New market research reports from Infonetics and Juniper Research are summarized in this article which also looks at the critical issues to transform LTE Capex into revenue for telcos.
I. After a second straight year of decline, Infonetics Research predicts telecom carrier capital spending (CAPEX) to be up a modest 1.6% next year. In its just released updated report on Service Provider Capex, Opex, ARPU, and Subscribers, Infonetics analyzes telco capex, operational expenses (opex), revenue per user and subscriber trends by operator, operator-type, region, and telecom equipment segment. The firm predicts video, 3G, and LTE to be the top telco investments in the coming year.
"Telecom capital expenditures are bottoming out at US$289 billion this year, and our cycle-based forecast model and conversations with service providers indicate that a new investment cycle will start in 2011 and last several years, with capex growing to US$321 billion in 2014 before growth slows again. Overall, capital intensities will continue to slowly decline through at least 2014 because the world's telecom infrastructure is essentially built out, and unless a nuclear bomb wipes out some of it, there is no need to increase capital intensities," says Stéphane Téral, principal analyst for mobile and fixed-mobile-convergence infrastructure at Infonetics Research.
Infonetics' new report tracks revenue, capex, capital intensities (capex-to-revenue ratios), opex, ARPU, subscribers, and access lines of 184 public and semi-private/government-owned service providers on a monthly and biannual basis. The report includes past, current, and forecast capex and revenue data through 2014 and equipment forecasts through 2010, market drivers, analysis, service provider demographics, and customizable pivot tables to analyze data by service provider, service provider type, and equipment category.
The report includes a Fundamental Telecom/Datacom Market Drivers section with analysis of overall market conditions for service providers, enterprises, subscribers and the global economy. Regions covered in the report include North America, EMEA (Europe, Middle East, Africa), Asia Pacific, CALA (Central and Latin America), and worldwide.
Report Highlights:
- From its peak in 2008, worldwide service provider capex declined 5.3% in 2009, and is on track to decline another 3% in 2010.
- The dip in capex in 2010 is due mainly to the fact that carriers in China, which invested heavily in network upgrades in 2009, have completed their 3G rollouts.
- Infonetics Research forecasts a 1.6% pickup in telecom carrier capex in 2011, marking the start of a new investment cycle.
- Despite the overall decline in service provider capex in 2010, some telecom equipment segments are faring well, including video infrastructure and IP routers/carrier Ethernet switches, which saw double-digit worldwide revenue increases in the first half of 2010.
- Infonetics expects the major areas of investment from 2011 to 2014 to be fiber-based wireline broadband (FTTx), 2G mobile network capacity expansion, network migration from 2G to 3G, and migration to LTE (mobile broadband will follow).
- Low equipment pricing resulting from fierce competition between western and Chinese vendors is giving service providers incentive to cap their capex budget and buy more equipment with lower budgets.
Click here to learn more.
II. Meanwhile, Juniper Research forecasts that global LTE service revenues will exceed $200bn by 2015, from a standing start in 2011. The firm predicts that the first beneficiaries of LTE mobile broadband networks will be business users based in developed countries, led by the US and Japan amongst other countries. Juniper expects that LTE premium services for high-end business users will be critical revenue drivers for mobile operators. Indeed, Verizon seems more focused on laptop-centric business users in its marketing. Dan Hays, a telecommunications consultant for PRTM in Washington, said LTE will be "very compelling for businesses, especially with the emergence of data-heavy applications such as video chat over wireless."
Howard Wilcox, author of the new 4G LTE Revenue Opportunities Report noted: “Our business modeling demonstrated that high traffic enterprise subscribers using web, email and video services will be the critical early adopter segment to benefit from LTE. There is an opportunity for premium pricing plans that will drive service revenues and the report shows this.”
- Operators can attract and retain high-end business users through premium services which could generate double the ARPU in a high usage scenario.
- Consumer users will typically spend at only about half the monthly rate of enterprise users.
- North America, Far East & China and Western Europe will together account for nearly 90% of LTE service revenues by 2015.
- Revenues from consumer users will remain under half of total revenues until at least 2015.
Juniper's 4G LTE Whitepaper and 4G LTE video and further details of the study, 4G LTE Revenue Opportunities: Business Models, Scenarios and Operator Strategies 2010-2015 can be downloaded from www.juniperresearch.com. Alternatively please contact John Levett at john dot levett at juniperresearch dot com, telephone +44(0)1256 830002.
Analysis:
The common thread in these two market research reports is the growth forecast for LTE capex and service revenues. We don't doubt that it will happen, but there are several key concerns that will drive LTE revenue growth, in our opinion. Here are just a few:
- Will there be sufficient coverage to attract a critical mass of subscribers? Will the pricing plans be attractive to both business and consumer customers?
- How well will LTE interoperate/ handoff with 3G and (to a lesser extent) mobile WiMAX? That is, when you move from one network coverage area to another, will you retain seamless connectivity?
