Is the high price of 5G spectrum hurting telcos? AT&T has been under particular pressure from the financial industry on the point, but claims to be confident in their finances. There are a lot of moving parts involved in deciding whether spectrum costs are a risk, and the answer may be critical to the long-term financial health of the telcos involved. Thus, we need to look at the picture closely.
One good place to start is a Fortune article that offers a look at the record-breaking US spectrum auction and does a decent job of ranking winners and losers. It rates T-Mobile and Verizon as winners because the former didn’t have to buy as much (it had a lot of Sprint spectrum available) and the latter really needed to get a lot of spectrum, and did. The big loser, according to the article, is AT&T.
The financial markets weren’t thrilled with the auction because it seemed to them that all (or all but T-Mobile) spent so much on spectrum it hurt their debt load and perhaps limited investment in future infrastructure. They particularly didn’t like AT&T’s situation post-auction because AT&T already had a high debt level, has just agreed to sell off part of its DirecTV business, and has also seen some executive changes. But can a simple financial-market view really tell the story?
It seems to me that the Fortune piece, by making a casual, often-cited, and erroneous point, actually starts us in the right direction. How many times do they talk about “speedy” or “fast” or even “superfast”? What they’re implying is that the 5G market will be competitive based on speed, and that all the telcos needed to get themselves up toward the front of the pack in that area. The question is whether that’s true, and if so, for whom in particular.
I’ve noted many times that the typical mobile device user would be unlikely to notice 5G speed differences (I see none in my services). The great majority of the mobile experience is streaming not downloading, and streaming speed is set by the content rather than by the connection. That point leaves us with just a few possibilities to explain the land-rush spectrum auction. First, operators went nuts. Second, operators think speed will be a competitive driver in mobile service even if nobody notices it. Third, there’s something more complicated going on. I’m doubtful on the first two, so we need to explore what complicated things might be at the root of this.
One possibility is wireline replacement. C-band spectrum, the stuff we’re talking about here, isn’t going to deliver the capacity of millimeter-wave 5G, but a single frequency has been shown (by Ericsson) to be able to deliver over 1.5Gbps to a user, and actual tests of services at this frequency range show it could deliver 100Mbps, the broadband sweet spot de jure. Because C-band has a nice combination of capacity and range, it could serve to replace wireline in rural areas where demand density is too low for fiber to the home to be profitable.
A second possibility, the one that gets cited the most, is IoT. Some love factory IoT. Some love connected or autonomous cars. Others love smart buildings, and some just love a good story. The problem with the IoT story is that it’s appealing on the surface, but not very deep. We have factory IoT today, as well as smart buildings, and we don’t use 5G for them. There’s no credible mission for 5G in an autonomous vehicle; things that need low latency and high bandwidth like collision avoidance are necessarily on-vehicle functions. Could an IoT explosion be a driver, though?
Possibility number three are applications of AR/VR, a topic I blogged on recently. This would include both gaming and future AR/VR “contextual services” and “point-of-activity empowerment” tools. Here we have some potential, but my “complicated” qualifier surely applies. There are a lot of elements needed to make any of these applications a big driver of 5G, and even then it’s not clear whether users would pay more for 5G benefits, or just take what they could get at the usual mobile-service pricing.
Some have also suggested that we might see 5G-ready laptops and tablets, whose larger screens and potentially greater computing utility might justify faster connections. I think there are in fact some applications for this sort of stuff, but I think they’re more likely to evolve to exploit 5G than to drive it, or its revenues, forward.
The revenue point is critical here, because operators are not only committing to a higher spectrum spend than ever before (Verizon spent more than most analysts thought the entire auction would bring), but to 5G infrastructure too. It’s not enough that 5G works, it has to generate ROI to cover a pretty substantial new investment.
Where does it leave the spectrum bidders and winners? I think T-Mobile has the most “classical” of the telco situations. They’re an up-and-comer and they think 5G will improve their mobile market share radically. They didn’t have to break the bank to get enough C-band spectrum to fill the gaps in what their Sprint spectrum covered, so we can say they’re fine.
Verizon is, in my view, the operator who’s a bit like a billionaire shopper. They spend a lot more than most, but they can afford it. Verizon has the most profitable territory of all the US telcos, so they can stick with the old principle that when you’re a telco you fear competition more than seek opportunity. They can’t leave a big hole in their 5G service set, and without C-band, that’s what they had. They’re OK too.
AT&T is a harder play. If they don’t have a very specific plan to draw new and credible revenue out of their overall 5G investment, then I think they took a big gamble with the bids. Maybe, like Verizon, they were working to shut out competition. Maybe they believe that they can be profligate with spending, again like Verizon. Maybe they intend to push forward on one or more of my “complication” themes above. The thing is, this isn’t a good time for them to be taking risks, particularly risking their dividend, which is holding their stock price out of the basement.
AT&T isn’t the big loser, though. For that, we may have to consider Dish or Comcast. Dish won only one license and Comcast (who jointly bid with Charter) didn’t win any. These bidders will either have to give up mid-band 5G aspirations, which may mean giving up any hope of significant 5G market share, or hope to make a big play in the later 3.5GHz auction. What happens if that also blows past bidding records out of the water?
None of these are what I’m worried about, though, and I don’t think they’re the stuff telcos need to be worried so much about either. I think that there are pathways to redeeming the 5G spectrum investment, and I think that MVNO deals will serve for Comcast. Dish won’t get everything it wants spectrum-wise, so they’ll need to combine MVNO service and their own 5G. What all these people are facing is a potential opex crisis, and I’m not sure they see it coming.
Telcos have always been naive about operations. Their organizational makeups tend so split service (OSS/BSS) and network (NMS/NOC) operations, and virtualization shapes services and networks from a pure technology side. Virtualization, which is mandated by 5G, also creates more things to manage, more layers of complexity to dig through. AT&T took a stab at service lifecycle automation with ONAP, but they got started wrong and never fixed it. Nobody else has really got a clue either, and as most future 5G revenues depend on raising the feature level of services by adding additional elements above traditional networks, 5G is going to push these guys into the cloud whether they like it (or even know it) or not.
For AT&T, efficient operations is critical because of their low overall demand density. They can’t afford inefficiency, and they can’t afford service issues in 5G that could tarnish their brand. For the other telcos, the need might not be as immediately urgent, but they need to realize now (before it’s too late) that 5G operations is inherently more complex because of the hosting and software dimensions, and that additional services will take them only deeper. How much of the essential ROI that the high spectrum prices will demand might be justified by operations problems is hard to say, and nobody should be eager to find out.
My view is that spectrum pricing is hurting the telcos, whatever they say. There’s only so much you can spend on infrastructure, an amount that’s set by your internal rate of return, before you start eroding your own financial position. The worst damage may not be suffered by the telcos though, or even the bidders in general, but by network vendors. What you spend in one area, given a presumptive constant pool of available capital, you have to save somewhere else, and equipment is where the savings is most likely to come. Pressure for lower technology cost will mount, favoring open-model networking.
The only ways out are first, that new service set, the value-add above the connection, and second, significant operations automation. If I were a network vendor, this is what I’d be looking at right now.