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Summary

Earnings for four large US-based communications service providers (CSPs) suggest a 2015 capex drop of 3% for the US market. That’s roughly in line with our latest capex forecast, which projected a 2% decline to $68bn. For 2016 our forecast calls for capex to remain flat. Factors constraining US capex include: recent big outlays on wireless spectrum (not part of capex), a vigorous M&A market, flat to down top-line revenue trends, and the emergence of other network operators in the OTT, cloud, and carrier-neutral space. Most of these factors are also affecting CSPs in other regions.

Telco market is flat, but OTT and cloud providers are expanding

Top-line weakness is a problem even in the relatively healthy US telecom market.

Since 2009, CSP revenues in the US have grown at a fairly reliable clip, averaging 3% per year. Growth is slowing, though. For the four large US CSPs reporting to date (70% of the market: AT&T, Verizon, Sprint, and Time Warner Cable), 2015 revenues were $347.7bn, down 1% from 2014. Capex fell 3% for the group. That’s consistent with our latest forecast for US CSPs. While equipment revenue trends are strong for most carriers, service revenues are a different story – they fell by 1% and 8% at Verizon and Sprint in 2015, respectively.

This top-line pressure limits capex budgets. So, too, does the high cost of spectrum. In the FCC’s AWS-3 auctions last year, AT&T, Verizon, Dish, and T-Mobile bid a total of over $40bn. That’s nearly equal to one year’s worth of capex for the four operators. AT&T says the new spectrum will improve overall cost per bit and support growth for its TV Everywhere platform. In the short term, though, this huge cash outlay can crowd out network spending.

Another factor putting a damper on US capex is a recent boom in domestic M&A. Several significant cable deals are ongoing (notably, Charter–Time Warner), and AT&T just absorbed DirecTV in 2H15. Once these mergers are under way, they consume a huge amount of management attention. Decisions are delayed. Mistakes are also made, as mergers tend to bring chaos. The net effect is often to delay capex outlays and slow down new technology decision-making.

The telco market is also evolving, with new breeds of providers reaching maturity. Carrier-neutral providers, focused on cell towers and data centers, have enabled telcos to spin off assets and effectively outsource some of their capital spending. More important, though, is the growth of providers from the OTT and cloud worlds, which we track as Internet content providers (ICPs).

One ICP, Facebook, increased capex by nearly 40% to $2.5bn in 2015. That puts it on par with telcos such as CenturyLink, Swisscom, and SK Telecom. Some capex from ICPs goes to initiatives that compete directly with telco services, such as messaging platforms (Facebook), fiber access (Google), and IP communications/Skype (Microsoft). The influence of the big ICPs goes beyond capex, though – Verizon and AT&T just joined Facebook’s Open Compute Project, as one example. The growth of ICPs and the networks supporting their “hyperscale” data centers, together with continued exponential growth in data traffic, is enticing telcos to move to software-centric networks faster than they would otherwise, and pushing for scale and efficiency in their network design.

Appendix

Further reading

Cable Dominates Telecom Sector M&A in 2015, TE0006-001176 (January 2016)

“Internet of Things: AT&T leverages its network to lead in cellular M2M,” TE0001-001003 (January 2016)

Communications Provider Revenue & Capex Forecast: 2015–20, TE0006-001167 (December 2015)

Communications Service Provider (CSP) Revenue & Capex Tracker: 3Q15, TE0006-001172 (December 2015)

Open Networking Software: Turning a Bare Metal Switch into a White Box Switch, TE0006-001137 (November 2015)

Author

Matt Walker, Principal Analyst, Intelligent Networks

matt.walker@ovum.com

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