- If there is limited coverage and/or broken hand-offs, then we believe LTE will be reduced to a fixed line replacement service for the immediate future.
- What kind of devices, e.g. netbooks, notebooks, tablets, smart phones, etc, will be available and when? We think that LTE can't be much more expensive than 3G to attract a crticial mass of subscribers. Telcos may have to rely on "forward pricing" to stimulate demand, especially while few LTE devices are available (which limits customer choice).
- Attractive "4G" apps that take advantage of low latency, RFI awareness, or other attributes of LTE. These could be particularly valuable for mobile M2M apps, e.g. video surveillance in a police car, medical diagnosis in an ambulance, first responder maps to pinpoint location, etc.
Reference:
Please also see this article on Infonetics LTE Market Forecast + our own LTE Carrier Survey:
9 replies on “Telco Spending Up Modestly in 2011; LTE Revenues >$200B by 2015”
Good summary and thanks for summarizing, Alan.
Based on conversations I have had in the past couple of weeks, broadband stimulus funds should start to kick-in, in 2011. Even with the RUS "stretch factor" (leverage their loans), the total of this amount is around $8 billion. Assuming a linear distribution, this $2 to $3 billion per year is less than 1% of the worldwide Capex; probably not too significant overall. Granted, this doesn't account for stimulus programs in other parts of the world.
It would be interesting to see what Juniper Research or Infonetics thoughts are on the impact of these programs over the time frame. The folks from Calix don't believe the stimulus, at least in the U.S., will cause a peak and trough because of the relative size of the U.S. broadband stimulus.
Excellent summary!
Question for Infonetics: Won't 3G spending (CAPEX/OPEX) far exceed LTE spending in 2011 and 2012?
One more point that I forgot to make is that the Tax Bill, which looks like it may pass, may have a positive impact in 2011 on telco's (and others) capital expenditure plans. In a recent conversation with Chris King, Sr. Telecom Services Analyst for Stifel Nicolas, told me to, “Keep and eye on the tax bill.” He pointed out the provisions which would allowing the expensing of 2011 capital expenditures is something that would tend to pull-in investment.
Ken
If the final Tax Bill includes NEW tax write-offs for capital expenditures it will be a big boom for all types of capital spending. However, I don't see that provision in either the bill, which cleared the Senate yesterday. Don't know when the House vote will be.
Can anyone put their finger on such a capital expenditure write-off in the bill?
I haven't looked in a week, but this was from one publication on December 9th that confirmed what Chris King had told me.
http://www.bizjournals.com/albany/news/2010/12/09/house-democrats-demand-changes-to-tax.html
"In addition, businesses would be able to immediately write off 100 percent of their capital expenditures next year instead of having to depreciate them over a number of years. For the past two years, businesses have been able to expense 50 percent of capital expenditures."
Of course, politics as they are, who knows what is now in the bill.
Just to clarify, Infonetics is not saying LTE will be one of the top areas of investment in 2011. We stated that LTE migration will be one of several drivers — including, namely: 3G rollouts — fueling the new telecom investment cycle that is STARTING in 2011 and ending most likely in 2014. In fact, in a response to an LTE story last month, Infonetics analyst Stéphane Téral posted this reply: "Bottom line: Although the raw LTE spending number looks impressive, it’s just a drop in the worldwide capex ocean." LTE investments will represent just a small portion of the money carriers will be spending in the next few years, especially in 2011.
Thanks to Infonetics for straight talk on LTE spending. Hypsters create the impression that it's a huge spending wave, but in reality it's much less than 3G buildouts/upgrades in 2011.
In 2011, I think telcos will spend more on GPON based FTTH transmission systems than on LTE and WiMAX combined! Mobile backhaul (3G and WiMAX) will be another hot area, IMHO.
Telecom Earnings Grow 50 Percent Slower Than Revenue
Telcos have to realize a return on their investments (CAPEX/OPEX) and then translate top line to bottom line- earnings. It's not happening!
"Globally, earnings growth at the largest public telecom companies over the last three years trailed revenue growth by an average of 50 percent over the last year, says AlixPartners. The clear problem is that earnings are falling behind an ever-growing need for higher outlays on capital investments, "sometimes dangerously so," AlixPartners argues.
This is especially the case in North America, where earnings before interest, taxes, depreciation and amortization trails revenue growth by a factor of 10, AlixPartners argues. Overhead costs (sales, general and administrative) also are outstripping both earnings and revenue increases.
Those findings are consistent with virtually all other studies of global telecom provider financial performance, and simply point out the structural changes occurring in the telecom business. Basically, older legacy products that underpin the bulk of total revenue are in a declining phase. Until quite recently, robust growth of mobile services has compensated for the weaker fixed-line performance. But the wireless revenue growth engine now is peaking as well, at least in developed markets."
http://telecommunications.tmcnet.com/topics/telecommunications/articles/123779-telecom-earnings-grow-50-percent-slower-than-revenue.htm
A very precarious situation to say the least, especially in light of carrier spending to upgrade wireless and wireline access networks.