CAPEX vs. OPEX Models for Private Networks: Why Renting is Not Always Better than Buying

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By Leo Gergs | 4Q 2021 | IN-6294

As private networks continue to grow and upgrade, it is essential that there be flexibility in the evolution process.

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CAPEX and OPEX Announcements in the Private Network Domain

NEWS


If you look at the current private networks’ discussion, it has centered around how to provide the entire End-to-End solution in an as-a-Service business model for enterprises (monetization would therefore happen through operational expenditure, OPEX). While the idea behind this very valid (reducing upfront investment necessary from an enterprise point of view), it does not consider that in this model, enterprises will never fully own their connectivity infrastructure and therefore would always be dependent on a third party. Furthermore, the ownership of vital production infrastructure is often seen as an important economic asset and therefore increases enterprises’ readiness to invest some capital expenditure (CAPEX) to acquire network infrastructure.

On a different note, considering recent developments within the telecom domain, such as Elisa acquiring software house TenForce, camLine Group, and CalcuQuote in 2021 and Microsoft acquiring the likes of Affirmed Networks and Metaswitch, it is therefore time to revisit the OPEX versus CAPEX discussion and assess its validity, with a specific look at the effects it has on the assessment of financial stakeholders.

What Determines Enterprises' Preference of CAPEX or OPEX Models?

IMPACT


On a first level, there are business economic decisions on the supply-side of cellular connectivity solutions. Looking at the exemplary cases of Elisa and Microsoft, it becomes clear that they invested CAPEX to increase the breadth of their product portfolio. First, the investment truly adds value to the likes of Elisa or Microsoft as they do not duplicate already existing products. Secondly, even though these acquisitions extend the traditional portfolio of Elisa or Microsoft, they are strategically aligned with their core products, i.e., present a valuable direct addition to connectivity solutions. Therefore, this increases competitive advantage over other players in the market and will increase their bargaining power. As these acquisitions present an immediately monetizable asset to connectivity suppliers, they increase the economic valuation.

On a second level, there are economic considerations on the implementer-side of a cellular connectivity solution. On this level, the discussion is slightly more complex, as it needs to distinguish between possessing connectivity infrastructure and adjacent responsibilities (like system integration, network management, and network support). An implementing enterprise (such as medium-sized port or warehouse, for example) certainly sees possession of communication infrastructure (as part of production infrastructure) as an important economic asset. In fact, an enterprise that is dependent on a third party for the provision of their own production infrastructure gives away the basis of their economic activity and places their economic fate into the hands of a third party.

On the other hand, owning network infrastructure comes with certain responsibilities, as enterprises will be tasked with network management and maintenance, or integrating the network into their existing workflows. In contrast to network infrastructure, however, this presents a new set of network management capabilities, which are not strategically aligned with most enterprises’ respective fields of activities and are therefore not able to monetize these capabilities. As network management expertise consequentially is seen as a financial burden to most enterprises, acquiring these in a CAPEX model will not be appealing to them.

What Does This Mean for the Telecom Industry?

RECOMMENDATIONS


The telecom industry needs to appreciate that even small and medium-sized enterprises owning all their connectivity infrastructure is seen as a financial asset and therefore affects the enterprise’s economic valuation. What is prohibiting them from possessing their own connectivity infrastructure is the fact that this comes with additional responsibilities around system integration, network management, and maintenance that enterprises cannot (or strategically speaking, do not want to) get involved in.

An enterprise connectivity offering, therefore, needs to distinguish more carefully between infrastructure on the one hand, and managed and professional services on the other. Furthermore, it needs to bear in mind that high upfront investment costs still serve as barriers to entry. Therefore, suppliers need to think about intermediary monetizing models that allow enterprises to pay off infrastructure over a period of time but guarantees them full ownership at the end of that payment time.

At the same time, network operation, support, and enterprise-grade applications can be offered in an as-a-Service model to small and medium sized enterprises, as they will have limited business economic interesting in acquiring these capabilities. To account for the fact that large enterprises might have their own inhouse network management expertise and application development resources, the telecom industry should furthermore be prepared to offer the infrastructure layer individually from any services and application layer, as this would give large enterprises the flexibility they require. This therefore maximizes the total addressable market for a cellular connectivity solution provided by the telecom industry.

 

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