The Myth of Revenue Fluctuation During the Network Investment Cycle

According to the leading telecommunication infrastructure vendors, 5G connectivity entered the commercial deployment stage at the end of 2018. Early adopters, including the United States, China, Japan, South Korea, and the United Kingdom, all announced their commercial mobile 5G launches for 2019, as telecommunication infrastructure vendors have already started to ship 5G-capable network equipment. Huawei alone claims that it is currently testing 5G with 154 Mobile Service Providers (MSPs) in 66 countries and has already shipped more than 10,000 5G basestations worldwide. Mobile infrastructure vendors’ revenue fell flat for the past 7 years, in parallel with the wide-ranging spread of 4G technologies. Despite the momentous hype around 5G, vendors cannot expect a significant revenue increase from the new generation in the upcoming 2 years either.

5G hype is evolving further, and not a week goes by without a groundbreaking 5G success story from any major MSP: Verizon launched commercial pre-standard 5G home Fixed Wireless Access (FWA) on October 1, 2018; Elisa already started to sell 5G subscriptions in Finland; Ooredoo launched the first “commercially available 5G network in the world” in Qatar’s capital city Doha; and the three South Korean MSPs launched 5G for enterprise customers.

On the other hand, major mobile network infrastructure vendors are in the middle of their cost-cutting plans: at the end of October 2018, Nokia already recorded a total of EUR1,56 billion in cost savings from the expected EUR1,75 billion. The Espoo-based vendor also expects a further EUR700 million in savings during the upcoming 2 years. Ericsson is also in the middle of its own restructuring program: after major changes in the executive team and a comprehensive reorganization program, the number of employees has reduced with 23,500 to 94,500 since 2014.

Nevertheless, the first 5G-related announcements are seeing limited geographical coverage: 5G rollouts in several cities could literally mean a dozen 5G-capable hotspots in frequented areas, mainly driven by marketing priorities. 5G is expected to be deployed in phases, starting in dense urban areas, or megacities. Total 4G investments did not have a steep increase either in the early stage of the 4G investment cycle: after a 10% increase, fueled by early deployers in 2010, the market platooned around US$100 billion.        

Total MSP Capital Expenditure (CAPEX) remained flat, as 4G became more mature, and large-scale Chinese and Indian deployments provided a stable revenue stream to infrastructure vendors between 2013 and 2016. Afterward, vendors could successfully monetize more advanced, 4G-based technologies, such as 4.5G or 4.9G, and gross vendor revenue stayed on the same level until 2017. Increasing demand for fiber deployments also helped vendors balance out the drying up mobile network market. Only 9 years after the launch of 4G, infrastructure vendors are ready to offer the next generation of connectivity, but the level of demand for large-scale deployments is questionable.

The notable exception in the chart above is the rise of Huawei’s Carrier Business Group, which has experienced stable growth, contrary to Western infrastructure vendors, which suffered after initial nationwide LTE deployments were mostly complete. On the other hand, Western vendors now have access to the U.S. market and other early 5G adopters, while Huawei’s political challenges are only increasing.

Apart from a few exceptions, such as T-Mobile US (only low band on 600 Megahertz) or the microstate of Singapore, MSPs are cautious and do not promise CAPEX-intensive, nationwide 5G coverage. While vertical-focused, advanced 5G features, such as Ultra-Reliable Low Latency Communications (URLLC) and network slicing have yet to be seen, customers will also need to wait for their first 5G-capable handset until 2019. The U.S. market leader, Apple, is rumored to be introducing its 5G-capable iPhone in 2020, probably during its familiar September smartphone launch cadence. ABI Research expects that, despite 5G’s enhanced network efficiency, 4G will remain the largest mobile data conduit at least until 2023. Thus, 5G-related investments will not take off before 2020 on a global scale; and furthermore, 5G networks will grow at a much slower pace than 4G did.

Despite the current 5G hype cycle, major network infrastructure vendors cannot expect soaring revenue. While Ericsson and Nokia reported relatively flat sales for their network units in their latest quarterly reports, Huawei continues its growth, but that is still unsure with the impact of the global battle over network security, and ZTE recently reported promising sales figures. To prepare for the upcoming difficult months, ABI Research expects that infrastructure vendors will focus on internal efficiencies and very careful vetting of commercial decisions. There may also be further cost-cutting measures by the large infrastructure vendors during 2019. Nevertheless, ABI Research expects that all vendors will continue to capture synergies, eliminating duplication in operations, and focusing on improving cost structure, while implementing lean, agile processes. Secondly, they will target MSPs with enhanced financial positions and large-scale deployment plans, increasing R&D investments and customer operations to accelerate deployments.