Capex up, revenues improving - what's the catch?

Metaratings
18 Oct 2010
00:00
Article

Everybody in the telecommunications sector gets excited at predictions of increased spending in capital expenditure (capex), all except shareholders that is. They always seem to respond negatively to any signs of increased costs, especially in the wake of lowering or flattening revenues.

If a report released today by Ovum is on target then we can expect to see SP capex rising by 9 per cent in 2011 to $303 billion after experiencing falls of 9 per cent in 2009 and a further 4 per cent in 2010. But what is most exciting is the expectation of growth in revenues by 2 per cent this year and another 3 per cent in 2011. But the good news comes with the warning we all know about already even though pockets of strong growth exist, telcos and vendors alike must be picky and open to reinventing business models as industry dynamics evolve towards 2020.

The telecoms industry remains challenged, and growth in most places is modest at best, but things are starting to improve. Regionally, Asia-Pacific's revenue strength has been the early driver in the global market's pickup; India, though, was one key factor in the recent fall in global capex, along with the South & Central America region.

As North America and Europe recovers, India will see the impact of its 3G spectrum auctions, reversing the recent drops in that market’s spending. Globally, Ovum expects many large SPs to make 4G/LTE (or HSPA+) wireless, FTTx, and service- and software-layer investments aimed at reducing costs and enhancing competitiveness. The impact is that global SP capex will grow from $277 billion in 2010 to $303 billion in 2011, resulting in a slightly increased ratio of capex-to-revenues (capital intensity) of 16.3%, from 15.5% in 2009. The global average in 2005–08 was 16.4%, so 2011 marks a return to normality.

Low revenue growth and predictable capex needs make telecoms sound dull: like a utility business, but without a guaranteed rate of return. Whether some parts of telecoms deserve the "utility" label is beyond this comment. What’s clear, though, is that there do remain highly profitable service-, vertical-, and region-specific markets in telecoms. However, the more successful operators are not standing still. They are seeking out new operating models leveraging content and applications, more scale (often across borders), tighter partnerships with vendors and other third-parties on services and software, and help from regulators.

Vendors are not done consolidating, and continue to push into applications and services. The downturn helped vendors in some regards, as it pushed a few big operators to lay off or spin off and outsource key functions to their vendors. Much of this spending was previously an internal operational expense, so can represent a growth in vendors' addressable market. The challenge posed by Chinese vendors to their competitors has not faded, but has morphed as they have entered the mainstream. The urgency – for Ericsson, Cisco, Juniper, Tellabs, NSN, and many others – of developing offerings that can't easily be matched by Huawei or ZTE has not gone away, and is unlikely to given the continued tight capex climate.

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