Societies globally are all relying on technology, especially telecommunications, which powers the connectivity needed to communicate, work, and make transactions online. Driving innovation in 2022 and beyond will only see a surge on the pace and scope of digitization. With this comes massive capital expenditures or simply, CAPEX.
Telecom is one of the most investment-driven industries, claiming its spot as one of the sectors known as the ‘bedrock’ of global CAPEX. As per S&P Global, the global corporate capital expenditure is set to grow 13.3% in 2021, the biggest annual rise since 2007, signaling an economic recovery revive spending after last year's pandemic upheavals. From this, the information technology sector is leading the growth.
According to GSMA, between 2020 and 2025, mobile operators across the world will spend $1.1 trillion on CAPEX, with more than three-quarters of that intended for 5G-related investments. In 2021 alone, Dell’ Oro stated that the worldwide telecom CAPEX increased 3% YoY in the first half of the year.
A more stable CAPEX trend relative to previous generations is anticipated as operators try to keep their CAPEX-to-revenue ratios below a certain threshold. But to achieve that, operators must ensure that investments are made at the right time, place, and way.
Network investment decisions are among the most difficult for operators to address, making CAPEX optimization at the top of the agenda for telecom executives. Analysys Mason forecasts that all aspects of telcos’ CAPEX between 2017 and 2026 is crucial within the time of significant change in networks and business models. To highlight, fiber-to-the-premises (FTTP) deployment will be pervasive after 2022, causing wireline investment to fall, and increased spending on 5G to prosper.
Problems and solutions
How can leading telecom executives approach their CAPEX and turn it into their most strategic weapon to beat their competition? If we think about it, the definition of a successful project investment can be determined based on time and budget, but most importantly whether the benefits of the project are delivered. Hence, poor decision-making within an industry that invests as much as telecoms can be very costly.
CAPEX optimization is a dynamic process. Given technical and commercial constraints, it’s important to realize that the telco itself has the responsibility to define its limits, following its own strategic priorities. This will depend on the telco’s size, positioning, client base, and long-term strategic orientation.
To illustrate, let’s compare the capital decisions between an airline and telecom executive, who are both spending $6 billion of CAPEX. The airline is replacing old aircraft with new ones from a mix of configurations. On the other hand, the telecom executive needs to consider either expanding the wireline FTTH footprint, buying spectrum, upgrading cell towers to 5G wireless, or replacing legacy networks with cloud-native ones.
It is rather obvious that the complexity and diversity of telcos’ CAPEX investments exist. From this, typical problems such as lack of coordinated planning between the business/commercial and technology/service delivery teams and lack of accountability in measuring ROI performance arise. At a time when the telecoms industry is at an inflection point, spending billions on new infrastructure investments should ensure returns. Yet, telecom executives have admitted previously that capital allocation and management are both deeply flawed and frustrating.
As the markets mature, cracking the CAPEX code for efficiency is a continual route as key CAPEX levers like subscriber numbers, traffic levels, and usage patterns must remain supported by the networks. In response, we are summarizing some of the suggested solutions gathered from industry analysts and experts in terms of fulfilling CAPEX effectiveness in terms of four S (situation, strategy, spend, and structure).
Comprehension of the current plan. With a clear understanding of the current CAPEX plan, executives can identify where spending doesn’t align with strategic priorities. It also allows meaningful detection of the hot and cold zones where the company may be over-and-under investing.
Cost management. Wireless and wireline operators alike should implement these skills as an inherent core competence that can only be possible with substantial changes in the business/operating model. New pressures will mean a change in mindset and ability to adapt to the ‘new normal’.
Relevant market opportunity. By having efficient planning/upgrade guidelines that can efficiently unleash the full capability of existing assets, it is important to invest in the most relevant market opportunity areas. This will be based on priorities related to highly profitable clusters, securing fast ROI.
Assessment of existing assets. The majority of operators have a long tail of products, networks, channels, and segments that are either lucrative or ineffective. Pruning product portfolios to make way for beneficial investment cases will underpin company strength in the long run.
Satisfaction and consumption. Before, CAPEX decisions were primarily based on technical criteria such as network coverage. Now, customer satisfaction is key, and it’s not necessarily linked to network performance. Depending on their location and activities, expectations can vary greatly.
Full cost transparency. This will identify, prioritize and optimize additional-saving measures when established. A stringent OPEX/CAPEX analysis must be done to let the responsible staff responsible know the current cost drivers and the potential alternatives.
Alignment of objectives. May it be for the long term or short term, telecom players must utilize steering tools and procedures to be aligned to actual business goals. An example is partnering with hyperscalers and OTT players to improve CAPEX efficiency and network capabilities.
Overall, rewiring the end-to-end CAPEX process with clear strategic objectives puts an end to the annual budget fights and misuse across business units as well as eliminates the waste and organizational frustration that come from low returns.
CAPEX-intensive rollouts
Operators are in a period of high CAPEX mainly because of the convergence of two investment-filled cycles: 5G and fiber. 5G will involve unparalleled network investments, especially as operators migrate to 5G standalone (SA) architecture while accelerated fiber rollouts across regions would require stronger backhaul infrastructure.
Telecom CAPEX will grow until 2023, with 5G network investments (more than $700 billion globally until 2025) and the wider 5G B2B business case as the main driver of revenue growth. As per GSMA analysis, the average contribution to total revenues of B2B services (connectivity and beyond) reached 30% in 2020 for major operators. The shift to commercial deployments seen in 2021 is a clear sign of progress, but proof of value is key to scale enterprise 5G going forward.
But operators should no longer shoulder the burden alone as they can establish co-investment partnerships to help relieve CAPEX pressure. It has been estimated that operators can save roughly $250 billion cumulatively between 2017 and 2027 by sharing the CAPEX costs of new network deployments with partners.
2022 is the year for 5G to prove its value as an enabler for advanced automation in the industry, while telecom companies continue to maximize mobile tower and network monetization. CAPEX plans may have not been structurally affected during the pandemic, including FTTH rollout plans as according to GSMA Intelligence, by the end of 2022, FTTP/B as an average share of total fixed broadband connections across 36 major markets will be more than two fifths.
