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Summary

The Internet content provider (ICP) group of companies is on track to record over $60bn in capex for 2015. Year-to-date capex for the group hit $44.6bn at the end of September, up 8% from last year. Telcos still spend about five times this figure, but the gap is narrowing. The biggest ICP spenders – notably Google, Apple, Microsoft, Amazon, Facebook, IBM, and HP – are also influencing industry technology directions. While cloud buildouts fuel rising capex for ICPs, year-to-date results indicate that telcos will see drops in both revenues and capex this year.

Telecom’s balance of power shifting as CSP revenues stagnate

This has been a tough year for communications service providers (CSPs, aka telcos). Global CSP revenues will fall about 4% this year in US dollar terms. Both mobile and fixed sales are down, and telco capex will also drop in 2015, at roughly the same rate as revenues.

Some of this is a currency effect due to recent strengthening of the dollar. But many regions are struggling in local currency terms as well. In Europe, for instance, total revenues for the top eight telcos reporting in euros (i.e. excluding Vodafone and BT) were €57.0bn in 3Q15, compared with €56.9bn in 3Q14. That tiny growth represents progress, though, as YoY revenue growth was negative for all 10 quarters from 2Q12 to 4Q14.

China, usually a reliable growth driver, has fallen back. Year-over-year revenue growth for Chinese telcos turned negative in the second half of 2014. Revenues started growing again this year, but almost entirely because of new device revenue streams (the iPhone effect). Adding millions of iPhone users to the network will eventually have capex implications. Nonetheless there are strong signs that capital intensity (capex/revenues) in China, now at 28%, is peaking. The new tower venture should result in some capex savings for all three Chinese telcos.

Telcos’ revenue outlook contrasts with the relatively healthy growth in the cloud market. The diverse range of Internet content providers that play in the OTT/cloud ecosystem are seeing strong revenue growth, about 6% in 2015, twice the rate of global GDP growth. The ICPs’ combined revenues will exceed $1 trillion this year, and they are spending big on their networks. Apple and Google are standouts, as each logs over $10bn in capex annually. Cloud services leader Amazon has actually cut capex in 2015, but Oracle, Microsoft, Facebook, Tencent, and Google have more than made up the slack. LinkedIn, ChinaCache and Akamai are also notable, spending over 20% of revenues on capex. Most ICP capex is for data centers (power, servers, networking, storage), data center interconnection, and capitalized software development.

Many ICPs develop their own technology, servers in particular. They also buy some components and materials directly from suppliers, cutting out the vendor “middleman.” They show up at telecom-focused events to discuss technology. Telecom-focused suppliers are eager to sell to them. Telcos are considering how to compete with them and what cloud assets are needed for the task. Whether you like the OTT wave of Internet companies or not, they are clearly having an impact on telecom. Look for more on this topic soon, in our forthcoming update to last January’s Communications Provider Capex Forecast Report.

Appendix

Further reading

Communications Provider Revenue & Capex Highlights: 2Q15, TE0006-001132 (October 2015)

IBM: Network and Technology Profile, TE0006-001134 (October 2015)

Communications Service Provider (CSP) Revenue & Capex Tracker: 2Q15, TE0006-001135 (September 2015)

Facebook: Network and Technology Profile, TE0006-001059 (May 2015)

Communications Provider Capex Forecast Report: 2014–19, TE0006-000993 (January 2015)

Author

Matt Walker, Principal Analyst, Intelligent Networks

matt.walker@ovum.com

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