5G Spectrum Purchases Will Drive Up U.S. Mobile Capex

Vital though the new U.S. mid-band spectrum for 5G might be, the cost of acquiring rights to use the spectrum worries financial analysts. S&P Global, for example, says spending on the C-band spectrum is “excessive.” 

To pay for the licenses, U.S. mobile operator capital expenditure will be higher, also likely resulting  in lower levels of free operating cash flow and higher leverage.

source: S&P Global

At the same time, mobile operators will be tempted to promote aggressively to gain 5G share, risking higher levels of customer churn and profit margin compression as well. At least in the near term, new competition from Dish Network and continued gains by cable operators will limit top-line revenue growth. 

On the other hand, if you could choose the segment of the business one were in, most would prefer life as a cable operator. Cable will see revenue growth of about six percent over the next two years, with steady increases in cash flow. 

For legacy telcos, mobility would still be the top choice. Mobile revenue top-line is projected to grow at perhaps 2.5 percent over the next couple of years, according to S&P Global. 

Fixed network revenue growth will be negative over the next couple of years, with business revenue the bright spot, perhaps growing half a percent by 2022, with consumer revenues down four percent per year. 

The satellite industry might face some overcapacity issues once the low earth orbit constellations go fully commercial. And while there are variations, the data center and mobile tower segments should generally fare well, S&P says.

How Much will B2B Sales Processes Change after Covid-19?

Digital channels already are a big part of business-to-business sales processes, and the conventional wisdom has to be that use of digital channels will grow, as part of permanent behavioral changes created by the Covid-19 pandemic. What is yet unclear are the extent and degree of permanent changes. 

Gartner, for example, predicts that by 2025, 80 percent of B2B sales interactions between suppliers and buyers will occur in digital channels.

Depending on how one tabulates, that might be a bit more than presently happens, or might be less. Today, perhaps 17 percent of interactions tend to happen in person, for example. And most might agree that digital commerce channels will increase. 

That might logically happen for smaller purchases routinely, with strategic purchases requiring more sales interaction overall, and arguably more time spent in person-to-person engagements.  

Business customers now routinely use supplier websites, for example,  to identify problems, explore solutions, build requirements, narrow the range of potential suppliers, validate those choices and create firm consensus around choices, Gartner notes. 

Interactions with sales representatives still are part of those tasks. In fact, in 2019 slightly more B2B buyers reported reliance on sales personnel than websites. Followup communications and activities arguably also rely on other channels (email, text messaging, audio and video conferences) to flesh out details. 

source: Gartner 

About 17 percent of time spent conducting research happens in live meetings with potential suppliers. About 67 percent of research time is consumed conducting online research, meeting with buying groups and conducting other research offline, Gartner notes. Still, one can conclude by comparing information channel activities with time spent in each channel that meetings with potential suppliers have an outsized influence. 

source: Gartner 

One might also assume that strategic choices and expenditures will require more face-to-face interactions, as well as more digital research and follow-up, than routine purchases. 

SMBs in Industries with Moats Spend Much More on IT Than SMBs in Risky Sectors

U.S. smaller businesses (defined as “small” when there are up to 99 employees and “medium” with 100 to 499 employees) can be split into four market segments, according to Analysys Mason. 

You likely would not be surprised to find that bigger spenders also are firms that face less competition--and therefore are more profitable--while also being larger firms overall. That has traditionally been the case. 

It would not surprise you that firms in financial distress, or in declining markets, spend less than growing or prosperous firms. You also would not likely be surprised if growing firms were more focused on growth--and investing for growth--while most declining firms are more interested in harvesting revenue for as long as possible and spending as little as possible. 

That is one way to interpret the way SMBs can be characterized in terms of their information technology spending volumes. 

Analysys Mason sees SMBs in four spending groups: super spenders, ahead of the curve, constrained strugglers or disengaged groups. 

What also might catch your attention is that firms that spend more tend to be in well-protected industries with moats of some sort that keep competitors out. They tend to be larger, growing and likely more profitable. 

The firms that invest less are all in high-risk industries, perhaps declining industries, are smaller and in financially-stressed industries. 

Source: Analysys Mason, 2020

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The super spenders make up roughly one third of the Analysys Mason sample and tend to be found in well-protected industries such as professional services.

The constrained strugglers and disengaged SMBs are mostly small businesses in challenged industries who focus on cost cutting and survival. These businesses tend to be found in high-risk industries such as retail, construction and manufacturing.

Is IoT "Digital Transformation" for Most SMBs?

