Data traffic growth or decline – there's no upside for telecom

A fiery debate has erupted in the halls of telecom about traffic – the gigabyte rather than vehicular variety. On one side are the mountaineers, who argue data volumes will continue to climb as usage grows and more advanced applications take off. On the other are the dissenting levelers. Led by William Webb, an independent consultant and former Ofcom executive who has written several books on the topic, they foresee a plateauing of consumption as smartphone customers struggle to cram more gigabytes into the day. The levelers are heartened by some evidence of a recent slowdown in growth.

The implications of continued growth would seem to be very different from those of an S-curve flattening. Telcos often grumble about the heavier burden they must bear each year, using words like "exponential" to scare onlookers. Equipment vendors, conversely, seem to love it. More data usage equals more demand from telcos for the gigabyte-transporting products they sell. The telco and vendor positions are entirely consistent with each other.

An S-curve flattening of the kind Webb predicted years ago would naturally seem to ease that gigabyte burden for telcos. Rather than spending money on capacity upgrades, operators could reduce capital intensity (expenditure as a percentage of sales), invest elsewhere or pay out juicier dividends. But for the likes of Ericsson and Nokia, it obviously sounds bleak. After the initial buildout of network coverage, vendors rely on capacity upgrades for their profits.

The worst slump in years

The reality seems complicated and nuanced. What's clear, though, is that telco spending on radio access network (RAN) infrastructure, the part that gobbles the biggest share of capex, has dropped in the last couple of years – and dropped sharply. Last year, the amount fell 11%, to about $40 billion, according to Light Reading sister company Omdia. For 2024, Omdia predicts another decline of between 7% and 9%.

One factor is a previous build-up of stock in the warehouses of North American telcos. Instead of shopping for new products, they have simply dipped into existing supplies. Growth rates also appear to have slowed. The graphic used in Ericsson's latest mobility report pictures this very clearly, showing a church steeple of a traffic spike in 2019 and 2020 before a shallower downward-sloping gradient to the first half of 2024.

Webb has long surmised that an S-curve plateau will be reached in 2027, and his forecasts have been unerringly accurate so far. But it is probably too early to say Ericsson's data offers conclusive proof that usage will eventually do an adolescent and stop growing. After all, percentage growth rates naturally decline when they measure the same actual change against a much bigger number. Growth of one exabyte is a doubling if there was only a single exabyte the year before. On top of 100 exabytes, it is, of course, just a 1% gain.

To illustrate this effect with real data, consider Ericsson's latest numbers, handily available through its mobility visualizer tool. It shows the monthly volume of worldwide mobile data rose by just 4.34% in the second quarter of 2024, compared with the first. This is much lower than the rate of 10.76% Ericsson observed in the corresponding quarter four years earlier. But the actual increase in 2024 was 6.27 exabytes. In 2020, it was 4.86.

Naturally, if the percentage changes keep falling, usage will eventually plateau. But there are reasons to think growth might continue, even if high-definition video remains the hungriest application a network will ever have to support, as Webb seems to posit. In a thought-provoking response to Webb's thesis, Stefan Zehle, the CEO of Coleago Consulting, draws attention to the extreme divergence in consumption levels between otherwise similar countries. Finland saw monthly usage hit 74 gigabytes per capita between January and June this year, he says. Germany appears to be at just one tenth that amount.

"Given that Finland and Germany are economically similar, what might cause this difference?" asks Zehle in his blog. The answer, he thinks, is the pricing of services. In Finland, tariffs are largely based on connection speed and Elisa, the biggest operator, offers a no-usage-limits service. German operators, by contrast, charge for buckets of data. "It is unreasonable to assume that there is no price elasticity of demand," said Zehle. "Surely, if prices in Germany were like those in Finland, monthly mobile data usage per customer would be much higher."

Surviving the avalanche

Unfortunately, however, RAN product revenues have been falling at their sharpest rate in many years despite the 6.27-exabyte increase in monthly data volumes that happened in the second quarter. There are no signs today's 4G and 5G networks are about to keel over beneath an avalanche of data. And whether networks are sufficiently robust to cope with many more exabytes, or telcos simply do not care about any service problems caused by congestion, telcos are not spending as much as they once did.

There is also no obvious correlation between traffic growth and expenditure. Spain's Telefónica supported 17,054 petabytes of data on its global networks in 2015, its annual reports show. By 2023, the amount had rocketed to 146,074. Yet its capital intensity has fallen from more than 17% to just 14% over this period. Energy use, a proxy for operating costs, is also down, dropping from about 6,578 gigawatt hours in 2015 to 6,012 last year. Despite all that data consumption by its customers, Elisa's capital intensity last year was less than 15%.

Either way, telcos seem to be no better off. Even if a lower rate of data growth does relieve some of the pressure on networks, expenditure seems mainly determined by other factors. The much bigger problem is the difficulty of making data pay. All-you-can-eat tariffs are less risky because a fall in growth rates cannot directly hurt sales. But the German experience suggests customers would simply cut usage if telcos tried to be more aggressive about charging by the gigabyte.

What's more, monthly average revenue per user (ARPU) for a postpaid customer of Deutsche Telekom, Germany's biggest telco, has fallen from €22 (US$23.7) before the launch of 5G to about €20 ($21.6) for the most recent quarter. At Elisa, with its seemingly more generous data allowances, postpaid monthly ARPU has risen from €19.3 ($20.8) to €23.2 ($25) over roughly the same period.

The cost realities are especially awkward for Europe's telcos, which have refused to give up their "fair share" argument that big content companies should pay for network usage because of all the traffic they supposedly generate. Wrong, say critics: The telco's own customers are the traffic generators, and they have already paid for it, even if pricing schemes do not help telcos to grow their sales. Gigabytes, it seems, have turned out to be not such a big deal.