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Summary

More signs of capex moderation appeared with the latest round of communications service provider (CSP) earnings reports. For the 65% of CSPs reporting, capex totaled $43.6bn in 4Q16, down 3% from 4Q15. The outlook for 2017 capex is flat to down for most, consistent with Ovum's projection that global telco capex will fall 6% in 2017, to $316bn. There are bright spots, but overall, 2017 will be a challenging year for many telecom vendors.

More bang for buck, shift to software, need to conserve cash

As a percent of revenues, CSP capex actually started falling in early 2016: annualized capex/revenues was 19.3% in 1Q16, and fell to 18.7% in 3Q16. Results to date for 4Q16 suggest a further drop is likely. Moreover, telcos are due for a moderation in capital spend; a slowdown in LTE and small cell upgrades among mobile operators, combined with a broader telco shift to software spend, are among the factors that will depress telco capex in 2017.

Nearly all the big North America-based telcos have now reported. AT&T, Verizon, Comcast, CenturyLink, Charter, BCE, and Telus have all projected either flat capex for 2017, or flat capex/revenues – implying capex declines. Many carriers outside North America are guiding to lower capex, especially those with mobile-heavy capex profiles such as Vodafone, Telenor, and Taiwan Mobile. Integrated operators also are conserving; KDDI just revised downward its FY16–17 capex target, to zero growth (from +6% previously). The much bigger NTT has longer-standing cost reduction targets: reduce capex by 200bn yen by FY17–18, versus the figure three years prior.

Plenty of telco capital budgets are on the rise. Telecom Italia, for instance, is pushing hard on a 4G upgrade in Brazil and ultra-broadband rollouts in Italy, which will push its capital intensity higher for three years. Telstra is also on a small binge, targeting 20% capex/revenues in 1H17 (from 16% in 1H16).

Virtualization and its promises

Moreover, there are many pockets of technology growth. One focal point is virtualization; many operators are making real, multiyear commitments to SDN and/or NFV deployments and expect cost reductions to boot. CenturyLink, for instance, expects to save $200m in annual capex by 2019 due to virtualization, noting that its software-defined network already controls about 50% of "network capabilities." Naturally, CenturyLink – like many other operators – also expects virtualization to reduce opex and generate new revenue streams. Some of this will be true, but it's too early to know the degree – the technologies are new, and implementation success will vary widely across companies. CSPs will need to support parallel networks for some transitional period as customers adopt the new services. Deploying SDN/NFV is far more complex than, say, installing more WDM capacity in the backbone. And they are not replacing other network infrastructure yet.

To buy or build

Spending capex on networks is just a means to an end – one of many tools in an operator's overall capital allocation strategy, which (hopefully) aims at long-term earnings growth. Telcos have always had other things to do with their cash: return it to shareholders, invest it, or use it to fund M&A – a very popular option now. Communications sector M&A activity, in fact, is on a tear right now: total deal value increased to $421bn in 2016, nearly twice the 2015 figure of $213bn. And the M&A climate remains good in 2017.

Capex in 2017 will be constrained by relatively easy ability to buy assets, rather than build. More consolidation in 2017 could dampen capital spending further, and delay technology decisions. Verizon integrating XO while CenturyLink merges with Level 3, for example, will have both short-term and long-term impacts on capital deployment. Further, telcos are pushing vendors hard on pricing and terms, with the big players trying to get the most return from their bargaining power. Established vendors are being pushed from the bottom by a plethora of start-ups (VeloCloud, Viptela, for instance), and many big telcos are relying more on open source. Vendors will face a challenging 2017.

Appendix

Further reading

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

AT&T's Transformation into a Cloud-Enabled, Software-Centric Provider, TE0005-000894 (February 2017)

"Data centers drive ICP capex up ~16% in 2016; this year's outlook good, but may bring regional shift," TE0006-001343 (February 2017)

Network & Tower Sharing Analyzer: 2H16, TE0006-001342 (February 2017)

ICP Network Strategies and Their Impact on the Market, TE0006-001321 (January 2017)

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

"$2.1 trillion in communications capex up for grabs in next five years," TE0006-001304 (November 2016)

SDN/NFV in Residential Broadband Networks, TE0006-001247 (June 2016)

Global Data Center Analyzer: 2Q16, TE0017-000067 (May 2016)

Author

Matt Walker, Practice Leader, Companies & Markets

matt.walker@ovum.com

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