It’s tempting to attribute the growing interest in capex reduction among network operators to the current economic malaise. The problem is that the push to buy less gear, or at least spend less on it, has been around for well over a decade. The recent interest in capex plans by AT&T and Verizon, then, are investor reflections of an old problem, one that investors can’t solve themselves, and that capex reduction may not be able to solve either. And there are new problems to confront too.
Over the long haul, operators have typically spent about twenty cents of every dollar on capex, but the current trend is slowly downward. My 2022 data says that the industry was targeting a bit more than 19 cents per revenue dollar for 2023, which doesn’t sound like a lot but which is alarming many of the vendors who depend on network operator spending for a big chunk of their revenue.
The reason for the dip is what can be only described as an alarming negative trend in return on infrastructure, most of which can be attributed ironically to the most successful network venture of all time, the Internet. Broadband Internet has transformed our lives and the fortunes of operators, largely because it enabled the development of a host of new applications that operators have largely been unable to profit from. Yes, many will claim that regulatory limitations kept them from getting into these areas, but even without the barriers, operators have largely been unable to make a go of higher-level services, including content. Orange recently announced it was selling off its content unit, one of the pioneer ventures in the space for telcos, and AT&T’s retreat from the TV business is well-known.
When you ask operators why they’re under pressure in 2023, the most common response is that “5G didn’t generate the expected bump in revenue”, and while there’s some truth in the answer, it’s the truth behind it that really matters.
Historically, users have tended to spend a fixed portion of their disposable income on communications services. While 5G offers clear benefits to a telco in terms of capacity per cell, the value of its supposedly higher speed turns out to be hard to see from the perspective of the 5G consumer. Yes, mobile downloads might go a bit faster with 5G, but with phone storage limited and the value of downloaded files on a small device at least as limited, most users didn’t find much to sing about. That meant that there was no appetite for higher 5G charges.
The question is why operators didn’t see this, and continue to miss more subtle 5G benefit shortfalls like the value of network slicing and 5G Core. There’s no question that a big part of the problem is that an industry that has thrived for over a century on supply-side thinking doesn’t get a strong handle on consumerism. There’s no question that self-delusion is another part of the story, and all technology companies tend to push new technology stories if they think it will help them with Wall Street. And yes, the media plays a role by playing up sensational stories about what something like 5G will do, on the grounds that the truth is rarely exciting enough to generate clicks. But every single network operator I’ve chatted with has senior planners who are frustrated by what they see as clear failures to exploit opportunities.
The cloud is a good example. Verizon bought Terremark in 2011, which gave it an early foot in the door of what’s arguably the most important technology sector of the decade, then sold it off six years later to IBM. While IBM hasn’t set the cloud world on fire, they’ve certainly earned a place for themselves in recent years, so why couldn’t Verizon do the same? Sure, telcos are conservative companies, but who ever said IBM was anything but conservative? Verizon also sold off its data centers to Equinix, which got them out of another aspect of the cloud business that’s now hot on Wall Street.
Is there something fundamental here? Some reason why the network operators have difficulties with anything but same-old-same-old? Maybe. Some have suggested that since they were late into the cloud, they couldn’t compete with other providers on economy of scale, but as I’ve pointed out, economy of hosting follows an Erlang curve, so it doesn’t improve continuously as the size of the pool grows. I think the problem is a different kind of economy, economy of scope.
Network operators have the great majority of their staff and real estate concentrated in their home market areas. If you live in the northeast US, you’re probably only a few miles from some Verizon facility, and same for AT&T if you live in California. You need buildings to house cloud resource pools and staff to operate them. A credible cloud offering has to be at least national, and increasingly multinational in scope. In order to make a real entry into the cloud market, an operator would have to either spread out beyond its own staff-and-facilities border (at great cost) or “federate” with other operators, something like was done in telecommunications through interconnection. This doesn’t just impact the cloud, either. It’s hard to think of a “higher-layer” service that isn’t built on hosted software features, which of course require something to host them on.
Federation to support higher-layer features was actually one of the goals of the IPsphere Forum (IPSF), a body I was heavily involved in over a decade ago. Little has been done since then, and even in the public cloud space you don’t see much interest in federation for the same reason that it’s not all that hot among operators; big operators don’t want to enable more competition.
Because mobile services have a much broader footprint than traditional wireline, it’s tempting to ignore the issue of footprint when talking about creating resource pools, but I don’t think that’s a valid connection. Things like tower-sharing have been in place to reduce the cost of extending mobile infrastructure, and few operators have deployed significant incremental facilities to support out-of-region mobile operations. In any event, mobile services are not feature-differentiated; operators are either vying for price leadership, total coverage, or the best phone deals. Mobile experience, then, isn’t contributing to operator literacy.
Mobile isn’t contributing to profit relief, either. 5G, in my view, may turn out to be more of a curse for operators than the blessing they’d hoped for. They had to increase capex to deploy it, and yet it hasn’t opened new market areas as they’d hoped it would. How much of the current capex crunch started with that low-return 5G investment, an investment that looks increasingly unlikely to yield any meaningful incremental return?
Operators need to be thinking about all of this, because as I noted in a blog earlier this week, the cloud is encroaching on the whole model of “higher-layer” services, to the point where network as a service may end up being a cloud application and not a network service in the sense that operators offer it. If that happens, then getting out of the profit basement may be very difficult for operators indeed.