Industry Trend Analysis - Key Themes For Telecoms In 2018 - APR 2018
BMI View: Operators will increasingly be judged on the breadth, relevance and quality of the services they offer to end-users. Success will require investment in passive and active infrastructure, the creation or acquisition of unique content, the acquisition of complementary businesses and the use of disruptive technologies. The roll-out of networks offering ubiquitous connectivity will take on a new urgency in 2018 as 5G nears commercialisation and the pressure is piled on wireline operators to invest in fibre. Vertical consolidation is still possible - and is actually necessary - in some markets, but horizontal expansion has much to commend it as long as service-led business models are clearly defined.
We have identified five key themes for the telecommunications sector for 2018. While we do not expect all operators to be willing to follow through on them, or to have the resources necessary to act on them, players should look to embrace new service delivery strategies and to use whatever new technologies that enable them to differentiate themselves and best serve their return on investments.
|Service-led Strategies redraw business models||Network-agnostic service expansion will force telecoms operators to differentiate through services||Traditional value-added service usage to decline. Operators to partner more widely.||AT&T, Verizon, Uber, Netflix, Amazon, GM, Toyota||Cable TV operators, mobile network operators, traditional telcos|
|More focused investment||LTE investment has peaked; network sharing to increase; fibre deployment to accelerate||Tower sales; creation of specialised infrastructure companies; fibre/ NB-IoT/G.fast deployments||Tower companies, network operators (capex reduction), consumers||Network operators (reduced capitalisation/ financial leverage)|
|Consolidation accelerates||More mergers and acquisitions, both horizontal and vertical||Higher number of merger deals presented to regulators and competition bodies||Large, cash-rich operators with converged service strategies||Smaller, but more innovative service providers and specialised players|
|Disruptive technology impacts industries||Start-ups launching new products and services; partnerships with technology companies||Data analytics, artificial intelligence, ubiquitous connectivity||Companies willing to embrace new technologies to enhance productivity||Traditional industry participants unable to adapt (eg: workforce)|
|5G takes shape at last||Pre-5G networks will help operators formulate usage cases||'5G' network rollouts and supply agreements with vendors||Large operators with convergence business models, mostly in Asia and North America||Early adopters backing wrong technologies or network topologies|
Service-Led Strategies Redraw Business Models
Operators have been using services to differentiate themselves from their rivals for decades. However, there is a new urgency as services increasingly become application-centric and can be accessed on a wide range of devices (smartphones, TVs, domestic appliances, etc) that are network-agnostic (ie: a service, such as streamed video, is not tied to a particular network provider). Operators are seeing usage of their own-brand services decline and respond in kind, launching 'me too' applications that, often, fall short in terms of appeal of the platform they are trying to emulate.
There are many alternatives to platforms such as Netflix, including a growing array of operator-developed services, but these tend to offer little that is new or relevant to consumers - and businesses - that continually seek new content or demand more personalised service.
Having attempted, with some success, to take a more active role in the pay-TV market, AT&T is taking the next logical step and is attempting to buy a content producer, Time Warner. Rival Verizon is looking to develop more personalised information-centric services and is buying search engine and advertising specialist Yahoo!. These efforts are a step in the right direction, but unless operators can develop more comprehensive services that can be offered on a network-agnostic 'white label' basis, they are doomed to limit their potential.
We see the connected home and the connected car markets as being fields where operators can shine. With regards to the latter, we point to recent deals - such as the one between Verizon and General Motors - which are based on a relationship we liken to Amazon's Kindle platform.
GM and Verizon have agreed a partnership to establish a standardised communications platform. GM will use a data communications module in all the cars it sells to transmit data on driving patterns and any potential issues in relation to maintenance (a service we have called 'diagnostics'). We believe this implementation of the 'Kindle model', where a manufacturer has a relationship with only one provider, who in turn deals with operators in specific countries, is the simplest way to provide that type of connectivity for car manufacturers, and it is likely to be replicated by many of GM's rivals. Car manufacturers want one single provider, which major telecoms operators are best placed to offer. Car manufacturers also need connectivity to turn vehicles from products into services.
