Tag Archives: T-Mobile

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.

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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.

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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.

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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.

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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.

Warring Wireless

The M&A permutations being talked about in the US telecom sector are fascinating. The AT&T/Time Warner deal has commentators frothing at the mouth about possible tie-ups, particularly given the laissez faire attitude to regulation of the new FCC Chairman, Ajit Pai. Names such as DISH, Comcast, Disney, Netflix, SiriusXM, Charter are regularly tied to the big telcos and/or each other in the speculation.

Existing wireless revenues from AT&T and Verizon have plateaued and are now starting to decrease due to cut throat competition on unlimited plans from T-Mobile and Sprint, as the graph below shows.

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The T-Mobile/Sprint merger is now been talked about again, after the year long FCC spectrum moratorium on competitors talking has passed. The current bidding frenzy between AT&T and Verizon over Straight Path’s millimetre wave frequencies that can be used to carry large amounts of data over short distances has brought the hype over 5G services to a new high. Verizon’s purchase of XO last year enabled them to lease XO’s 102 LMDS licenses in the 28 GHz and 39 GHz bands so it is somewhat surprising to see them be so aggressive in bidding for Straight Path.

The analyst Craig Moffett believes that the winning bidder for Straight Path will have significant leverage with the FCC in determining how these wave frequencies are repackaged for use by competitors. Although wireless margins are not under significant pressure, as the graph below shows, it is obvious that there is now a full scale war for control of the wavelengths that will be critical to 5G services in the search for new revenues. T-Mobile and DISH are also holders of high frequency wavelengths been touted as suitable for 5G.

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The fascinating thing about the frenzy over Straight Path is that the hype over high frequencies such as the 39 GHz band is not new. The reason such spectrum has gone largely unused in the past is that it has been historically difficult to create reliable, secure, mobile connections in those bands. Variable weather conditions, often something as common as a rainy day, can impact coverage in high frequencies. I wonder what’s changed?

European Telecom Frenzy

After many years of forecasted telecom consolidation in Europe, the recent uptick in M&A activity in the European communications sector is turning into frenzy. The catalyst includes European regulator’s agreement to allowing consolidation from four to three operators in mobile markets in Germany, Ireland and Austria. Declining mobile revenues & ARPU, the capital expense required to upgrade networks to 4G and buy spectrum, and the popularity of the quad play (bundled mobile and fixed telephone, broadband & TV) in certain markets are other catalysts. The graph below from the Wall Street Journal highlights the trends in the European mobile market.

click to enlargeEuropean Mobile Telcom Revenues

BT is a central player in the frenzy and reported to be looking at accelerating its mobile strategy by purchasing either EE (owned jointly by Orange and T-Mobile) or O2 (owned by Telefonica) in the UK. Vodafone will need to respond to such a development and is reported to be assessing a bid for Liberty Global. Hutchison Whampoa, owner of mobile provider Three, is also reported to be considering its options. Sky and TalkTalk are talked about as possible targets in the UK.

The list of recent deals is long. O2 and KPN’s E-Plus merged in Germany. Vodafone purchased Ono in Spain and Kabel Deutschland in Germany with its Verizon booty. Liberty Global recently completed its acquisition of Ziggo in the Netherlands. Altice, owner of cable operator Numericable, bought SFR in France and, in Portugal, it’s just announced a deal for the Portuguese assets of Portugal Telecom from Brazil’s Oi. Hutchison Whampoa bought Orange in Austria and O2 in Ireland. France’s Orange is buying Jazztel in Spain.

The attraction of combining mobile traffic with fixed assets is highlighted by the growth in data traffic over connected devices like smart-phones as an exhibit from the Ericsson Mobility report below shows.

click to enlargeGlobal mobile data traffic 2010 to Q3 2014

A recent article from the FT speculated on other combinations in the European telecom sector. France’s Iliad, who made an audacious yet unsuccessful bid for T-Mobile in the US, may have another crack at Bouygues Telecom (maybe with SFR-Numericable taking some assets). In Italy, Hutchison Whampoa, owner of 3 Italia, may have a go at the debt heavy Wind, although the part ownership by the Russian Vimplecom may be an issue.

I haven’t taken an active (or economic) interest in the sector in Europe since Virgin Media came out of Chapter 11 and was subsequently bought out by Liberty Global a few years later. Although I have looked at Liberty Global a few times since, I couldn’t get over the valuation at the time or the massive goodwill/intangible items from its acquisitive history (currently over 40% of total assets). Liberty’s debt load of over 4.5 times EBITDA is scary but not overtly so given its strong cash-flow. At a current enterprise value (EV) to EBITDA multiple of 9.5, a merger with Vodafone would not be cheap (which currently trades around a 7.6 EV/EBITDA multiple with a lower net debt to EBITDA ratio of less than 2.5). A Vodafone/Liberty merger would be a fascinating test for European regulators as such a match-up would have been unthinkable just a few quarters ago.

The only European telecom firm that I have kept up with is the disappointing COLT (who I posted on here and here). COLT may get caught up in the merger frenzy as a target. I suspect majority owner Fidelity is looking to exit whilst maximising its value (or minimising its loss is more accurate in this case). COLT recently bought the Japanese operator KVH (who also had Fidelity as an owner). I updated my projections, as below, but given that COLT will likely spend most of its cash pile on the KVH acquisition and integration, the medium term operational outlook for COLT looks uninspiring. COLT does have a €150 million debt facility which is more than enough to get it to free cash-flow (I estimate that will not be until 2017 with KVH integration costs), unless of course it goes shopping!

click to enlargeCOLT Telecom Revenue & EBITDA Margin 2006 to 2016 incl forecast

So overall, the European sector is getting really interesting and, although I can’t see any obvious way to play it that excites me, it will be fascinating to watch from the side-lines.