The telecom industry looks rotten to the core

These are dark times for the telecom sector – as cheerless as this correspondent has witnessed since he arrived on the industry scene (not as a reporter) nearly 25 years ago.

To all but diehards, the 5G standard that was supposed to unlock opportunities has failed to make telcos fitter and happier, leaving them winded by rollout costs without the endorphins of new growth. Big operators tracked by this site have hemorrhaged about 384,000 jobs since 2015, when yours truly joined Light Reading. Given impetus by AI, the carnage continues, spilling into the vendor community as well. Ericsson and Nokia are cutting up to 22,500 jobs between them.

Nobody has a good answer. Having watched customers slash investments this year, the Nordic vendors say telcos will eventually be "forced" to spend on reinforcing their networks or drown in a torrent of gigabytes. This is about as upbeat a sales message as Pfizer telling sick people they must buy its vaccines to survive. Operators don't want merely to linger in poor health, gradually amputating diseased parts. That condition would obviously not be in the long-term interest of their suppliers, either. But connectivity revenues in saturated, uber-competitive markets are under pressure. And the "beyond connectivity" pitch sounds increasingly desperate.

EE's big diversification plan is to sell fridges and coffee machines. If that seems like a joke, it was the headline of a Financial Times story (subscription required) published this week as the UK operator, a part of BT Group, announced efforts to sell various retail products through a revamped online store, alongside the phone subscriptions it already provides. James Crawshaw, a principal analyst with Omdia, was unrestrained in criticisms published on LinkedIn.

"Why not try consumer electronics retailing? That seems like a highly profitable market with limited competition. NOT," he wrote. "This has to rank as the dumbest idea I have seen in telecom ever. And I've seen a few." While others were less derogatory, it is hard to imagine consumers preferring a telco to Amazon – currently able to bundle in TV services and free parcel delivery for the unprincely sum of £7.92 (US$9.62) a month – as a general shopfront.

API campers

Unfortunately, other ideas are not much better. Right now, much of the industry is captivated by application programming interfaces (APIs), the joinery between software developers and untapped features of the 5G network. The idea is that developers pay for access to those APIs and write snazzy 5G applications, proving the generation now entering middle age was worth it after all. But even some telco executives doubt if developers will share Ericsson's enthusiasm for the value of these APIs. The Swedish firm last year spent $6.6 billion on Vonage, positioning it as a network APIs platform, and this year wrote down its investment by nearly $3 billion. Ouch.

Outside telecom, sadly, these features don't sound very interesting on a planet where AI can now write your college dissertation. The most trumpeted is quality-of-service, which, er, supports better-quality connections, something 5G was supposed to do anyway. Others can be used to pinpoint location even more accurately than GPS. A generative AI-type breakthrough this is not.

Ericsson's investors may be asking two questions this week. First, if Vonage has given Ericsson a headstart in network APIs, as bosses insist, then why does Ericsson CEO Börje Ekholm expect revenues to be just "tens of millions of kronor" this year and not "meaningful" until 2025? Analysts cited by Ericsson estimate revenues from network APIs will total $3.1 billion next year, rising to about $20 billion in 2028.

Second, and considering those meager revenues, why did Ericsson need to splurge $6.6 billion on Vonage at all? Rival Nokia has already signed four telco agreements regarding its own "network as code" platform, designed to help developers and service providers "accelerate the use and monetization of 5G and 4G assets through network APIs," in the words of CEO Pekka Lundmark. It apparently did not require a $6.6 billion takeover or $3 billion impairment charge to make progress.

Deeper malaise

While telcos hunt for the scraps that have fallen off Big Tech's table, vendors and their investors are feeling nervous. Ericsson's share price has dropped 9% since it published results on Tuesday and is lower than it was nearly seven years ago, when Ekholm became CEO. Nokia's stock was down 5% at the time of writing. Earlier today, the Finnish vendor said it would cut up to 14,000 jobs by the end of 2026 to safeguard profitability. After a difficult few months, the fear is that a malaise will extend deep into next year.

Analysts have contrasting views on the immediate outlook. Dell'Oro in October forecast a 7% drop in capital expenditure by telecom operators worldwide between 2022 and 2025 and said next year would "remain challenging." But Omdia, a sister company to Light Reading, is more positive. After falling by 0.8% this year, capex on mobile networks will grow 1.4% in 2024, it says. Overall investments by communications service providers are expected to be flat this year before rising 4.2% in 2024, although Omdia thinks much of the increase will be driven by technology players.

Despite talk of APIs and telco-delivered fridges, numerous European telcos have apparently decided their best hope for additional revenues is redistribution of wealth – Big Tech wealth, specifically. Derided as "large traffic generators," the most famous Internet companies are seen no longer as the reason consumers buy a telco broadband service but as vile and exploitative despots. Hence Leninist-sounding calls for them to contribute a "fair share" to the networks they supposedly ride to exhaustion.

Problematically, fair-share champions have not been able to establish a strong link between traffic growth and cost. And the headline figures don't help. Between 2017 and 2022, for instance, Telefónica's capital intensity (capex as a percentage of revenues) dropped from 17% to 15%, while its annual operating costs fell by €8.7 billion ($9.2 billion). All that was despite a 353% surge in the volume of annual petabytes carried on Telefónica's networks.

Omdia's forecast won't help, either. Across fixed and mobile telcos worldwide, capital intensity is expected to fall from 18% last year to 16.3% in 2028. This is over a period when a lower-cost version of Apple's Vision Pro could land on networks, when more advanced "standalone" 5G takes off, when AI potentially goes ballistic. Operators will eventually have to reinvest. But unless the EE fridge, the Ericsson API or fair share proves a hit, big telco spenders may remain in short supply.