Ovum forecasts CSP capex over 2014–19 period will surpass US$2tn

London, 17 December 2014 – Revenue growth rates for communications service providers (CSPs) remain modest, but CSPs will continue to invest heavily in their networks, expects Ovum. With global CSP capital expenditures (capex) forecasted to total more than US$2tn from 2014–19, the global analyst firm warns CSPs must continue to do less with more, leveraging new technologies, network designs, vendors, and operating models.

In a new report,* Ovum reveals 2014 capex will likely be US$346bn, with fixed CSPs accounting for 41% of the total and mobile the remainder. Ovum expects flat capex in 2015 due to mobile growing roughly the same amount as fixed capex declines. The years 2016 and 2017 are likely to be weak capex-wise, for both the fixed and mobile segments. We expect a modest recovery in 2018–19 as a new wave of fixed broadband, fixed cloud/data center, and mobile broadband upgrades start rolling out in a number of large markets.

Report author and principal network infrastructure analyst Matt Walker says: “CSPs have invested fairly heavily in 2013–14 across both fixed and mobile networks to support broadband rollouts. But this capacity will be absorbed, and technology and feature upgrades will drive capex back up to about $354bn by 2019. Over the entire 2014–19 forecast period, CSP capex will total over $2tn.”

As CSPs have navigated the tight revenue climate, they have been faced with one constant pressure: the need to continue investing in their networks. The CSP business is a capital-intensive one. Technology doesn’t stay stagnant. Users continue to put more pressure on the networks. New players from adjacent markets threaten to steal customers and revenue streams if CSPs can’t keep up. Hence CSPs have continued to spend heavily on networks in the last five years, plowing an average of nearly 18% of revenues per year into capex. Going forward, we expect CSPs’ capital intensity (capex/revenue ratio) to fall slightly, to roughly 17.4% on average from 2014–19.

Walker notes that CSPs have faced a tough revenue climate for several years now, and learned to keep a lid on capex through a number of tactics. Network sharing is one. “We’ve seen rapid growth in network-sharing agreements over the last year or two, as discussed in the November 2014 report, ‘Network and tower sharing projects reach 100 by end 3Q14, up 32% from last year.’ Even China has joined the party; mobile revenue growth has slowed rapidly there over the last few quarters, and the new tower-sharing venture is meant to help operators lower their cost base and increase efficiency.”

CSPs are also adding software intelligence into their networks, in many ways. Mobile operators have been deploying software-defined radios for many years, which may lower the initial capex requirements of radio upgrades. Software-enabled features also appear in most other parts of the network, even in optical transmission and fixed broadband equipment. Vendors typically spend 50–70% or more of product R&D on software, in fact, revealing its importance to future network operations. And then there are software-defined networks (SDN) and network functions virtualization (NFV). While not necessarily offering immediate capex savings, one clear aim of CSP proponents of SDN/NFV is to lower both operations and capital costs, along with new service/feature deployment.

Walker concludes, “While CSP capex is tightly constrained, adjacent markets are starting to invest heavily in networks. Internet content provider (ICP) capex will reach nearly $57bn in 2014, up from $18.3bn five years ago. We expect network capex from the ICPs – which include Google, Apple, Facebook, Alibaba, and many others – to continue growing over the next few years. These providers represent an attractive growth market opportunity for vendors selling technology.”