Tag Archives: NFV

5G: Telecom Hype or Saviour

John Legere of T-Mobile is a canny operator and knows how to play the sycophant to Trump’s nationalist instincts in touting the ability of a combined T-Mobile & Sprint to invest in a super-charged 5G roll out, as per this presentation, playing the job creation and beat the Chinese technological advancement cards. Legere cites an Analysys Mason report commissioned by the US industry lobby group CTIA to back up such claims which in turn cites an Accenture report from 2017 on 5G in the US which claims that “telecom operators are expected to invest approximately $275 billion in infrastructure, which could create up to 3 million jobs and boost GDP by $500 billion”. In 2016, the European Commission in this report stated that 5G “investments of approximately €56.6 billion will be likely to create 2.3 million jobs in Europe”. An IHS Markit 2017 report commissioned by Qualcomm claims that in 2035, “5G will enable $12.3 trillion of global economic output” and “the global 5G value chain will generate $3.5 trillion in output and support 22 million jobs” on the basis that “the global 5G value chain will invest an average of $200 billion annually”.

These are fantastical figures. Many assumptions go into their computation including the availability, range and cost of spectrum plus infrastructure spend and policy in relation to streamlining procedures and fee structures for the deployment of the small shoe-box cell sites (between 10 to 100 more antenna are required for 5G than current networks). Larger issues such as privacy and security also need to be addressed before we enter a world of ubiquitous ultra-reliable low latency networks as envisaged by the reports referenced above. Those of us who lived through, and barely survived, the telecom boom of the late 1990s can be forgiven for having a jaundice view of a new technology saving the telecom industry. This blog illustrates some of the challenges facing the wired telecom sector and the graph below shows the pressures that the US mobile players are under in terms of recent trends in service revenues.

click to enlarge

The mobile service revenues trends are remarkably similar to those in the enterprise and wholesale space. The graph above also shows the rationale for the T-Mobile/Sprint merger in terms of size as well as the impact of T-Mobile’s aggressive pricing strategy. All these trends are in the context of the insatiable increase in bandwidth traffic, as illustrated by the IP figures from Cisco below.

click to enlarge

This report from 2017 by Oliver Wyman is one of the better ones and contains some illuminating context for the 5G era. It shows that in Europe despite a 40% annual increase in mobile subscribers and a 36% annual increase in European IP traffic from 2006 to 2016, mobile service revenue and total telecom service revenue decreased by 22% and 19% respectively, as per the graphic below.

click to enlarge

The Oliver Wyman report concludes as follows:

“In the next five to ten years, demand in fixed-line broadband bandwidth will grow exponentially, leading to speeds that can only be supplied by FTTH/B. Mobile broadband demand will follow in parallel. Virtual reality is the “killer app” that will drive massive demand. Mobile broadband supply will begin to reach its limits, with spectral efficiency gains and additional attractive spectrum in the current bands not growing as fast as they have in the past. High-frequency beam technology in 5G will be radically new and will be able to meet future demand. At the same time, however, it will create massive mobile backhaul demand. The outcome is likely to shake the industry, leading not only to a new balance of power between mobile-only and integrated/fixed-line operators, but also to new potential revenue growth for the first time in many years.”

Another interesting graphic from the report, as below, is the historical and projected broadband usage.

click to enlarge

This 2017 report from Deloitte argues that “5G, across both the core and radio access network, stands to have a potentially greater impact on the overall ecosystem than any previous wireless generation”. Deloitte sees a “convergence of supply between wireline and wireless broadband, as almost all devices become connected over short-range wireless”. Deloitte concludes that “with an increasingly converged ecosystem of network and content players, an increasingly software-managed and defined physical networking space, and the demands and needs of consumers becoming complex enough that they no longer can manage individually, 5G and its associated technologies may have the power to reset the wireless landscape”.

This paper from an Infinera executive called Jon Baldry highlights the need for “improvements to the overall network infrastructure in terms of performance, features and bandwidth” to support 5G “using software-defined networking (SDN) control and network functions virtualization (NFV) will play a major role in the optimization of the network”. I came across an interesting claim that SDN and network virtualisation can reduce opex and capex by 63% and 68% respectively compared to traditional telecom networking. Baldry concludes that “these improvements will drive new fiber builds, and fiber upgrades to an ever-growing number of cell sites, creating significant opportunity for cable MSOs and other wholesale operators to capture significant share of cell backhaul and fronthaul services for 4G and 5G mobile networks”.

Whether all these investments and resulting new networks will halt the declining revenue trend for the telecom sector or merely provide a survival avenue for certain telecoms is something I have yet to be convinced about. One thing seems certain however and that is that tradition telecom models will change beyond recognition in the forthcoming 5G era.

