Service providers' revenue grew 5% in Q1 while their capex increased 8%. The strong capex growth is due mainly to investments in HSPA and LTE. During the first quarter commercial HSPA+ networks increased by 10 to 204 and commercial LTE networks rose by 16 to 66.
Despite this surge, we expect operators to continue restructuring their cost base drastically over the next few years, as revenue growth moderates. The unsettled, evolving vendor market will play an essential role in this transition.
In our annual forecast of service provider revenues and capex we projected moderating growth rates due to slowing economic growth in the developed world, network saturation in many emerging markets and continuing high macroeconomic risks. While revenues grew at a CAGR rate of over 6% from 2004-10, we project around 3% CAGR over 2010-17. A similar picture appears in capex growth, which expanded at a CAGR of 6.5% from 2004-10 but should slow to 3.1% in 2010-17. These global trends also apply to the Asia-Pacific region, with slightly different growth rates.
However, even carriers faced with tight budgets need to invest in their networks. Upgrades to the mobile radio access network (RAN) are often the easiest to justify, as they appear tightly linked to new revenue streams. While moderation in capex (and opex) is the long-term carrier goal, we did expect a surge of HSPA/LTE-related spending in 2012-13.
In the Asian market Japanese telcos posted strong capex growth in Q1, with LTE the driving force.
DoCoMo spent $2.84 billion, a 17% increase. It now has 2.2 million subs and more than 7,000 LTE-enabled base stations and targets 10 million subs by next March.
KDDI's capex rose up 24% YoY to $1.87 billion. It will launch LTE before December and cover 96% of population by March 2013. Softbank increased its capex by 10% to $2.27 billion. It hasn't deployed LTE yet, but has announced LTE base station deals with Ericsson, Huawei, NSN and ZTE.
Despite intense instability in Europe and fears of another collapse, the IMF upgraded its forecast in both its January and April 2012 outlook reports. Those both reflected and helped to create a climate of more stability and confidence around investments, including telecom network capex. That's apparent in 1Q12 capex results.
Company earnings calls since then have seen some optimism, but also plenty of caution Ð coming from Cisco, in particular. Cisco guided down revenue expectations and commented that "Europe and customer conservatism have gotten worse." It's very possible that Cisco's situation is impacted by Huawei's all-out foray into enterprise markets this year. The end result may be the same, though: while Huawei is clearly doing more than competing on price, the increased competition it brings can lower average prices, and can also lower net market revenues (or capex, in this case).
Cost control strategies
Beyond relying on increased competition among their vendors, operators have a number of cost control strategies and innovations to cope with capex moderation. These include:
- Improved sourcing strategies, including joint procurement
- Reliance on software to deliver more of functions and features in networks, especially important in the LTE era, as it smoothes capex over time
- Emergence of competition in new areas, like provision of base station passive infrastructure
- Renting hardware instead of buying it
- Use of vendors for services, from network rollout to operations
The vendor landscape continues to evolve. Some are slimming, some expanding. Vendors are also recognizing that their addressable market with service providers goes beyond capex. It now also includes many IT- and network-related operational tasks, booked as opex, which are frequently subject to outsourcing. The weak capex climate, then, need not signal tough times for vendors.