Telcos love to sing the praises of 5G technology, but ask them how much it will cost, and whether it will make any money, and they often clam up like a choirboy with stage fright.
But now Japan's NTT DoCoMo Inc. (NYSE: DCM), one of the world's 5G pioneers, has revealed exactly what sort of financial impact it expects 5G rollout to have on its business in the next five years. And the answer seems to be… not much (in the overall scheme of things).
In an earnings presentation published earlier today, the operator said it would invest about 1 trillion Japanese yen (US$8.9 billion) in 5G deployment between 2019 and 2023. That sounds like a huge sum until you recall that NTT DoCoMo spent ¥576.4 billion ($5.1 billion) in its last fiscal year (ending in March).
The 5G spending forecast works out at just ¥200 ($1.8 billion) annually over a five-year period. That does not mean austerity beckons, of course, because NTT DoCoMo invests capital expenditure in lots of other areas. Commenting on Twitter, Analysys Mason senior analyst Rémy Pascal says the ¥1 trillion ($8.9 billion) figure "will not be linear but roughly one third of their capex over the period."
In other words, it will spend about ¥3 trillion ($26.6 billion) over this period, or about ¥600 billion ($5.3 billion) annually. That would be only a 4% increase on its total spending levels in the most recent fiscal year.
To anyone tracking this market, the projection is not such a big surprise. In fact, at this year's Mobile World Congress event in Barcelona, Seizo Onoe, NTT DoCoMo's chief technology architect, had pointed out that capex has been on a downward trajectory since 2001, when it peaked at nearly ¥1 trillion ($8.9 billion). "We can continue this trend," he said during a presentation by the Next Generation Mobile Networks (NGMN) Alliance. (See NTT DoCoMo: Capex to Fall With 5G Rollout.)
That sounds like great news for cash-strapped operators desperate to fatten margins, but no so good for profit-starved vendors counting on 5G for a sales boost.
No doubt, NTT DoCoMo's overall mobile investments will increase with 5G rollout, while spending in some other areas seems likely to fall. Nevertheless, forecasts from vendors and third parties are not exactly thrilling. Dell'Oro, a market research company that Sweden's Ericsson AB (Nasdaq: ERIC) cites in its earnings reports, expects overall sales of radio access networks to rise at a compound annual growth rate (CAGR) of just 2% between 2017 and 2022. Finland's Nokia Corp. (NYSE: NOK), which deals in both fixed and mobile networks, reckons its main addressable market will grow at a CAGR of about 1% over roughly the same period. (See Nokia Warns of Job Cuts in €700M Shake-Up, Nokia's Enterprise Push Is Adding €180M in Annual Sales, Have We Reached Peak Ericsson? and Ericsson Corruption Scandal Sullies Strong Q3.)
But it seems 5G might not do much for telco profits, either -- or, at least, not for NTT DoCoMo's. The Japanese operator expects operating profits to fall after the launch of commercial 5G services in spring 2020. It did not indicate how sharp this drop will be in today's presentation, and it does think profits will start to recover in the early 2020s. Yet it forecasts an operating profit of just ¥990 billion ($8.8 billion) in the 2023 fiscal year. That is only 2% more than NTT DoCoMo made in its last fiscal year and the same amount it expects to generate in the current one.
On a more encouraging note, NTT DoCoMo is anticipating revenues of about ¥5 trillion ($44.3 billion) in 2021, an increase of nearly 5% on sales in the last fiscal year. According to Bloomberg, however, the forecast for operating profit in 2023 is about 2.3% less than the average analyst estimate for the current fiscal year.
Of course, from a telco perspective, nobody seriously expects 5G in its mobile broadband outfit to spur revenue growth. It is, however, supposed to a be a lot more cost-efficient than 4G technology. The extent to which this cost efficiency might ultimately buoy telco profits, given all the other moving parts in the telco organization, continues to remain unclear after NTT DoCoMo's latest update.
The other slight concern in the Japanese case is that NTT DoCoMo claims to be quite far advanced in its trials of 5G outside the mobile broadband sector. Indeed, it talked up several potential "use cases" at last week's Broadband World Forum in Berlin, including applications aimed at the automotive and healthcare industries, as well as factory automation. It is these markets on which telcos are banking for a sales boost from 5G technology.
NTT DoCoMo's guidance offers little hope these opportunities will make a big difference in the next few years. And if such an adventurous telco sees limited impact before the mid-2020s, then other service providers may have to wait even longer.
— Iain Morris, International Editor, Light Reading