UBS: 5G capex at $30 billion for India telcos; 5G spectrum auction by January 2020?

UBS analysts say that India’s top three telecom operators will have to spend a little over $30 billion on 5G base stations and fiber infrastructure. According to UBS, the need for a dense site footprint and fiber backhaul for 5G access networks will likely shift the balance of power towards larger and integrated operators with strong balance sheets.

Bharti Airtel and Vodafone Idea would need $10 billion capex each over the next five years.

“Bharti has solidly defended its market share and has narrowed the gap with Jio on 4G network reach, with improving 4G net adds. The company recently revamped its digital offering and launched converged digital proposition ‘Airtel Xstream’ offering digital content across TV, PC and mobile devices along with IoT solutions for connected homes. Further, Jio’s recently announced fixed broadband plans starting at Rs 699 are not as aggressive as we (and the market) feared and, therefore, do not pose significant pricing pressure on Bharti’s broadband average revenue per user,” UBS said in a research note to clients.

Reliance Jio’s incremental 5G capex is estimated somewhat lower at around $8 billion.  That’s because Jio already has more 5G-ready fiberised towers than the incumbents, having already spent around $2 billion on tower fiberization.

Analysts were skeptical about Vodafone Idea’s ability to sustain such big-ticket capex spends given its continuing market share losses and weak financials, which they said could limit its 5G deployment ambitions.

They also said the need for a dense site footprint and fibre backhaul in 5G would shift the balance of power towards larger and integrated operators with strong balance sheets like Jio and Airtel, while those with high gearing levels are at risk given the sustained high capex needs.

“Airtel and Vodafone Idea will each need to spend $2 billion annually on 5G radio and fiber capex spread across 5 years,” UBS said in a report, implying 65% and 85% of Airtel’s and Vodafone Idea’s current annual India capex run rates respectively.

By contrast, Jio’s 5G capex, “would be lower due to its larger tower footprint and higher proportion of towers on fibre backhaul compared with Airtel and Vodafone Idea.”  The brokerage firm also expects Jio to transition to 5G in a “time-efficient manner,” given its in-house data centres and investments in a content distribution network (CDN).

“Vodafone Idea’s stretched balance sheet will limit its participation in the 5G opportunity, and the company will require a significant improvement in network quality to arrest market share loss and revert to revenue growth,” UBS said.

Credit Suisse backed the view, saying, “Vodafone Idea will lose the most market share, and will need additional equity capital by FY2021, given our expectation of no price increase”.

UBS estimates that Airtel’s India mobile revenue will grow 5-6% in this financial year and the next even if interconnect usage charges – a source of revenue for incumbents – get scrapped from January 2020.

According to analysts, the India telecom sector can reduce overall estimated $30.5 billion 5G capex spends by 15-20% if Airtel, Vodafone Idea and Jio share towers and fiber resources.  However, there is currently no progress on that front.

“We estimate the sector can reduce overall capex by 15-20 per cent if the three Indian telcos share towers and fiber (either commercially or driven by the regulator) – third-party tenancy poses upside risks to our estimates,” UBS said in its report.

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India’s Department of Telecommunications wants to hold a 5G spectrum sale by January 2020 at the latest, according to referenced sources.

Credit Suisse doesn’t expect that 5G spectrum sale to attract much interest.  That’s due to a mix of “high reserve prices, telcos’ focus on monetising 4G investments, stretched balance sheets, a nascent 5G ecosystem and lack of significant 5G use cases for mass consumption.”

Rajiv Sharma, co-head of research at SBICap Securities, said that Vodafone Idea is unlikely to bid for 5G spectrum at current base prices “as the telco doesn’t have an existing pan-India 4G network that is essential for any telco planning to spend top dollars on 5G,” according to the report.

Analysts believe that Reliance Jio will probably take part in the process, as it is the only profit-making telco in the Indian market.

The Department of Telecommunications (DoT) had recently asked the Trai to lower the starting prices, which the regulator refused.  “There was a chance for the Trai to reduce 5G prices. Let’s see what the DoT does now. But at current rates, Airtel won’t buy,” Airtel’s executive reportedly said.

Vodafone Idea CEO Balesh Sharma has previously said that the prices recommended by the regulator were ‘exorbitant.’ The telco said it will participate in the next auction but did not confirm if it would buy 5G spectrum.

