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Global Telecom and CAPEX Forecast

Global telecom capital investment dipped in the wake of the 2008 Great Recession, as you might expect. But what of the longer-term trend? Some believe telecom capex, on a global basis, will be steady and upward, reflecting growing revenue in many regions. "The near-six percent increase in global telecom carrier capex we expect in 2011 over 2010 is due in part to AT&T’s ramping LTE deployments, HSPA+ upgrades, and investments in WiFi hotspots for traffic offload,” says Infonetics Research analyst Stéphane Téral. This offsets Verizon Wireless' slowing mobile spending since their LTE rollout peaked earlier this year. That’s North America. In the EMEA region, a capex hike in Africa is partially offsetting delays in telecom investment in Greece, Italy, and Hungary; Asia Pacific remains stable; and in the Caribbean and Latin America (CALA), América Móvil and Telefónica, the two telecom giants that control 75 percent of mobile subscribers there, are preparing their infrastructure to host the soccer World Cup in 2014 and the Olympics in 2016," says Stéphane Téral, principal analyst for mobile and FMC infrastructure at Infonetics Research.

Global capex forecast Given global growth, most, perhaps all analysts project longer-term growth of telecom capex, though there might be key regional variances. Heavy Reading, for example, took an early look at telecom capex trends in late 2008 and concluded that investment would vary quite widely from region to region. In absolute terms, Asia/Pacific is the region expected to demonstrate the most growth over the next five years, with cumulative growth of around $38 billion over the period. Much of this will be driven by investment in 3G networks in China and India. The worst-performing regions will be Western Europe and North America, with cumulative growth of 5 percent and 6.4 percent, respectively, between 2008 and 2013. Both those regions, along with Central and South America and Eastern Europe, were expected to contract in 2009. Global capex will continue to grow In the 10 years from 2005 to 2015, telecom service provider revenue has shown and will continue to show year-over-year growth every year except in 2009, Infonetics says. Following a 4.1 percent increase in 2010 over 2009, telecom service provider revenue will grow 7.6 percent in 2011, to US$1.86 trillion. Perhaps more important in a broader sense, telecom carrier revenue is forecast by Infonetics to grow to US$2.17 trillion in 2015, driven by mobile broadband services. Service provider spending on every type of next-gen telecom equipment except TDM voice was up in 2011, Infonetics says. The fastest-growing investment areas among telecom carriers in 2011 were WiMAX equipment (up 27.5 percent) and video infrastructure ( up 20.7 percent) Those capex forecasts, though, include a wide variety of investments.

The largest investment areas remain software, real estate, labor and mobile infrastructure, all of which are necessary to provide service, but which are not restricted to hardware and software of key importance to many industry suppliers. Wireless pure-play operators will grow to account for nearly a third of all telecom carrier capex by 2015. A detailed analysis of the capital expenditure of the world’s Top 100 telecom operators by Arthur D. Little indicates a decrease in the capex-to-sales ratio to 16.5 percent by 2014 (down from 18.4 percent in 2008). With industry revenues expected to grow at a modest two percent a year, overall capital expenditure will thus remain stable (0.7 percent CAGR) for the foreseeable future, with growth coming from spending on equipment. Global capex shifts to mobile Wireless access infrastructure, already accounting for 43 percent of total telecom infrastructure capex, will increase its overall share as spending continues to shift away from fixed infrastructure. That has to raise questions about the long-term role, revenue and services suite to be offered by broadband fixed network operators. Not, it must be said, because demand will be lacking, but only because cable operators seem to be executing on their premise that they can deliver bandwidth more affordably than fixed-line telcos. Indirect evidence for that view comes from the A.D. Little analysis, which suggests that fiber to the home investment for very-high broadband will be “mainly” driven by non-telecom players.

In part, in some markets, that will be the case because 65 percent of all households with access to FTTH networks in Europe are on networks deployed by fixed-line incumbents. In other words, in Europe, much fiber investment already has been made. Where it has not been made, there likely are payback issues that make FTTH highly questionable. So utility companies and alternative operators are expected to split the value chain as well as the financial investments, by forming innovative partnerships to invest in more fiber access, A.D. Little believes. If cable operators continue to nibble away at available demand for fixed broadband, telcos will face the challenge of a radical rethinking of their business models and offerings. If one assumes that broadband will underpin and drive most future revenue for fixed line providers, and if one assumes it is the cable companies who can do so at lower cost, telcos will face a challenging investment case, especially given the arguably better financial prospects in mobility and wireless. Strategically, one might argue that, though expensive, a full fiber to home upgrade might be necessary. In some cases a fiber to neighborhood approach might be “good enough” as a bridging strategy over the medium term. Either that, or a telco has to dramatically lower its operating costs to compete as a provider of lower-bandwidth solutions, with cable claiming the premium segments. That will not be an appetizing prospect for most telco executives, especially those without wireless assets. FTTH is better, no doubt. But the business case remains challenging, especially where cable operators are able to boost bandwidth at much lower costs.

Source: Carrier Evolution