Where can telcos add value for small or medium business customers beyond connectivity? Start with potential value in edge computing and internet of things. In many cases, value will start with ultra-low-latency application performance based on 5G radio links.

That only helps if the computing function also is capable of ultra-low latency, and that will mean edge computing. So add potential roles as suppliers of real estate: racks, security, power, cooling and cross connections, with the brand names supplying the actual computing function. 

Nobody expects telcos to manufacture the actual sensors and supply sensor software. That will be done by the established device and software firms. But end users, software suppliers and device manufacturers will not want to be in the business of system integrating and supervising devices, related software and analytics processes. 

source: CompTIA 

As with much information technology support in the SMB space, third party system integrators will be called upon to manage the process of designing, installing, testing and maintaining whole systems (devices, software, analytics, hosting) required on the premises to create the digital output supplying business value. 

Sure, telcos can supply all the transport, gateways and interfaces to the wide area network, and also the radio infrastructure and operations support for on-premises private networks. Beyond that, they will have to start acting as system integrators or premises IT specialists. 

That never is easy, given the peculiarities of each industry vertical. But it is hard to see how connectivity providers are going to be in position to reap more of the financial reward from IoT capabilities unless they move beyond their core communications function. 

Broadly speaking, many view IoT as the key to SMB digital transformation, in a practical sense. 

This is the way Singtel segments its cloud computing offers for small and medium business customers. As you can see, Singtel sees IoT as the key to creating SMB value from digital transformation. 

Singtel offers the brand names in computing as a service, rather than trying to recreate such capabilities on its own. 

Singtel also adds a preconfigured solution for internet of things monitoring, the cloud gateway and bulk data transfer. But Singtel focuses on integrating and managing the on-premise devices and software used to collect data, not the actual edge computing function itself. 

source: Delta Partners Group 

You might argue that the value of digital operations is based on three capabilities: intra-company and inter-company communications, enabling better information tracking and extending business reach. All three of those objectives are classic “communications” requirements. 

The new value-add is support for the analytics function. While not supplying the analytical engines or the core processing to conduct analysis, telcos can package the “function” of sensor network management as a key added-value role. Neither computing as a service vendors nor analytics software firms want to manage the on-site networks of sensors. 

Most smaller businesses might not want to have their limited information technology staff doing so, either. In essence, the telco IoT role becomes that of system integrator and operations manager for the IoT sensor network. 

source: Delta Partners Group

Some Things--Such as Bandwidth Price Trends--Do Not Change

Some things do not seem to change much. Generally speaking, global capacity prices have continued to decline in 2020, continuing the general trend we have seen for a few decades. 

Source: TeleGeography

Price changes also vary by capacity. 100-Gbps prices have fallen more than 10-Gbps prices, for example, TeleGeography says. 

As always, there are regional differences. Routes to and from Latin America and North America have fallen significantly since 2018. 

Routes terminating in Sao Paulo have fallen more than 40 percent since 2017, while routes terminating in Jakarta have fallen less than 10 percent, TeleGeography notes. 

IP transit prices tend to reflect changes in pricing of transport prices on most routes, as well, with regional differences. Routes between Europe and Africa; Mumbai and Singapore and Los Angeles to Sydney are higher than on trans-Pacific or trans-Atlantic routes. 

The Covid-19 policies essentially shutting down education and in-office work, though, have not caused colocation prices to drop, TeleGeography says. About 83 percent of survey respondents say prices have not changed. 

Source: TeleGeography

Cross connect pricing likewise have been stable in U.S. markets, though rates are rising in Europe. 

Source: TeleGeography

Workers Like WFH, Their Bosses, Maybe Not So Much

Employees generally report in surveys that they prefer working from home, and often also report they believe they are more productive working from home, than working in the office. Executives might not agree. Remote workers are harder to manage, for example.

The issue is that large remote workforces are very hard to support, train and evaluate, says Bill Barney, Asian Century Equity chairman. 

Source: Asian Century Equity

The issue seems to extend beyond cultural issues, such as some executives being uncomfortable with supervising remote workers. Not every employee, in every business function, actually works at a job allowing for effective productivity measurements.

If Telcos Manage for Equity Valuation, Asset Sales, Spinoffs Will Happen

For better or worse, executives running Asian telco businesses are going to have to take a hard look at their asset bases, to maximize equity valuation, says Bill Barney, Asian Century Equity chairman. That might be especially true for assets that do not spin off free cash flow. 

Source: Asian Century Equity