2020: convergence, divestment, disappointment and political posturing

With 2020 drawing to a close, it’s only fair to have a look at how the industry has been shaped over the last few months, and what to expect in the build up to Mobile World Congress.

Although the headlines have been continually dominated by friction between the worlds’ two most dominant super-powers, there have been other trends to pay attention to. Here, we are going to dissect four of the trends we feel will make a mark over the coming months in the build up to Mobile World Congress in Barcelona, most notably:

  • Continued political posturing as decision day looms large
  • Convergence as the new status quo for telecom operators
  • 5G delivers, but delivers very poorly
  • Telcos gradually hand their fate over to the money men

The Huawei white-noise will reach deafening levels

2019 has been a year defined by political conflict. Almost everywhere you look there is collateral damage from more extreme and absolutist politicians wielding the power afforded to them by public vote (or not in some cases). The concept of tolerance and compromise almost seems to have disappeared as bullying tactics and misleading statements are the go-to plays in politics.

In the telecoms industry, this political friction has been concentrated to the fate of Huawei. Huawei is somewhat of a proxy, representing the rise of China’s influence in the technology world and a loosening grip from the US. Some might believe the US is acting as the champion of the world, countering the espionage threat of China through its telco champion, but a lack of evidence presented to the industry will always undermine these claims.

And while the continued barrage of political propaganda, from both sides might we add, was stuttering towards intolerable at times, perhaps we should brace ourselves for an onslaught in the New Year.

Italy has recently made noises about greenlighting Huawei, Germany’s incumbents are already reliant on the firm and soon enough someone in the UK will have to make a concrete decision regarding the Supply Chain Review. These are three very influential nations and could dictate the fate of Huawei throughout the rest of the European bloc.

But final decisions have not yet been made.

In each of these markets, the telcos are chomping at the bit to drive forward with 5G deployment, but without the certainty of a Huawei decision only stuttering progress can be made. If these national economies are to compete in the digital economy, scaled 5G networks will need to be present soon enough; a decision needs to be made.

If a decision is on the horizon, expect some hardcore lobbying over the next couple of weeks, especially as we build towards the annual bonanza in Barcelona. The Huawei noise is perfectly poised to reach deafening levels.

Convergence is King

The idea of convergence, the bundling together of products and services into a single bill, is not new but it is starting to gather momentum.

It does seem like we have been talking about it for years, though it is only today the telcos have finally aligned all the relevant pieces to make a competent offer. This is a strategy which is expensive to develop, but the rewards do appear to be significant.

What is worth noting is that there are telcos who bought into the trend very early and are reaping the benefits today, Orange is a prime example. This forward-looking telco has been building towards the convergence dream for years and now looks as far away from the commoditised business model as possible.

This is a business which should be envied. It has a solid mobile and fixed business, a banking brand, fingers in the content pies and is even starting to make headway in areas like consumer security. Convergence is one reason for this as it has driven loyalty and trust through creating products which people want to buy and at a price which is tolerable.

Convergence works both ways. For the consumer, bundling two services into the same bill is cheaper in the long-run, and for the telco, it reduces churn, increases ARPU and creates opportunity to sell additional services. Theoretically, everyone benefits.

More telcos are driving towards the convergence dream, though some are not. What may emerge in the future, is a two-tiered telco industry (although it arguably already exists today). At the top, you have the telcos who have embraced convergence early, and at the bottom, the pure-play companies who believe there is nothing to the hype.

Convergence works. And those companies who have ignored it, will be the also-rans of the telco community.

Be surprised if people are happy with 5G

5G will be a lot of things, and above all else, we suspect it will be a disappointment.

This might sound incredibly negative and counter-intuitive, but it is being realistic. Today’s consumer is demanding, impatient and cash-conscious. 5G has been launched by numerous parties across the world, though the geographical footprints of these networks are minimal.

Realistically, the telcos have done an excellent job in delivering 4G connectivity. In most advanced nations, coverage is almost guaranteed, unless you are a farmer. Unfortunately for the telcos, this experience will count against them as we push into the 5G era, as the consumer will expect the same. Few will have been educated to understand that emulated the scale of 4G in 5G will take years to achieve.

This is a challenge the telcos will have to address over the next couple of months. Consumers will have to be upgraded to 5G tariffs, but they will not want to pay anything extra, irrelevant of the geographical coverage. Telcos might well have to introduce a premium on these tariffs to raise the funds to continue deployment, as the efficiency gains of 5G connectivity over 4G are highly unlikely to be enough to fund the required investments.

Enterprise customers will of course provide a lot of stimulus for the industry to drive forward with 5G deployment, though everyone in the industry should brace themselves for an unhappy consumer as the sparse 5G connectivity gets negative reviews.

Money men start to erode telco influence in telco industry

2019 has already seen numerous money men get more actively involved in the telco industry but it looks like this is only the tip of the iceberg.

Goldman Sachs bought CityFibre, Elliott Management has been wrestling for control of Telecom Italia and Brooking Infrastructure is hoovering up assets throughout the industry. These are only a few examples, but the financial and investment industry is looking much more attentively at telecoms.

But why?

