Reduced CapEx in the telecom industry signifies a strategic shift towards more efficient and flexible investment approaches, potentially leading to innovation and new growth opportunities while balancing the risks of underinvestment.
Recent operator reports confirm a global decline in CapEx throughout 2023, with forecasts suggesting further reductions in year-end financial results. As 5G adoption peaked in certain regions in 2022, the telecommunications sector saw a 130 basis point drop in Q1 2023, bringing CapEx spending down to 16.7%. This trend underscores the industry's shift towards optimizing investments aligned with market demands.
While decreasing CapEx may prove to be challenging for vendors and civil engineering firms with contracts, it also presents operators with opportunities to enhance cash flow and explore strategic alternatives.
Analysys Mason forecasts predict that capital intensity (CapEx/revenue) will decrease from approximately 20% to 12–14% by the decade's end. This decline reflects diminishing customer demand for speeds beyond 1 Gbit/s fiber and unlimited 5G, as current networks adequately meet these requirements, slowing measurable demand growth annually.
The CapEx Reduction Trope
Telecom Review previously shared that 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. And to achieve that, operators must ensure that investments are made at the right time and place, and in the right way, which is continuously being seen across the industry.
These approaches help operators maintain competitiveness and profitability while managing capital expenditures more effectively:
Enhanced Profitability: Lower CapEx can lead to improved profitability and cash flow. For example, in Q1 2024, du’s CapEx amounted to AED 359 million, while operating free cash flow for the year increased by 28.2% to AED 1.2 billion. These CapEx investments are being directed towards continuous 5G coverage and fiber deployment as well as the ongoing transformation of du’s IT and network infrastructure.
Operational Efficiency: Telecom companies might focus on optimizing existing assets and enhancing operational efficiency, ensuring they get the most out of their current investments. In parallel to 5G deployments, cloud BSS would help CSPs on multiple fronts, such as reduced costs due to shared resources, improved operational efficiency, and increased monetization capabilities.
New data from Dell'Oro Group indicates that the global mobile core network market will decline at a CAGR of 10% from 2023 to 2028. As of the end of 2023 until the time of writing, the number of commercially deployed 5G Standalone (5G SA) networks remains around 50. This slow growth means vendors face reduced spending on core network equipment. However, if operators currently evaluating, planning, and piloting 5G SA networks proceed with commercial launches, the number of deployed networks could increase significantly.
Shift to OpEx Models: There may be a shift from CapEx to operational expenditure (OpEx) models, such as adopting cloud-based services and outsourcing certain operations. This can provide more flexibility and scalability while reducing upfront costs.
NEC noted that in system integration, inefficient activities such as siloed approaches and excessive customizations without following industry standards can lead to increased costs and time required to complete the work.
Also Read: Double-Digit Growth in Hyperscalers’ CapEx Set to Continue
Increased Focus on Digital Transformation: Reduced CapEx could lead telecom companies to invest more in digital transformation initiatives, such as automation, AI, and software-defined networking (SDN), which often requires less physical infrastructure investment.
Netcracker suggested that modern networks must be cloud-native, react in real-time and support intent-based orchestration. Thus, CSPs can leverage automation technology and best practices, including AIOps and E2E service orchestration, to monetize cutting-edge services and maintain the highest levels of customer experience.
From a server perspective, Dell’Oro Group tipped that data center CapEx is set to surge 11% in 2024, as new AI applications such as generative AI will be a key investment driver in the cloud and enterprise. AI data center spending alone could nearly triple today’s overall CapEx figure, but only time will tell if this will materialize in a healthy and sustainable way.
Investors are growing increasingly concerned that hyperscalers, including Amazon, Meta, Microsoft, and Alphabet, are spending too much on artificial intelligence, according to Goldman Sachs Group Inc. strategists, upon utilizing about USD 357 billion for capital expenditure as well as R&D in the past year.
PMP Strategy believes that by leveraging AI in thoughtful and strategic ways, ICT companies can navigate the challenges of the current market landscape, ensuring sustainable growth and competitive advantage.
