Service provider (SP) capital expenditure (capex) has been hit hard by recent economic troubles, falling 8% in 2009 and on track for another 4% drop in 2010.
Yet Ovum expects global SP capex to rise 9% in 2011, to $303 billion. SP revenues, after declining 2% in 2009, are growing again, slowly: we expect 2% growth in 2010 and 3% in 2011, to $1,854 billion. Pockets of strong growth exist, but telcos and vendors alike must be picky and open to reinventing business models as industry dynamics evolve towards 2020.
Improved economy and LTE support 2011 recovery; India on the mend
The telecoms industry remains challenged, and growth in most places is modest at best, but things are starting to improve. Looking at data for the four-quarter period ended 2Q10, global revenues grew 3.5% year-on-year (YoY), compared to a 2.0% decline in 3Q08–2Q09.
Capex fell 5.3% YoY in 3Q09–2Q10, a worse result than 2Q09 but improved from the previous three quarters, where YoY declines were in the upper single digits. Regionally, Asia-Pacific’s revenue strength has been the early driver in the global market’s pickup; India, though, was one key factor in the recent fall in global capex, along with the South & Central America region.
Looking ahead, Ovum has just updated its forecast of SP revenues and capex (see our forthcoming “Market Forecast spreadsheet: Telecom operator revenues and capex”, to be published in October 2010). This report extends through 2015, segmented by region, and split into fixed and mobile SP types.
For 2010, projected revenue growth of 2% and capex growth of -4% is consistent with 2Q10 actuals. In 2011, we expect modest upticks in several regional markets; revenues will track macro trends, but less saturated markets such as MEA and India will outperform.
Mobile revenues are growing at an average of 3.5% per year, based on the projected 2009–15 CAGR. Fixed revenues, which are shrinking in many developed countries, are still rising but just barely, at an estimated 1.3% CAGR in 2009–15.
Capex returns to normality in 2011 at 16.3% of revenues
As North America and Europe recovers, India will see the impact of its 3G spectrum auctions, reversing the recent drops in that market’s spending. Globally, we expect many large SPs to make 4G/LTE (or HSPA+) wireless, FTTx, and service- and software-layer investments aimed at reducing costs and enhancing competitiveness.
The impact is that global SP capex will grow from $277 billion in 2010 to $303 billion in 2011, resulting in a slightly increased ratio of capex-to-revenues (capital intensity) of 16.3%, from 15.5% in 2009. The global average in 2005–08 was 16.4%, so 2011 marks a return to normality.
For 2012–15, we have modest expectations for capex, likely to rise to $320 billion by 2015, with a continued shift away from fixed-line networks, as mobile hits 60% of the total in 2015, from 47% in 2005. Mobile’s share of revenues over time is comparable.
Tight capex climate requires innovation and business model revamp
Low revenue growth and predictable capex needs make telecoms sound dull: like a utility business, but without a guaranteed rate of return. Whether some parts of telecoms deserve the “utility” label is beyond this comment. What’s clear, though, is that there do remain highly profitable service-, vertical-, and region-specific markets in telecoms.
However, the more successful operators are not standing still. They are seeking out new operating models leveraging content and applications, more scale (often across borders), tighter partnerships with vendors and other third-parties on services and software, and help from regulators. (For more on this topic, see our report “Telecoms in 2020: core scenario”).
Vendors are not done consolidating, and continue to push into applications and services. The downturn helped vendors in some regards, as it pushed a few big operators to lay off or spin off and outsource key functions to their vendors. Much of this spending was previously an internal operational expense, so can represent a growth in vendors’ addressable market. (See our “ICT services quarterly market share: 2Q10” for market sizing and vendor-share details).
The challenge posed by Chinese vendors to their competitors has not faded, but has morphed as they have entered the mainstream. The urgency – for Ericsson, Cisco, Juniper, Tellabs, NSN, and many others – of developing offerings that can’t easily be matched by Huawei or ZTE has not gone away, and is unlikely to given the continued tight capex climate.