Now that the two largest wireless operators have reported their second-quarter earnings, it's a good time to start speculating how they might spend their budgets the rest of this year.
AT&T (NYSE: T) is maintaining its 2015 capex guidance of $18 billion, and of that, roughly 58 percent may go toward wireless, according to a research note by Evercore ISI research analyst Jonathan Schildkraut and associate Justin Ages. That implies wireless capex of $10.4 billion in 2015. "Assuming T deploys $600MM in Mexico this year, U.S. capex falls to $17.4B," the analysts wrote.
Management indicated that the mix shift would further favor wireless. "At 60 percent of the U.S. spend aimed at wireless, this would imply the same $10.4B in wireless spending," they wrote.
As for Verizon (NYSE: VZ), it reported second-quarter capex of $4.49 billion, bringing the first half of the year's capex to $8.2 billion. "By maintaining its $17.5-18B target, we expect capex to ramp in 2H," the Evercore analysts said. That would imply Verizon will spend about $9.3 billion in the second half of the year, just a bit more than the first half."
But the long-term trend is to spend less, not more. Asked if he anticipates another period of elevated investment given the technology roadmap with 5G on the horizon, AT&T CFO John Stephens said as much during the company's second-quarter conference call with analysts.
"What we are seeing is our move to get this fiber deep into the network and getting LTE out deep into the wireless network. And the solutions that we are finding in a software-defined network opportunity, we see a real opportunity to actually strive to bring investments, if you will, lower or more efficient from historical levels," he said, according to a Seeking Alpha transcript.
"Right now, I will tell you that this year's investment is going to be in that $18 billion range, which is about 15 percent. We are certainly--we are not going to give any guidance with regard to next year or the year after," he said. "I think there is a real opportunity with some of the activities [that] are going on in software-defined networks on a longer term basis to actually bring that in capital intensity to a more modest level."
The telecom industry--both wired and wireless--is going through a major transformation. Operators are pursuing software-defined networking (SDN) and network functions virtualization (NFV), which should, over time, drive their spending lower because it's software-driven, not hardware-driven.
Rather than focusing on how much operators are spending, it might be more appropriate to ask: How much are they saving by deploying these new technologies? That's where the operators want to go, and both traditional and newer vendors have no choice but to follow suit. Legacy operators can't stand still while over-the-top players eat their lunch.
Verizon CFO Fran Shammo said on Verizon's second-quarter conference call that it is well into SDN, as well as continuing with small cell densification and it has at its disposal things like C-RAN, or cloud radio access network technology, which is one way to derive savings in capex and opex.
Among other things like 4x4 MIMO and carrier aggregation, Verizon Wireless is in the early stages of connecting its cell towers to dark fiber for fronthaul and backhaul, Mike Haberman, Verizon's VP of network support, said during the Wells Fargo Telecom Symposium last week. That dark fiber fronthaul can be used to support C-RAN. Verizon already has deployed a localized C-RAN solution to improve in-building performance using Ericsson's Radio Dot.
Meanwhile, AT&T is retraining thousands of employees--possibly as many as 130,000--as it shifts to SDN and away from legacy systems. AT&T has said it wants to have 75 percent of its network be software-centric by 2020 and aims to complete the first 5 percent of that this year. At the same time, it's devoting internal resources to innovative solutions like the EchoBOT in sports stadiums and other venues. It's also got its AT&T Labs expertise to help develop things like software-defined storage (SDS). In fact, earlier this year, at the Open Networking Summit in Santa Clara, Calif., AT&T Technology and Network Operations head John Donovan reiterated that the company's future is all about the software and its mantra is "faster, more agile, scalable, open, cheaper."
While operators like AT&T are orchestrating their own pivot, vendors will need to do the same. Asked during the second-quarter earnings call about what Juniper Networks is seeing in terms of appetite for NFV and SDN solutions, CEO Rami Rahim said those things are definitely part of every strategic discussion the company has with any of its customers, especially service providers but also some in the enterprise base. "Right now it's very much an architectural discussion of what needs to evolve within the service provider network locations, what we call central offices or PoPs, as to set their infrastructure up in order to be capable of delivering next-generation services using NFV," he said.
"It's still early days in summary, but I feel very good about the discussions we're having, the products we're building, the way that we're executing and the go-to-market attention we have in terms of just making sure that we emerge as true winners in this space," he said.
Of course, further into the future, there's 5G, and no one can really know how much operators will spend on that given the standards have yet to be written. However, it's reasonable to assume there's still a lot of run rate left in LTE-Advanced, that 5G will still require some tie-in to 4G and operators aren't going to necessarily want to or need to build multiple new networks. And with 5G, a lot more industries will be joining wireless at the table to develop the standards. As Ericsson CEO Hans Vestberg told Fortune, one slice of the network could provide a high-speed connection to some devices, while another slice could provide a very low-latency connection to autonomous cars, for example.
Vestberg also told the publication he believes wireless has yet to solve some of the biggest problems on earth. I don't have a crystal ball, but it's a pretty safe bet to say he's right. --Monica