Partnerships and Collaborations: Telecom companies might seek more partnerships and collaborations with technology providers, infrastructure companies, and other stakeholders to share the burden of large capital investments.
According to Netcracker, telcos have historically allocated substantial CapEx for infrastructure, which often doesn't generate the same revenue as services and other areas. Consequently, they have depended heavily on technology partners for development.
e&'s expansion into Europe aims to achieve significant OpEx and CapEx savings through their collaboration with PPF Group, while also creating opportunities to introduce e&'s advanced B2B and B2C digital products in Central and Eastern Europe (CEE).
Network Sharing and Co-Investment: Companies may increasingly adopt network-sharing agreements and co-investment models to reduce individual CapEx while still expanding and upgrading their networks.
In Vodafone Oman’s case, the telco leveraged the government’s infrastructure investments by adopting a different approach to its own assets. Instead of constructing its own telecom towers, Vodafone Oman leased tower capacity from local entities, maximized site sharing, and formed partnerships with state-owned companies.
Network Virtualization: Network virtualization significantly reduces CapEx by shifting from hardware-centric to software-centric solutions. INTEGRASYS CEO, Alvaro Sanchez, previously expounded that updating software applications is more cost-effective and easier than upgrading physical hardware. This approach enhances network security, providing a competitive edge in customer success.
Moreover, virtualization extends the life of network infrastructure, yielding better returns on investment. For example, upgrading a 4G cell tower to 5G through virtualization avoids the high costs of new hardware, supporting scalable and adaptable business models while ensuring long-term financial and operational benefits.
Intelligent IT Integration: Addressing the role of IT integration in reducing CapEx at MWC24, Bruce Xun, President of Huawei’s Global Technical Service Department, highlighted the importance of intelligent IT integration in creating diversified computing centers for the AI era, citing an example for reference. He explained that Huawei's intelligent IT solutions, particularly the innovative prefabricated Fusion Block data center, significantly enhances efficiency in general data center scenarios. These solutions shorten time-to-market (TTM) by 29%, improve space usage effectiveness by 10%, and reduce initial CapEx by 30% compared to traditional data center solutions.
Innovation and New Business Models: With lower CapEx, telecom companies might explore new business models and revenue streams, such as offering more value-added services, digital services, and solutions tailored to specific industries.
Shifting from being a telco to techco, the “e& partners network” program will support operators in customer engagement and value management, sales channels and customer experience, pricing and proposition support, AI/ML modeling, international carrier and wholesale channels, network procurement and overall CapEx and OpEx optimization and digital and mobile finance services.
Focus on Asset Monetization: Telecom companies might look to monetize their existing assets more effectively, such as through leasing infrastructure or selling off non-core assets. In January 2023, Zain Group announced a 15-year agreement with TASC Towers Iraq to sell and lease back its 4,968 tower portfolio in Iraq for USD 180 million, including management rights. This move allows Zain to focus on its core business and enhance mobile and data services for customers by freeing up resources.
Similarly, in June 2024, Nokia's divestment of Alcatel Submarine Networks (ASN), identified as a non-core standalone business, enables the company to focus on growth opportunities in its core Network Infrastructure markets and enhance profitability within its Network Infrastructure Business Group.
Potential Risks: Reduced CapEx could also imply potential risks, such as underinvestment in network infrastructure, which might affect service quality and competitiveness in the long term. During events beyond control, such as Russia’s invasion of Ukraine, CapEx for new broadband network infrastructure rollout in the country decreased. Network deployments were slowed or suspended to prioritize the health and safety of engineers.
Related: How an OpEx/CapEx Model Can Transform Cost Structures and Increase Operational Efficiency
Outlook
In the long term, the ICT market is likely to see a rebalancing, where the focus shifts from sheer volume of investments to the strategic quality of those investments. This could result in a more resilient and adaptable industry that is better prepared to navigate economic fluctuations and technological disruptions.
Ultimately, while the reduced CapEx trend might pose challenges, it also opens avenues for a more thoughtful and sustainable growth trajectory in the ICT sector. The industry’s ability to adapt and innovate in response to these constraints will be crucial in defining its future landscape.