Hemant Joshi, partner at Deloitte India, said it would be “prudent to defer the 5G auction till 2020 at least since at Trai’s recommended base prices, the industry response may be very lukewarm.” He also said that the reserve prices need to be lowered, taking into account the experiences in countries where 5G spectrum was recently auctioned.

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Analysts said there are three things that India’s Centre for Telecom Excellence (within the DoT) must do immediately to hasten the adoption of 5G:

First, lay down a clear roadmap of spectrum availability and specify frequency bands aligned with global standards (IMT 2020 from ITU-R). Given that 5G services will be supporting massive data applications, operators will need adequate spectrum.

Editor’s Note:  India’s TSDSI has proposed a candidate IMT 2020 RIT based on Low Mobility Large Cell (LMLC), but it hasn’t yet been accepted by ITU-R WP 5D.  TSDSI posted a revised and more comprehensive proposal on 10 September 2019, which will be evaluated at the next ITU-R WP 5D meeting in December.

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Second, there is a need to move away from the existing mechanism of pricing spectrum on a per MHz basis. 5G services require at least 80-100 Mhz of contiguous spectrum per operator. If the Centre were to fix the floor price based on the per Mhz price realised in the last auction then no operator would be able to afford buying 5G spectrum. The pricing, therefore, will have to be worked out anew, keeping in mind the financial stress in the telecom sector and affordability of services.

Finally, the Centre must rapidly complete the national fiber optic network rollout as 5G high speed services will require huge back-haul support for which existing microwave platforms will not be sufficient.

References:

7 thoughts on “UBS: 5G capex at $30 billion for India telcos; 5G spectrum auction by January 2020?

  1. From https://www.ubs.com/global/en/wealth-management/marketnews/home/article.1453135.html

    5G faces some very real economic issues. Carriers will have to fund additional spectrum purchases at the same time they are building 5G networks, and continuing to upgrade 4G networks. Small cell densification requires a very high investment into additional fiber optic cable.

    We also believe carriers will have to creatively and compellingly market and position 5G beyond a simple speed upgrade to drive consumer adoption, and enterprise adoption will likely require much trial and error.

    While the infrastructure and technology investment will be significant, there are numerous monetization opportunities for carriers, equipment vendors, fiber optic owners, and handset manufacturers.

    However, we do caution that the 5G ramp will be lengthy, with some industry players pointing towards 2035 as the year the full economic benefit will be realized. We also expect that progress will be uneven and that experimentation of new business models will be accompanied by some failures.

    Looking at the major industries the transition to 5G will affect, telecom equipment is one of the earliest beneficiaries. Industry analyst IHS forecasts the global 5G equipment market revenue will grow at more than a 70% compound annual growth rate from 2019-2022 to approximately USD 20 billion and continue to rise until 2025.

    The current small cell rollout only represents the last-mile of 5G wireless connections. Carriers are pushing wireline networks as close to the customer as possible prior to the small cell utilization, which requires connection to new and existing fiber optic cables.

    Fiber-leasing is a common tactic carriers are using, which is giving tower companies a boost in revenues. To put the demand in perspective, Verizon acquired XO Communications in 2016 for USD 1.8 billon. In doing so, Verizon received 2.3 million route miles of fiber. Verizon has also signed a supply agreement with Corning, a leading global provider, to buy up to 20 million kilometers of optical fiber annually from 2018-2020.

  2. From UBS 11 Sept 2019 report (free download): 5G refresh – a lot has happened in two years

    Industry analyst Ovum forecasts as many as 1.3 billion 5G users globally by 2023 compared to approximately 720,000 by the end of this year. Given that 5G is useful for industrial and enterprise customers, we would expect a larger portion of the initial subscribers to be those focused on IoT and autonomous compared to 4G and 3G rollouts.

    Although 5G smartphones are already available, 2019 will likely not be a ground-breaking year. We would expect adoption to ramp up in later 2020 and 2021 in the US as the carriers continue to roll out coverage and develop the small cell network needed for the advertised performance.

