Mobile network operators (MNOs) are facing the challenges of declining average revenue per user (ARPU), increased competition, and the constant need to upgrade their networks. This Insight looks at the general capital expenditure directions of MNOs and challenges their reluctance to invest in future technologies. ABI Research argues that a successful MNO exhibits technology and service quality leadership, not through the amount of capital expenditure, but rather through its capital expenditure strategies.
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Same Capital Intensity but a Drop in Total Amount
The year 2016 was difficult for the wireless telco market in general. Barring a few operators (Canada seems to be the safe haven for mobile revenue growth), most mobile network operators (MNOs) experienced some decline in average revenue per revenue (ARPU). According to the ABI Research market data report Mobile Carrier Revenue Profit (MD-MOPB-129), ARPU growth between 2016 and 2021 will remain negative, with Latin America and Africa experiencing the highest decline.
While MNOs are trying to figure out the next big revenue drivers, the rest of the value chain is exposed to decline in revenue as MNOs optimize their network capital and operating expenditures. Interestingly, no huge fluctuation has been witnessed in capital intensity ratio for the past three years. Capital expenditure per revenue dollar hovers around 20% to 25% for all MNOs outside of North America and Africa, while North American and African MNOs consistently invested between 13% and 17% of their wireless revenue over the past years. However, ABI Research believes that this is likely to change due to 5G.
What and Where to Invest
In general, there are four major network capital expenditure items that a MNO invests in:
Network Expansion and Densification: This refers to the expansion of current network coverage and an upgrade in service quality. This demands continual investment in basestations, small cells, DAS, and backhaul. Expansion effort often occurs in rural areas, while densification is targeted at mobile traffic hotspots.
Network Optimization: Refers to the optimization of MNOs’ network control, network service assurance, as well as network design, planning, and deployment processes to deliver high-quality user experience, as well as meeting regulatory key performance indicators (KPIs), key quality indicators (KQIs), and quality of service (QoS). Common tools include RF optimization, KPI and KQI optimization, performance management, automated cell planning, geo-location, and self-organizing networks.
Network Modernization: This refers to the consolidation of software tools used in the context of BSS/OSS to allow MNOs to better manage and monetize their networks more efficiently. Automated processes such as service assurance and service fulfilment, in combination with greater degrees of integration such as network-wide policy implementations and SDN-enabled service chaining, are usually deployed to boost the agility of operations.
Network Function Virtualization (NFV): This refers to the migration from an appliance-driven model (e.g., deploying EPC-related boxes) to platforms that can run many different functions. NFV applications are supported by dynamically-configurable and fully-automated cloud environments (See ABI Research’s market data, Network Functions Virtualization Tracker and Forecasts [MD-NFV-101] for NFV deployments).
5G deployment, however, is likely going to drive capital intensity. The 5G air interface will take advantage of both licensed and unlicensed bands, as well as frequency bands that are unconventional for 3G and 4G technology, such as 15 GHz, 28 GHz, and 71 GHz to 86 GHz. This means new antenna technology through Massive MIMO, mmWave, and even cmWave. Emergence of new use cases, such as automated vehicles, critical control of remote devices, and high-quality media experiences on mobile devices, demands new core networks that enable end-to-end network slicing for dedicated functions. All these investments will likely drive capital intensity, decreasing ARPU.
5G Deployment Is a Worthwhile Investment
MNOs need to streamline their costs and keep their leverage in check for the overall health of their businesses. However, virtualization of network hardware, as mentioned above, has lower barrier of entry for new MNOs. When market disruption happens, MNOs have nowhere to hide (case in point, TPG Telecom in Australia and Singapore). Therefore, while keeping return-on-investment (ROI) in mind, ABI Research argues that MNOs should continue to invest in their networks.
To some, 5G technology may seem more than a solution looking for a problem, but let us not forget that MNOs’ core competency is in connectivity. We already witnessed this in recent public safety contract awards in the U.S. and the UK. Both governments demonstrate faith in MNOs to launch public safety networks instead of going on their own, and this is largely due to MNOs’ expertise, as well as decades of investment in R&D, human resources, and service quality.