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Summary

Total communications provider (CP) capex dropped 1% in 2016 due to soft mobile demand, and growing use of software for upgrades and features, only partially offset by strong spending by internet content providers (ICPs). The shift in industry power toward ICPs, and away from the CSP (telco) segment, accelerated in 2016. We currently expect a 3% capex decline for CPs overall in 2017.

ICPs' industry clout still on the upswing

Annualized revenues in the communications provider market, including CSPs, ICPs, and CNPs, has fluctuated in the $2.8–2.9-trillion range for the last 13 quarters. Revenues are now growing again, due to mobile CSPs: their +0.7% YoY growth in 4Q16 was the first positive result since 3Q14. Revenue growth for the ICP and much smaller CNP sector, meanwhile, remains strong (+5 and +13%, respectively).

ICP capex is also growing, up 15% to $71bn, in line with our forecast. Microsoft and Facebook are the standouts in terms of 2016 growth. ICP technical innovations are spreading across the sector, through collaborative R&D and planning work (e.g. OCP, TIP), and early rollouts of ICP-driven technology (e.g. Telia's test of the Facebook Voyager Switch).

Nonetheless, CSPs are the big players, and they'll drop in 2017. Capex, on an annualized basis, peaked for CPs overall at $409bn in 1Q16, but fell to $401bn by year-end. CSP capex is being pulled down by a decline in new LTE projects. Some carriers also need to fund M&A, which competes for scarce capital dollars.

We currently expect a 3% CP capex decline in 2017, and most recent guidance from large telcos supports this flat to down outlook. Vendor earnings and strategy updates are also consistent with leaner times. Just last week, for instance, Huawei reported weak 2016 profits (7.3% net margin, from 9.3% in 2015), and Ericsson announced a major reorganization; they are the top two suppliers to the CSP market.

Appendix

Further reading

Communications Provider Revenue & Capex Tracker: 4Q16, TE0006-001369 (March 2017)

"Ericsson hopes a leaner company also means a company with more profit and revenue growth," TE0006-001372 (March 2017)

Market Share Report: 4Q16 ON Global, TE0006-001354 (March 2017)

Communications Provider M&A: 4Q16 Review & Outlook, TE0006-001341 (February 2017)

"CNP revenues grow 17% in 2016; data centers to remain sector's growth engine," TE0006-001358 (March 2017)

Telecoms Vendor Contract Database: March 2017, TE0006-001360 (March 2017)

Communications Provider Revenues & Capex Forecast: 2016–21, TE0006-001300 (November 2016)

Author

Matt Walker, Practice Leader, Companies and Markets

matt.walker@ovum.com

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