    The 5G investment cycle is also predicted to last longer than 4G, which only took six years to reach its peak. Nokia expects 5G to reach its zenith in seven to 10 years due to a number of factors, the largest one again being the end customer. The innovation enabled by 5G such as autonomous driving and smart cities will require more
    time to deploy the necessary infrastructure and frequencies. North America and China are expected to lead the charge, with Ovum predicting North America consisting of 14% of the 1.3B subscribers mentioned previously.
    ……………………………………………………………………………………………………………………………….
    The RAN in 5G will be increasingly virtualized, meaning that instead of dedicated, purpose-built hardware will be replaced by general purpose servers (most likely x86) that will run the network as a series of functions in software. This network functions virtualization (NFV) enables key features of 5G adoption and economics. A virtualized RAN will enable network slicing, which allows a single physical network to be separated into multiple virtual networks that provide distinct service quality and offerings.

    Network slicing: Multiple applications such as voice, video, and are all currently supported on the same 4G network infrastructure, leading to inefficiency and low utilization. Network slicing is a new feature within 5G that aims to provide a dedicated virtual “slice” of the network to support a specific application. For example, two businesses may be on the same mobile network, but have very different mobile bandwidth requirements. One business may need ultra-high bandwidth, while the other requires extremely high reliability. Complicating the matter is that both customers have irregular usage patterns and therefore cannot justify a dedicated service. Satisfying both customers’ needs in a 4G environment is possible, but not particularly practical as significant network engineering is required each time the services are turned up.

    However, the software enabled 5G network is able to provide multiple dedicated network services when needed and where needed on the same physical infrastructure. A software layer on top of the physical infrastructure allocates horizontal “slices” of the network from end-to-end, i.e. from the application in the network core out through the radio network and into the end device. Importantly, this can be on-demand and can be applied as a vertical solution for individual markets.
    …………………………………………………………………………………………………..
    5G will likely have carriers looking beyond wireless:

    We believe carriers will have to creatively and compellingly market and position 5G beyond a simple speed upgrade to drive consumer adoption. We expect to see significant bundling of media over time. Furthermore, fixed wireless access may be a necessary ingredient to drive adoption. Although FWA (Fixed Wireless Access) has ramped slower than originally expected, we believe solid progress is being made by carriers in the United States. Importantly, we believe US carriers will focus on FWA combined with over the top video offerings (whether proprietary or US equities 11 third party) to support their nascent efforts in digital advertising. The combination of authentication and the rich user history available to carriers makes the USD 50bn US television advertising market an attractive adjacency

  3. India telecom minister Ravi Shankar Prasad on Friday said the 5G spectrum auction will be conducted this year-end or early next year.

    “The communications policy is already in place, and by the end of the year or the beginning of the next year, we propose to go for auction of spectrum. We are very sure that India’s auction of spectrum will be done in fair and transparent manner,” he said at an event in Mumbai.

    Under the scheme, the government plans to auction around 8,293.95 MHz of airwaves at an estimated total base price of Rs 5.86 lakh crore.

    The DoT has suggested a base price for 5G airwaves at Rs 492 crore per MHz and proposed a sale of a minimum 20 MHz blocks, which would mean a telco spending close to Rs 10,000 crore for 20 MHz, and Rs 50,000 crore for 100 MHz.

    “My department will surely look into all the issues of the telecom sector. Many of them we have already taken up with ..

    https://economictimes.indiatimes.com/industry/telecom/telecom-news/5g-spectrum-auction-by-year-end-or-early-2020-ravi-shankar-prasad/articleshow/71117477.cms

  4. Yet another informative article by the author!

    As to the capital investment requirements quoted by UBS and others, one has to be very skeptical regarding the capacity of major Indian carriers. They do not have the internal cash flow to make such expansion. That would leave the big three Indian carriers no option other than taking on new debt obligations on top of already disproportionately heavy debt and a questionable ROI/business model.

    Moreover, in spite of the hype, clear 5G use cases in most markets remain elusive.

  5. 5G use cases based on ultra low latency can not be implemented till 3GPP Release 16 is complete (sometime in 2020) and forwarded to ITU-R WP 5D for inclusion in IMT 2020 specs (to be finalized in early 2021).

    Enhanced Mobile Broadband use case would require ubiquitous 5G, standardized 5G spectrum, roaming and many more 5G smart phones. Not here yet and won’t be until atleast 2021.

