A Big 5G Investment Cycle? Don't Hold Your Breath

Mike Dano
5/23/2019

Some of the world's first real 5G networks are coming online this year, sparking plenty of buzz and noise. However, a wide range of industry experts are cautioning that North American wireless network operators don't appear poised to invest in 5G networks like they did with 3G and 4G.

"We’re negative on the prospects for a 5G investment 'cycle' from wireless operators -- at least over the near- and intermediate-term," wrote the Wall Street analysts at Jefferies Research. "Based on our analysis, we believe that the conditions for an acceptable return on investment (ROI) on 5G infrastructure are poor. Moreover, the 5G investment ROI looks drastically lower than the ROI associated with prior wireless investment cycles -- specifically 3G and 4G."

Why? It all comes down to flagging revenues in a saturated market. "The wireless service market is now a mature business," the analysts continued. "As such, operators’ motivations for major capital investments will be reduced. To be clear, we still believe that 5G infrastructure deployment will happen. We expect that it will simply be a cutover of existing 4G investments to 5G technology. Most importantly, we don’t expect the overall capex spending pie will grow as a result of 5G technology availability. In order to grow the overall wireless market (and therefore capex budgets), the market requires new 5G-specific applications that will enable new revenue streams and ARPU growth -- we’re just not seeing them yet."

Source: Jefferies
Source: Jefferies

The Jefferies analysts argued that vendors like Ericsson and Nokia have been turning up the volume on their 5G marketing -- actions that have dovetailed with operators' own 5G marketing efforts -- thus creating over-inflated expectations. "We think that -- to a great degree -- investors have been caught in the middle of these marketing heavyweights," the analysts wrote. "As such, we believe Wall Street views are too positive on the notion of a 5G investment 'cycle' -- i.e. where the size of the overall investment pie grows materially."

Recent comments from AT&T's CEO largely support this view.

"We're expecting our capital spending rate to come down," explained Randall Stephenson at a recent investor conference. He said AT&T's total capex budget ought to hit $23 billion this year, but could decline as the operator puts the finishing touches on its LTE buildout in Mexico, its transition to software-defined networking, its government-mandated fiber buildouts, and its so-called "one touch" wireless network upgrades.

As a result, "I'm actually quite optimistic that over the next couple of years capital spending actually works its way down," Stephenson said.

Others agreed that there aren't any clear drivers for an increase in operator 5G capex. "What are the applications that are going to drive the investments?" asked Alex Gellman, the CEO of Vertical Bridge, the largest privately held tower company in the US. "There's really nothing yet that you can hang your hat on for a business case."

In comments at the recent Connect (X) trade show, Gellman argued that operators don't yet have a clear way to raise revenues in 5G, given that they already offer unlimited data plans. However, he suggested that network slicing technology, whereby operators could charge extra for some type of premium product, could pave the way for operators to squeeze more money from their customers.

"We're so early," added Jay Brown, CEO of Crown Castle, one of the nation's three main tower companies. "We're not seeing, in any meaningful way, a deployment of 5G."

It's also important to note that some hold contrasting views. For example, research firm Dell’Oro Group recently forecast that global telecom capex growth will outpace operator revenue growth over the next three years, reflecting operators' increased focus on rolling out 5G.

“While the relationship between capex/revenue will likely remain strong over time and constrained operator revenue growth will be one of the primary inhibitors of further telecom capex acceleration, we remain optimistic that there will be some deviation in the short-term to accommodate the rollout of 5G,” Dell’Oro's Stefan Pongratz said in a statement. “And with the preliminary 5G capex guidance coming in stronger than expected, there is a lot of excitement right now about the potential 5G capex ramp."

The Wall Street analysts at MoffettNathanson predicted that total capital spending across the US telecom and cable landscape will rise 3.3% year-over-year in 2019, to $71.5 billion. However, the firm said that capex spending will slow to 2.4% in 2020 (to $69.8 billion), and then to just 2% in 2022 (to $66.8 billion).

"We believe significantly higher spending -- which would certainly be required for a meaningful millimeter-wave 5G build -- will await either a more credible business case (still some years away, in our view) or more economically viable mid-band spectrum bands," the analysts wrote.

The big question, though, is whether 5G spending will change in the long term, across the next five to 10 years -- and what might drive such a change.

"We're just at the beginnings of 5G," said Steve Vondran, president of US tower company American Tower, adding that he expects the migration to 5G to follow the same path that the industry took to 4G.

The analysts at Jefferies acknowledged that operators could significantly raise their 5G spending beyond 2022. "This analysis is focused on the near- and intermediate-term. That’s 2+ years in our view. During that time, we believe that the business case that supports existing 4G investment levels will stay the same," they wrote. "Beyond our time horizon, it’s possible that new applications will start to improve the wireless operator economics. Under that scenario, we could envision the market size -- in capex terms -- getting bigger."

For example, 5G operators could eventually run into the "iPhone effect." Prior to the iPhone and other smartphones, operators didn't see much demand for their 4G networks. But as high-powered, touchscreen smartphones became increasingly popular, network traffic rose at such a precipitous pace that operators had to respond with major network investments in order to keep pace with user demands. The result was a boon for tower companies, network equipment vendors and other wireless suppliers.

Already operators are hoping for a similar "iPhone effect" on 5G. At the Connect (X) show, T-Mobile CTO Neville Ray said that he expects real-time augmented reality (AR) to drive demand for 5G networks. He said that, at some point in the future, glasses, phones and other AR-capable devices will be able to display real-time information about all kinds of nearby objects and people -- like batting averages displayed above a designated hitter at a baseball game or social media updates preceding the appearance of an acquaintance at a coffee shop.

"There are going to be a thousand things like that in this space… This is the next era of the Internet," Ray predicted, adding that it could take five to seven years. "Believe me guys, it's going to happen."

Others concurred. "In order for the 5G catalyst to materialize, the carriers will need to see these new use cases and incremental revenue opportunities actually accrue to them, and improve their top-line trajectories," wrote the Wall Street analysts at Deutsche Bank Research.

Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano

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Mike Dano
Mike Dano
5/24/2019 | 9:41:16 AM
Re: Dell'Oro's (missing) numbers
Yup. That’s the free version. Though I will say Dell Oro is widely cited by the vendors.
James_B_Crawshaw
James_B_Crawshaw
5/24/2019 | 5:23:59 AM
Dell'Oro's (missing) numbers
Interesting chart from Dell'Oro. Did they really publish it like that with no vertical scale or numbers?