Telecoms’ troubles

The telecom industry is in a funk. S&P recently said that their “global 2017 base-case forecast is for flat revenues” and other analysts are predicting little growth in traditional telecom’s top line over the coming years across most developed markets. This recent post shows that wireless revenue by the largest US firms has basically flatlined with growth of only 1% from 2015 to 2016. Cord cutting in favour of wireless has long been a feature of incumbent wireline firms but now wireless carrier’s lunch is increasingly being eaten by disruptive new players such as Facebook’s messenger, Apple’s FaceTime, Googles’ Hangouts, Skype, Tencent’s QQ or WeChat, and WhatsApp. These competitors are called over the top (OTT) providers and they use IP networks to provide communications (e.g. voice & SMS), content (e.g. video) and cloud-based (e.g. compute and storage) offerings. The telecom industry is walking a fine line between enabling these competitors whilst protecting their traditional businesses.

The graph below from a recent TeleGeography report provides an illustration of what has happened in the international long-distance business.

click to enlarge

A recent McKinsey article predicts that in an aggressive scenario the share of messaging, fixed voice, and mobile voice revenue provided by OTT players could be within the ranges as per the graph below by 2018.

click to enlarge

Before the rapid rise of the OTT player, it was expected that telecoms could recover the loss of revenue from traditional services through increased data traffic over IP networks. Global IP traffic has exploded from 26 exabytes per annum in 2005 to 1.2 zettabytes in 2016 and is projected to grow, by the latest Cisco estimates here, at a CAGR of 24% to 2012. See this previous post on the ever-expanding metrics used for IP traffic (for reference, gigabyte/terabyte/petabyte/exabyte/zettabyte/yottabyte is a kilobyte to the power of 3, 4, 5, 6, 7 and 8 respectively).

According to the 2017 OTT Video Services Study conducted by Level 3 Communications, viewership of OTT video services, including Netflix, Hulu and Amazon Prime, will overtake traditional broadcast TV within the next five years, impacting cable firms and traditional telecom’s TV services alike. With OTT players eating telecom’s lunch, Ovum estimate a drop in spending on traditional communication services by a third over the next ten years.

Telecom and cable operators have long complained of unfair treatment given their investments in upgrading networks to handle the vast increase in data created by the very OTT players that are cannibalizing their revenue. For example, Netflix is estimated to consume as much as a third of total network bandwidth in the U.S. during peak times. Notwithstanding their growth, it’s important to see these OTT players as customers of the traditional telecoms as well as competitors and increasingly telecoms are coming to understand that they need to change and digitalise their business models to embrace new opportunities. The graphic below, not to scale, on changing usage trends illustrates the changing demands for telecoms as we enter the so called “digital lifestyle era”.

click to enlarge

The hype around the internet of things (IoT) is getting deafening. Just last week, IDC predicted that “by 2021, global IoT spending is expected to total nearly $1.4 trillion as organizations continue to invest in the hardware, software, services, and connectivity that enable the IoT”.

Bain & Co argue strongly in this article in February that telecoms, particularly those who have taken digital transformation seriously in their own operating models, are “uniquely qualified to facilitate the delivery of IoT solutions”. The reasons cited include their experience of delivering scale connectivity solutions, of managing extensive directories and the life cycles of millions of devices, and their strong position developing and managing analytics at the edge of the network across a range of industries and uses.

Upgrading network to 5G is seen as being necessary to enable the IoT age and the hype around 5G has increased along with the IoT hype and the growth in the smartphone ecosystem. But 5G is in a development stage and technological standards need to be finalised. S&P commented that “we don’t expect large scale commercial 5G rollout until 2020”.

So what can telecoms do in the interim about declining fundamentals? The answer is for telecoms to rationalise and digitalize their business. A recent McKinsey IT benchmarking study of 80 telecom companies worldwide found that top performers had removed redundant platforms, automated core processes, and consolidated overlapping capabilities. New technologies such as software-defined networks (SDN) and network-function virtualization (NFV) mean telecoms can radically reshape their operating models. Analytics can be used to determine smarter capital spending, machine learning can be used to increase efficiency and avoid overloads, back offices can be automated, and customer support can be digitalized. This McKinsey article claims that mobile operators could double their operating cashflow through digital transformation.

However, not all telecoms are made the same and some do not have a culture that readily embraces transformation. McKinsey say that “experience shows that telcoms have historically only found success in transversal products (for example, security, IoT, and cloud services for regional small and medium-size segments)” and that in other areas, “telcoms have developed great ideas but have failed to successfully execute them”.

Another article from Bain & Co argues that only “one out of eight providers could be considered capital effective, meaning that they have gained at least 1 percentage point of market share each year over the past five years without having spent significantly more than their fair share of capital to do so”. As can be seen below, the rest of the sector is either caught in an efficiency trap (e.g. spent less capital than competitors but not gaining market share) or are just wasteful wit their capex spend.

click to enlarge

So, although there are many challenges for this sector, there is also many opportunities. As with every enterprise in this digital age, it will be those firms who can execute at scale that will likely to be the big winners. Pure telecommunications companies could become extinct or so radically altered in focus and diversity of operations that telecoms as a term may be redundant. Content production could be mixed with delivery to make joint content communication giants. Or IT services such as security, cloud services, analytics, automation and machine learning could be combined with next generation intelligent networks. Who knows! One thing is for sure though, the successful firms will be the ones with management teams that can execute a clear strategy profitably in a fast changing competitive sector.