- 'Alphabet looking to Move Beyond Pure Advertising', December 12 2017;
- 'Competition In Bike Sharing Industry To Benefit NB-IoT Providers', September 20 2017;
- 'Vodacom: Safaricom To Provide New Growth Platform', September 14 2017;
- 'Sports Next Battle Between Traditional And OTT Players', August 9 2017;
- 'Verizon/GM Deal Reinforces Kindle Model View', July 26, 2017;
- 'Visualising Our Key Industry Themes', July 12 2017;
- 'Telia's Enhanced Enterprise Strategy A Response To Tough Competition', March 6 2017; and,
- 'A1 Digital Necessary For Telekom Austria's Future Growth', February 15 2017.
|From Products To Services|
|GM Global Sales (units), H1 2017|
|Source: General Motors|
More Focused Investment
The cost of deploying new technology or acquiring additional resources such as spectrum is now much higher than many operators can comfortably absorb, particularly as services become more commoditised. Yet competitive pressures conspire to subdue earnings dynamics. In recent years, operators have been working together to reduce costs on the infrastructure side, either through joint network build-outs, sharing key network elements or pooling assets in jointly or independently-owned companies. We expect this trend to continue in 2018 and anticipate an acceleration in tower sales/spin-offs; this would be welcome news for specialised towers companies, particularly in Europe, where such developments are long-overdue.
Cellnex agreed to buy towers from Sunrise Communications in May 2017, a welcome boost to that company's European expansion strategy which targets undervalued passive infrastructure assets and we expect it to make further acquisitions in 2018.
In mature markets, operators need to differentiate themselves in services instead of network quality; to do so, they must look at implementing low capex strategies without sacrificing quality of services. The sale of infrastructure to third parties or separation from the core business into infrastructure divisions is an effective way to cut costs, as the responsibility of building and maintaining the infrastructure then lies with a specialised infrastructure company. This represents a paradigm shift where tower companies provide connectivity and telecoms operators only provide services.
This scenario implies that other passive but high-capacity assets, such as fibre, could move to specialist owner/operatorship. Fibre deployment is at differing stages of maturity, even within developed regions such as Europe (where the UK has almost no full-fibre coverage, yet Latvia and Estonia are very well served). Part of the problem is that fibre is expensive to deploy and, thus costly for end-users. However, as content becomes denser and requires more and more bandwidth, so the need for fibre intensifies. Stop-gap solutions such as VDSL, DOCSIS 3.0 and G.fast are being utilised, but these risk deferring the problem rather than tackling it.
Although stop-gap upgrades can yield fibre-equivalent downstream speeds, upstream throughput increases will be very limited, leading to lower quality of service relative to those of fibre operators. Long term returns on investment will be lower with DOCSIS than with fibre, for example. However, we believe some markets - such as the UK, Italy and Germany - would require unfeasibly high levels of fibre investment and, therefore, DOCSIS represents their most cost-effective route forwards.
Wireless technology can solve some of these problems, particularly for operators looking to monetise more advanced and/or specialised services. Low power wide area networking (LPWAN) technology can support managed connectivity platforms for businesses large and small, in rural or urban locations. There are several different approaches to LPWAN, with narrowband Internet of Things (NB-IoT) technology offering considerable potential to bridge the digital divide within markets. Telefonica, Altice, AT&T and Vodafone are among those top tier operators that are investing in LPWAN to broaden their appeal and make them relevant in smart city scenarios where cost control is paramount. LPWAN also allows specialised players to enter the market, targeting customers that large operators would find it uneconomic to serve themselves.
- 'Sri Lanka's Tower Levy Will Hurt Operators, Encourage Consolidation', December 8 2017;
- 'Altice Requires Rationality, Especially In France', November 23 2017;
- 'Zain's Tower Sale To Have Market-Wide Benefits', October 12 2017;
- 'Tower Spin-Off Of Limited Benefit For BSNL', September 16 2017;
- 'Fibre Backhaul An Important Component Of 5G', July 20 2017;
- 'Sigfox/Telefonica Deal Confirms LPWA View', February 23 2017; and,
- 'Laggards Should Balance Demand And Needs In Fibre Investment', February 16 2017.
While 2016 was characterised by a number of large billion-dollar mergers and acquisitions (for example, Altice's purchases of Suddenlink and Cablevision in the US), deals were smaller in scale during 2017, but more numerous. Partly, this was due to there being a smaller pool of suitably-matched targets in the vertical growth space, but it was also due to a need to take stock and properly evaluate the return on investment outlooks posed by deals.