  6. 5G telecommunication, the widely-awaited next-generation technology, is just around the corner, but may not come into India with a dance, and may rather need government crutches to walk in. India is staring at the onset of 5G technology at a time when the telecom companies in the country are struggling with weak finances, low profitability, intense competitive pressures and existing infrastructure costs. Catering to a huge customer base in a country with a population of over 130 crore people would require a lot of funds to cover the costs of equipment, fibre, and tower installation. This may be difficult for Indian telecom firms.

    Adding more burden of new infrastructure costs looks like a far-fetched move for Indian telecom companies at this time when the industry is reeling under intense competition and struggling to keep up margins. “Implementing 5G technology in India will need a tower at every 500 metres, which would generate substantially higher radiation. The license fee can itself cost around Rs 25,000 crore for an operator, which can only be borne by a few companies such as Jio, which can take international loans,” Shrawan Dubey, Circle Secretary, Telecom Officers Association, BSNL, told Financial Express Online.

    He added that it is difficult to get such huge loans from banks and therefore the government’s help will be the only way other operators can afford it. A discussion at the World Economic Forum’s India Economic Summit this week may have a solution to 5G funding woes — government support in laying down the infrastructure. Governments and regulators across markets, including in India, must look at 5G as national infrastructure, Magnus Ewerbring CTO, APAC, Ericsson South-East Asia, Oceania, and India said at a discussion at the India Economic Summit in Delhi.

    A 5G national infrastructure could help telecom companies with a lesser burden of costs such as infrastructure, licenses, etc. “5G will bring socio-economic growth to nations in every corner of the globe. It will enable a connected, digital society and act as a core foundation for the Fourth Industrial Revolution, building on the scale of billions of connected devices and a global system of vendors,” Magnus Ewerbring of Ericsson said.

    Indian telecom companies with legacy infrastructure will have to consider replacement costs before taking the 5G road. “While Reliance Jio focuses on prioritising 5G investments in anticipation of accelerating commercial prospects, other telecom companies seem to be having a more conservative outlook,” said a recent Deloitte report.

    New telecom technologies can provide much-needed gains in efficiency and profitability as 5G is a system developed not only to support massive growth in mobile broadband use but also to support broader uses that require secure and reliable connectivity. These include massive machine-type communications such as smart buildings, logistics, fleet management, smart agriculture, and smart meters. 5G also addresses critical machine-type communications such as traffic safety and control, remote manufacturing and industrial applications.

    https://in.finance.yahoo.com/news/excited-5g-cash-crunch-may-124646272.html

  7. India is emerging as the testing and acquisition playground for global consumer technology companies, especially the so-called FAANGs, according to a veteran Internet analyst.

    RBC Capital Markets’ Mark Mahaney, who calls himself Wall Street’s “oldest Internet analyst” after covering the sector for more than two decades, said India is now more popular than markets like China because it has the same growth dynamics but with fewer regulations.

    As one of the largest economies and most populous countries in the world, India has turned into a testing ground for companies such as Facebook, which has used it to beta-test a payments feature for WhatsApp. Netflix rolled out a mobile plan in India at Rs 199 ($2.80), much cheaper than what it charges for a basic plan elsewhere, and has created original content to capture more market share.

    “India does have regulations but it doesn’t seem to be as protectionist as China,” said Mahaney. India has been considering a new law that would require personal data to be stored locally, which could impair the operations of the Internet giants but Mahaney remains confident they can still penetrate the market.

    Besides organic growth, acquisitions are another strategy for these companies in India, especially since they are facing more scrutiny back home and in western Europe. “There’s an opportunity to build growth” in Asia, particularly in India, Mahaney said.

    Amazon has already tried its hand at deals in the South Asian nation by attempting to acquire Indian ecommerce pioneer Flipkart, before it was snapped up by Walmart last year.

    Facebook, Netflix, Amazon and Alphabet can all win big in India, said Mahaney, who has a buy rating on the stocks. “India is less than 5% of Amazon’s total revenues but it has the potential” to get to that level within five years, Mahaney said.

    https://telecom.economictimes.indiatimes.com/news/us-tech-giants-turn-to-india-for-new-apps-before-world-release/71450318

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