL), the market was pioneered by upstarts (Rhythms, Covad, NorthPoint). It is too early to predict how the variety of platforms will fare, as the IoT market develops.