Firstly, the consumer is increasingly showing a willing to spend more money on connectivity services and products. This sounds strange, but more families are upgrading to fibre, more users are taking up unlimited mobile tariffs and more products are embedded with connectivity. The consumer appetite looks attractive to these companies.

Secondly, governments are setting in place the right policies to encourage investment in connectivity infrastructure. Red-tape is being removing, ransom rents are being killed off, access to public infrastructure is being opened-up and government subsidies are becoming more common place. Return on investment for communications infrastructure is looking much more achievable.

Thirdly, the enterprise segment looks like it will be a cash-bonanza in the future. Digital is finally embedding itself in industry as more companies realise that digital-first is the only way to survive. This opens up huge potential for telcos to make more money from assets which once laid have incredibly life-spans.

Finally, the telcos need cash. The digital dream is one which is very expensive, and these are companies which have taken a beating over the last decade. Despite the promise in the future, the telco industry is a difficult one to make profitable today. This presents a bargain opportunity for the money men to engage the telcos who are desperate for cash injections to drive through 5G and fibre deployments.

As we have said before, 2019 saw a lot more engagement from the financial and investment community, though this is likely to accelerate over the coming months.

Investment bank backs the BT waiting game

Don’t expect BT to give too much away over the next couple of months, but investment bank Jefferies thinks there is enough there to make the telco a good bet.

The arrival of new BT CEO Philip Jansen has sparked the prospect of the telcos revival, at least from a share price perspective, though Jefferies believes cards will be held very close to the chest for the moment. Don’t expect too much insight on future strategies over the near-future, but the foundations seem steady enough to put BT in a solid position.

The last few years have not made for comfortable reading for many BT investors. In November 2015, share price stood at £4.99. This was not a historical high, but it was a peak in recent memory. Since that point, share price has declined 56% after gains from EE remained elusive, the Openreach position was challenged and a disastrous entry into the content game. Under former-CEO Gavin Patterson, BT entered a slump.

That said, in January BT reported positive results, suggesting the restructuring process implemented over the last 12 months was setting the foundations for recovery. Jansen was entering a business which was in a reasonable position.

“BT welcomes its new CEO with foundations to build on, not a slate to wipe clean,” the Jefferies investor note states.

However, with Jansen’s first earnings call just weeks away, don’t expect too much insight on BT’s future strategy. With Ofcom’s Access Review still yet to see the light of day, it would be “illogical” for BT to make too much of a commitment in the near future.

Depending on the outcome of this review, there might be room for Openreach to consider premiums on FTTP, there might be demands to increase CAPEX, there might be a need to cut Dividend Per Share (DPS). There are too many maybe’s floating around the regulatory uncertainty created by government ambitions to fibre-up 15 million UK homes by 2025.

While there is a suggestion DPS growth might freeze or reverse, this could allow BT to redirect funds towards the CAPEX column at Openreach. This could assist the telco in creating a friendlier relationship with Ofcom, an outcome which would be beneficial for everyone involved.

Jefferies feels there are too many unknowns for the telco to make any concrete commitments moving forward, but in encouraging customers to Buy BT, there is seemingly a lot of confidence.

Regionalised monopolies or all-out competition? That is the question

It is always better to be a leader than a chaser, but sometimes you play the hand dealt. The UK is playing catch-up, but what is the right way forward; regionalised monopolies or bitter battle for the consumer?

This is a question which was addressed by Minister for Digital and Creative Services Margot James at the Connected Britain event this morning, and is currently being investigated by those running the Future Telecoms Infrastructure Review. The idea is to strike a balance between the two, but that is much easier said than done. Sitting on the fence, appeasing all contributors, is never a healthy situation.

As you can imagine, there are pros and cons for both sides. On the monopolistic side of things, the telco would be confident of capturing customers and therefore generating ROI. The rollout would be notably faster due to the guarantee of customers, either through direct-to-consumer services or wholesale, but then there is a risk of another Openreach saga being reached.

Looking at all-out-competition, the consumer wins as there would be a heated battle on price and performance to capture revenues, but deployment will be much slower. Telcos would have to spread investment further over different regions, while also not having the same level of confidence in securing revenues.

There are of course other options, collaborative investments in networks is one which springs to mind, though we are not entirely confident in the telcos ability to place nice with each other. The Future Telecoms Infrastructure Review will provide more insight, but the government is staying suitably tight lipped there.

“We are a matter of weeks away from delivering the review, I have the unenviable task of telling you the government’s view without telling you the government’s view,” said Raj Kalia, CEO of BDUK, the government department responsible for overseeing the deployment of future-proofed infrastructure.

While there was very little of substance said at the conference, pertaining to the review that is, we got the impression the government will be leaning more towards the network sharing model. This will be the telecoms version of herding cats, but perhaps is one of the most sensible. Investment risk for the telcos is reduced, while there is still the opportunity to monetize. Depending on how the government intends to ‘stimulate’ deployment, there might still be an element of regionalised monopolies, but with multiple telcos contributing to the rollout, risk is reduced for the consumer on the other side of the coin.

One comment was directed towards the UK’s fantastic ability to conduct investigations and reviews, as a substitution for genuine action, but all eyes will be directed towards the Department of Digital, Culture, Media and Sport, as well as the much lauded Future Telecoms Infrastructure Review over the next couple of weeks.