The pace of consolidation picked up in the second half of 2017, with telecoms operators turning their attention back to vertical expansion as a means of sustaining growth momentum in the short to medium term while they continue to look for solutions to deal with industry transformation along a more service-orientated paradigm. For example, Three Austria agreed to buy rival Tele2 Austria in July and may yet buy UPC's Austrian unit as the latter looks to divest some of its non-core European assets. The larger UPC business itself remains on the deals table as parent Liberty Global Inc (LGI) considers whether to buy - or be bought by - Vodafone Group.
A Vodafone-LGI deal would be driven by a perceived need for greater scale in the converged services market, with Vodafone generally lacking a wireline presence in several key European markets and UPC's mobile ambitions thwarted by a lack of a compelling mobile offer. UPC - like many pay-TV orientated players - is facing rapidly rising content acquisition costs and is losing out to network-agnostic online-only streaming providers. Being unable to finance the creation of its own unique programming, or at least in meaningful quantity, it must resort to scale in order to remain relevant. A similar reasoning underpins Cyfrowy Polsat Group's investment in alternative Polish wireline operator, Netia, and a group of pay-TV channels in December 2017.
In emerging markets, M&A rationale is centred on ridding the market of excessive or ineffective competition, with Africa seeing the greatest amount of activity in this regard. Airtel is considered to be close to pulling out of several African markets and we believe Orange and Viettel are likeliest to buy discarded assets. Millicom-owned Tigo also seems to be downplaying its long-term African strategy and may also be willing to sell up. MTN would also be keen to enter new markets, should they become available, although its natural dominance has earned it some unwelcome regulatory scrutiny relating to alleged quality of service and sub-standard subscriber registration practices; it may be unwilling to subject itself to greater scrutiny.
In Asia Pakistan, Bangladesh, India and Sri Lanka are the main M&A hotspots, with a surfeit of competition and falling profit margins weakening return on investment scenarios. Developed Asian markets - such as South Korea, New Zealand and Singapore, for example - have made heavy weather of merger deals in 2017, with asset-rich deals being blocked by regulators or weak players having little to offer would-be buyers. Hutchison's sale of its wireline unit in Hong Kong surprised us because it went to a private company with little ambition to scale-up or move into the convergence space; the asset may yet be sold on to a more visionary investor.
We close 2017 with the AT&T- Time Warner merger still ongoing and set to be subject to greater regulatory scrutiny as the notoriously anti-media Trump administration considers ways of curbing major media players' pervasiveness and moves to end net neutrality in the US potentially undermining the short-term need for AT&T to cut a deal. We are less optimistic that the merger will conclude successfully and other potential mergers could be put on hold until the administration's intentions become clearer.
- 'UPC Buy A Risk For Salt', December 1 2017;
- 'Qualcomm: A Deal Too Far For Broadcom', November 7 2017;
- 'Vodafone-IDEA Better Positioned As A Service Operator', October 27 2017;
- 'Cisco Expands: Is Ericsson Next?', October 26 2017;
- 'Axtel Acquisition A Long-Term Bet For Rivals', October 19 2017;
- 'I Squared's Wireline Approach Insufficient For Advanced Market', August 3 2017;
- 'Tele2 Buy Only Way Up For Three In Saturated Market', July 31 2017;
- 'Telecom Argentina-Cablevision Merger To Force Rivals' Hands', July 4 2017; and
- 'Low Pricing Key To Merged Drillisch/1&1 Viability', May 12 2017.
Disruptive Technologies Impact Industries
New technologies have always disrupted established industries' business models, with the impact generally hardest on human resources. 2018 will see increased regulatory scrutiny of existing and emerging disruptive technologies in markets worldwide, with 'industry disruption backlash' expected to be most visible in developed markets. We expect the following tangible impacts:
- Greater regulation of 'disruptive' players in industries including financial services (e.g. cryptocurrencies), energy utilities (e.g. renewable energy providers, particularly household solar), media (e.g. 'over-the-top' content providers such as Netflix), transport (e.g. ride-hailing and ride-sharing apps such as Uber) and retail (e.g. Amazon). We expect that in some cases, regulation will slow the transformative impact that disruptive players are having on these industries.
