I blogged yesterday about the general impact scenarios for COVID-19. Today I want to look at some more network-specific points, in particular the general impact on network capacity and the capex response and the impact on 5G planning. It’s easy to say that network operators, faced with significant traffic growth, will respond with massive capital plans, but we all know that bits don’t push capex upward, only revenues do that.
In the scenarios I outlined yesterday, service providers were likely to respond to COVID at the two-month-shutdown scenario. Traffic increases would create a competitive churn risk, and so the impact would be greatest in the areas where competition was greatest. The impact, however, is most likely to be one of accelerating the current 2020 budget spending rather than augmenting it, because there is still little indication that buyers are willing to spend more for broadband.
If the shutdown period lasts longer than 2 months, it’s likely to put more and more cost pressure on consumers and businesses alike. Consumers would then start looking for cheaper services, first for mobile broadband, then TV, and then wireline broadband. The result of this would be a gain in customers for those operators who have naturally favorable cost positions, but overall a price war that would eventually result in a dip in industry revenues. That dip would almost surely prevent any incremental budget improvements for 2020 at least, and likely make 2021 budgets more conservative.
In the long term, consumer spending on home broadband will be under pressure, with cable providers forced to change plans to allow lower entry prices, or to drop TV in favor of streaming support. It’s not likely that any home broadband provider will be increasing customer bandwidth through infrastructure investment; there is no long-term indication that willingness to pay will rise even when COVID is controlled, and if it’s not, household incomes would not support paying more.
On the business side, a shutdown at the two-month point would certainly ignite another review of network service spending. How this would impact specific services is harder to say, because it would depend on the nature of the businesses and how they used their branch locations. If businesses were required to work from home even in non-retail situations, branch offices would then be empty, and the cost of networking them would be difficult to sustain unless there was a clear end to the shutdown in sight. In that situation, businesses would likely ask operators for contract relief, and any who had renewals in process would almost surely rethink their strategies.
This could eventually produce a major uptick for SD-WAN services, particularly in MSP form. Businesses would be much more likely to embark on an SD-WAN VPN adventure that didn’t involve purchase/licensing, favoring a service approach in general, and in particular one with a fairly short contract period. Remember the branches are presumed empty here. SD-WAN providers, then, should be thinking about this scenario when they plan their 2020 sales/marketing activities.
Collaborative tools are already benefitting from the WFH pressure of the virus, but don’t expect to see a huge and long-lasting boom. The reason is that traditional collaborative tools aren’t really optimized for a WFH model. Some of the collaborative players have been telling me for years that the majority of their users are working from office locations, and using web conferences or collaborative video meetings just to avoid travel. These are actually mobile workers in most cases, and they make up only about 8% of the workforce overall.
It’s likely that at around the two-month point in a shutdown, collaborative vendors would start thinking about a WFH-tuned model of collaboration, and initiate a product plan to address it. The opportunity is most likely to emerge in as-a-service form, meaning a version of web meeting or conferencing, rather than as a product, because users would be unlikely to accept a license/purchase track to getting the capability.
The complicating factor here is the duration of the shutdown. Up to about the three or four-month point, businesses are likely to believe that normal business behavior will be reestablished shortly after the virus situation resolves. Beyond that, the problem is that layoffs likely would be anticipating a long-term decline in revenues, and there’s no need for a laid off employee to work from home.
Overall, it appears that as long as the virus is contained within 3-4 months, network spending at the service provider level could be sustained in the long term and even grow in the short term. Beyond that, things become difficult to predict.
5G impact of the virus is difficult to predict from the start. There are two forms of 5G to consider—the mobile 5G and 5G millimeter-wave 5G/FTTN hybrids. Each has its own issues and opportunities.
For the 5G mobile space, the problem is that consumers have to get a 5G phone to take advantage of the service, and that means spending more money, unless someone subsidizes 5G smartphones to the point where they’re zero cost. For that to happen, operators would have to believe that there was incremental revenue for 5G service. Verizon in the US charges more for 5G, but it’s far from certain they’d be able to sustain this position in a competitive market even without the impact of the virus on consumer willingness to pay.
If 5G does gain any mobile traction, it seems certain that it will be in the NSA (non-standalone) form, mixing 5G New Radio with LTE IMS and EPC. 5G Core doesn’t seem likely to deploy in a pandemic world, for lack of a convincing revenue upside to justify the cost. Again, I’m sure that 5G proponents can identify things you could do with 5G in a pandemic, but that’s not the question. The question is who will have the money to pay for them.
On the 5G/FTTN hybrid, the same issue applies. Consumers under price pressure are looking to spend less. Spending less means the pie gets smaller, and so industry costs (capex and opex) are under pressure even without increasing the budgets. However, competitive pressure created by consumers shopping for cheaper broadband might justify an entry into home broadband via 5G/FTTN as an alternative to losing the customer to somebody else.
The theory here is that the virus would, if it’s not quickly contained, result in a shift to more home viewing. That could mean that households who don’t stream video today could become streaming prospects, and if their current broadband service infrastructure could not deliver it with acceptable QoE, they would bail to another provider who could, presuming competition were available. Remember that 5G/FTTN could be deployed by some ISPs even out of their home regions, so competition might indeed become available. Also, 5G mobile could be used in rural or thin-population areas.
The big question, in my view, is whether network operators would see and take advantage of the higher-level service opportunities being generated. There is little question that primary and secondary schools and businesses preparing for WFH in a future pandemic (or a recurrence of the current one) would be interested in having as-a-service support to projecting their activities to the home. The network operators could benefit from this, enough to justify more investment in infrastructure, providing they won the business. Unfortunately, network operators have proved totally unwilling or unable to conceptualize this kind of service or even recognize the opportunity. Thus, I believe that what the pandemic will do is not to accelerate “carrier cloud” but to sign its death warrant. By accelerating the opportunity for above-the-connection services, the virus will assure that the cloud providers will win the business.
Carrier cloud was, five years ago, the source of the most credible explosive driver to data center deployment, offering the potential of one hundred thousand incremental data centers by 2030. If this driver is lost, it doesn’t kill the servers and software those data centers represented, but it does reduce the total capex. Larger pools of resources owned by a half-dozen public cloud providers don’t have the competitive overbuild of carrier cloud. Most of all, though, the loss of carrier cloud confines operators to connection services for a very long time.
It’s possible that some operators will see the light on this, but let’s go back to the stock market for a moment. Telcos in particular are highly valued as defensive stocks, which (with the exception of AT&T, perhaps) has been demonstrated in the recent movement of stocks. Will the telcos embark on a massive capital program to fund carrier cloud when it’s clear they have no real idea how to realize any of the opportunities that would justify the investment? Probably not.
For network vendors, I think the answer is clear. In the network operator space, bet on modest capacity augmentation in the near term, managed services and SaaS-type services in the mid-term, and competition and “public utility” status in the longer term. Don’t expect 5G mobile to benefit from the virus; it would be more likely it would be damped down beyond the NSA form or the FTTN-millimeter-wave hybrid form. For the enterprise, expect a short-term interest in WFH, but in the long term, expect that “cloudsourcing” will be more popular, and things like SD-WAN will become an almost-default model.
Stay well, everyone.