Analysis Mason: Telecoms industry faces challenging conditions in 2023
Analysys Mason has warned of the challenges facing the telecoms industry in the year ahead. Like many other industries, the biggest issue facing the sector in 2023 is how it copes with the impact of inflation, particularly rising energy costs, and the reaction to any price rises that are passed on to customers. In addition, this is set against a backdrop of existing market challenges that are already testing the industry’s ability to deliver services, open up new revenue streams and return value to shareholders.
The industry is experiencing a mix of declining revenue and increasing investment costs. The sector has underperformed compared to the market index over the past decade, reporting a low return in 2021 (7 percentage points below the European market, and a similar performance against the markets in North America and Asia), and it has some of the highest capital expenditure thanks to network and infrastructure investments, particularly relating to deploying 5G, the further evolution of 5G architecture and the prospect of 6G.
“After a decade of low inflation and low interest rates, the telecoms sector faces the uncertainty of how it will be affected by these cost increases and the degree to which it can increase its own prices in response,” said Larry Goldman, Chief Analyst at Analysys Mason. “Combined with high investment costs and questions about potential returns, the market outlook is challenging as the telecoms industry tries to steer its path through price rises, rolling out network availability and launching new services.”
Here are Analysys Mason’s 10 most-compelling predictions for the telecoms, media and technology (TMT) sector in 2023. These predictions will be supported by more detailed predictions for specific areas; consumer and enterprise services, networks and software, and satellite.
The biggest issue for telecoms operators in 2023 will be coping with inflation and particularly rising energy costs. After a decade of low inflation and low interest rates, telecoms operators, like other businesses face the problem of managing rising costs and uncertainty about how much they can increase their own prices to cope.
Price rises for telecoms services will become a political issue
Elected officials have largely left pricing issues up to regulators for the past decade. Operators and regulators will be under pressure to moderate price increases, especially on consumer services. Operators will also be pushed to introduce, and publicise, ‘social’ tariffs for consumers in financial hardship, especially for fixed broadband services. We believe that operators will be able to raise retail prices, but it is possible that ARPU will not keep pace with inflation, meaning a cut in real terms. However, it is worth remembering that telecoms services are a relatively small part of any household budget and the annual price increases will be far lower than those for other products and services, such as food and energy.
Telecoms operators were relatively unscathed in the pandemic but must now cut costs
Some cost cutting will come from the automation that telcos have invested in in the past few years, but they must focus on reducing energy costs. One particular area will be decommissioning older networks more rapidly than previously planned.
Telecoms operators will maintain 5G investment plans despite few prospects of short-term returns
FTTP investment will continue to grow and infraco joint ventures will shoulder a greater share of the financial burden. Telcos will move to FTTP pushed by competition from other technologies and pulled by an increasing number of consumers demanding high-bandwidth services that are not adequately supported by current broadband connections or preferring FTTP for reasons such as its better reliability. Traditional telco capex budgets are constrained by the need to invest in 5G, but the long-term value of fibre (and utility-like models) will continue to attract outside investors.
The metaverse will not materialise in 2023, but many more telecoms operators will align their roadmap to fit the vision of an xR-centric future
Meta will continue to spend billions in R&D in 2023 with little return on investment in that timeframe: 2030 will be increasingly framed as ‘the year of the metaverse’. However, operators will take xR use-cases (like VR immersive calls, 3D video calling or digital twin technology) more seriously in 2023 and most will formulate a specific metaverse strategy (internally, if not externally) this year. Apple’s long-rumoured xR headsets may be launched in 2023 but are more likely in 2024.
Telecoms operators will not give up on digital services despite some mixed results
Some high-profile operators have recently left digital services areas (in particular, AT&T and Verizon sold their advertising divisions) and some are rumoured to be planning to divest assets (for example, Orange’s reported plans to sell Orange Bank), but these decisions should not be taken as signals that all operators in high-income countries are rethinking involvement in digital economy services. The US cable operators continue to invest in advertising initiatives, and European operators are likely to follow. TELUS is expected to generate more than 10% of its revenue from health services in 2023. Others are looking at digital education as a growth opportunity.
Private networks take-up will continue, but progress will not be smooth
Take-up of new private networks has been led by large organisations with networking teams and significant internal expertise. We expect this to continue in 2023, but if take-up is to be strong in the next tier of organisations, private networking solutions will need to be simpler and easier to buy. Suppliers will need to offer networks, devices, edge computing, spectrum and other capabilities as a package. Some form of opex/as-a-service pricing will need to be offered. If these developments do not happen, it is possible that adoption will stall.
Demand for multi-cloud connectivity will drive the launch of new solutions
Enterprise demand for SLA-based, on-demand multi-cloud connectivity and network-as-a-service (NaaS) platforms will accelerate because it will be imperative for many businesses to have cloud interconnection, app-to-app networking, zero-trust security and data-sovereignty-compliant traffic management across multiple public clouds and SaaS providers. Telecoms operators with large enterprise/B2B divisions will increasingly prioritise multi-cloud network investments using software-defined networking (SDN) and cloud-native IP networking technologies to gain ground against the alternative service providers that are dominating the market today.
Open RAN will expand in rural and enterprise environments but the crucial massive MIMO challenge will remain inadequately addressed
An ecosystem is developing around Open RAN in areas that are poorly addressed by traditional cellular architecture and operator models, namely rural extension and enterprise small cells. These deployments will gather momentum in 2023 as organisations such as the Telecom Infra Project address issues such as common testing models. However, significant challenges remain to achieve optimum performance in urban macro networks using Open RAN architecture, especially those incorporating massive MIMO. These challenges will take several more years to address to the satisfaction of large operators, and a separate and parallel ecosystem is likely to be established for macro Open RAN.
The use of SaaS deployment models will grow by 19% in the telecoms industry in 2023
This growth will come from both BSS and OSS application areas as operators use hosted applications to help them to transform their current IT stacks to support new 5G services or use them to transform legacy systems to cloud-native, cloud-delivered hosted applications. Application vendors that previously sold on-premises applications will launch increasing numbers of delivery options that will include SaaS.
Direct satellite-to-device connectivity will enter a second wave
Apple, Globalstar, SpaceX/Starlink and T-Mobile have made the first moves in this market, and we expect significant developments in 2023 from the likes of Inmarsat, Iridium, Samsung, other LEO/MEO satellite providers and major telecoms operators. The Apple/Globalstar and SpaceX/T-Mobile propositions are narrowband SoS/emergency-type services, but the competitive edge in this second wave of deals or partnerships will be announcements of two-way wideband or broadband propositions, as well as non-US coverage. Direct satellite-to-device connectivity will have more than 25 million subscribers by the end of 2023, whether it be through mobile satellite services or mobile operators’ terrestrial spectrum, making it a milestone year for this technology.
About Analysys Mason:
Analysys Mason is the world’s leading management consultancy focused on TMT, a critical enabler of economic, environmental and social transformation.