- From a financial market perspective, a regulatory reining in of technology giants would come at a time when technology stocks are more richly priced than at any time since the 1999-2000 US tech bubble. The NASDAQ equity index has risen 25.6% in the year-to-date, bringing the rally from the 2009 low to 422% and taking the index 33.4% above the 2000 peak. Moreover, a small group of technology firms, particularly the 'FANG' ( Facebook, Amazon, Netflix and Google) stocks, are increasingly driving the equity rally. Should increased regulation start to erode profitability in core industries for major technology firms, the appetite of equity investors for tech stocks may start to wane.
As in times past, we expect the media, social commentators, lobbyists and regulators to look more closely at the costs of industry disruption wrought by new technologies, with a greater onus likely to be placed on regulators to - somehow - take back control and keep new technologies' impact on consumer and labour welfare in check.
Alleged Russian interference in the 2016 US election campaign has highlighted grey areas regarding news reporting on social media, for example, while the proliferation of cryptocurrencies has complicated capital controls and anti-money laundering efforts. In addition, the rise of the app-driven 'gig' employers such as Uber and Deliveroo has encouraged trade unions to lobby over worker rights and consumer watchdogs to highlight a lack of employer due diligence in the screening of customer-facing staff.
We do not expect many of these issues to be resolved quickly and certainly not easily as the pace of technological development far exceeds the ability of regulators to develop future-looking codes of conduct.
- 'Industry Disruption Backlash In 2018', December 8, 2017;
- 'Fintech To Make Construction Inroads', November 20 2017;
- 'Technology And Autos: A Primer On Five Disruptive Trends', November 10 2017;
- 'Technology And Mining: A Primer On Four Notable Trends', November 9 2017;
- 'Apple To Stay Ahead Of HTC-Augmented Google', September 22 2017;
- 'Amazon Poses Future Threat To General Mills', August 31 2017;
- 'Augmented A Better Commercial Bet Than Virtual Reality', July 27 2017; and,
- 'Baidu A Challenger In China's Self-Driving Car Future', June 7 2017.
|A Niche Technology At Launch|
|5G Forecasts, 2019-2025|
|f = BMI forecast. Source: BMI|
5G Takes Shape At Last
We expect that, following two years' discussion, research and development, work on defining and ratifying 5G wireless communications standards will intensify and a final set of 5G technology standards will be agreed upon by the end of 2018. As a result of prolific collaboration between telecoms operators and equipment While a number of 'pre-5G' networks and service platforms will undoubtedly be 'live' before then, as operators engage in their usual 'first-to-market' contests, each will take slightly different approaches to network construction and device authentication/security. Fragmentation of the 5G ecosystem is, therefore, all too likely and service and application developers will have to take a multi-modal approach to populating their ecosystems.
We hold the view that demand for 5G will remain niche at launch, particularly while operators strive to develop meaningful use cases for the technology. However, we expect 5G to develop more strongly where 4G has been successful, meaning that both the US and Asian markets will outperform their European counterparts from the beginning.
The standards body overseeing mobile technologies has accelerated its timeframe for 5G commercialisation from 2020 to 2019. The aim is to limit the potential for fragmentation but, as 2018 begins, many issues still remain to be agreed but now with less time to reach accord. The key pivot will be a decision on which frequencies will be set aside for 5G services. Pre-5G networks are using different frequencies, owing to limitations in geographic availability, and different approaches will require different economies of scale, which will undermine the business case for early investment.
We expect that 5G will help with the deployment of smart cities and Internet of Things (IoT) services, such as connected cars, as 5G's vaunted greater speeds and lower latencies will help with the quality of these services. Enterprise will have a key role in driving the technology's adoption, because of its premium attributes, and the trend with 4G uptake highlights that operators in different regions will have very different strategies.
- 'A Shared 5G Network For New Zealand Is Ideal But Difficult To Achieve', December 11 2017;
- 'Spectrum Latest Delay To UK's 5G Plans', August 23 2017;
- 'AT&T: Content And 5G To Regain Initiative', August 3 2017;
- 'Fibre Backhaul An Important Component Of 5G', July 20 2017;
- '2G Shutdowns To Boost Data Traffic Capabilities', June 20 2017;
- 'Singapore To Be A Frontrunner On 5G', May 30 2017;
- 'Verizon Goes All In On 5G', May 15 2017;
- 'High Frequencies Key To Future 5G Networks', April 11 2017; and,
- 'Pre-Standard 5G A Risky Marketing Tool', February 8 2017.