PwC report on Monetizing 5G should be a wake up call to network operators!
A PwC report titled, “The challenge of monetizing 5G,” states that capital expenditures and operating expenses will likely be very high with the deployment of 5G standalone networks and their fully virtualized, cloud-native architectures. Yet returns have been anemic across all generations, ranging from 1.5% to 4.5% of return on assets.
PwC’s 26th Annual Global CEO Survey found that 46% of telco CEOs believe that if their companies continue on their current paths, their businesses would not be economically viable in 10 years.
Source: PwC
As 5G becomes an everyday reality for both investors and consumers, carriers are going to face increasing pressure on two fronts:
1. Improve return on assets
As capital markets and stakeholders begin to focus on investment returns in a high-inflation environment, there will be growing scrutiny on telcos and wireless carriers, especially in comparison to other capital-intensive investment opportunities. An exemplar cloud services provider (CSP) has demonstrated ROA of 17% to 20%+ over the past five years, which compares to the 2% to 3% ROA range of MNOs. The ROA of MNOs approximates that of regulated entities like utilities, which explains investor angst.
2. Deliver on demanding service-level agreements to support 5G “killer apps,” such as metaverse applications (really?)
Improving ROA is intrinsically tied to successfully managing the costs and revenues of 5G applications. Many operators face a growing clamor from application providers and up-stack players to create “metaverse-capable networks,” without much clarity on how application revenue will be shared with them. Network operators risk becoming trapped in a “give more, get less” scenario of providing pure-play connectivity, while up-stack companies monetize the 5G applications.
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For those who believe 5G FWA is the way to monetize 5G, PwC warned that’s not likely. The market research firm’s analysis showed FWA services could cost more than 22-times as much as mobile connectivity services. That’s due to costs associated with delivering data tied to specific latency or QoS service-level agreements (SLAs). Immersive and augmented experiences — such as virtual-reality apps, mobile metaverse and gaming — could cost three to four times as much. Network costs related to the Internet of Things (IoT) are even more challenging to estimate and track, primarily because of the extremely wide range of connected devices and applications available.
The report also found that FWA services could have up to 40-times less revenue potential. This is due to FWA services being price limited by competing fiber or cable internet options.
“Most FWA subscribers are willing to pay only as much as wireline plans cost, yet they expect a similar quality of service for internet connectivity,” the report notes.
PwC Partner Dan Hays explained during an interview with SDx Central at the MWC Barcelona 2023 event that operators should approach FWA and other alternative 5G connection services like IoT with reasonable financial and operational expectations. “Fixed-wireless access is a great way to fill out excess capacity, if you have it,” Hays said. “You see some of the carriers making that play.”
“It’s not a cure all by any means,” Hays said, explaining, “we look at it as not a business model but really a technology. It’s a technology choice that you can use.”
Hays said that operators are indeed being “really thoughtful” in managing capacity to serve FWA customers, but that can potentially run into a problem down the road where a particular site can no longer support a high-bandwidth FWA connection. “Do they fire you as a customer at some point,” he said.
In conclusion, PwC states:
Carriers will be increasingly challenged to demonstrate better returns on invested capital for massive 5G capital outlays, while simultaneously meeting the demanding service-level agreements of future 5G applications. Network costs are likely higher — and revenue potential is likely lower — than carriers understand for these applications. Critical strategies for improving ROA and monetizing 5G successfully involve accurately valuing network features, quantifying network costs and communicating them to all stakeholders, as well as improving 5G offer management, pricing and service evolution.
References:
https://www.pwc.com/us/en/tech-effect/emerging-tech/5g-monetization.html
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Huge capex outlays for 5G fail to drive revenues. By Matt Walker and Arun Menon
For the 3 months ended September 2022, total revenues for the telecommunications network operator (telco) sector declined 6.5% from 3Q21. This decline followed a similar 6.1% dip in 2Q22. These declines are largely due to weak service revenues. In 3Q22, for instance, service revenues dropped 7% YoY, while equipment revenues grew 2%. Services account for nearly 90% of revenues, so they tend to drive the average, but volatility in equipment revenues can be significant and impact the sector’s growth curve. With the rollout of 5G networks and availability of new devices, there has been a pickup in equipment revenues over the last 2 years. For the 3Q20 annualized period, equipment accounted for 9.4% of total revenues, but this has steadily grown since then, to 11.2% in 3Q22. Annualized equipment revenues for telcos were $204.6B in the 3Q22 annualized period, up 23% from 3Q20’s $166.7B. In the same timeframe, annualized services revenues grew less than 1%.
In general, telcos do not prioritize profitability when it comes to selling equipment. Their main priority is signing up and retaining subscription customers, who drive their service revenues. As such, big jumps in equipment revenues don’t necessarily help profits. They are nice, but don’t guarantee growth in related service revenues. It’s more important to focus on service revenues in assessing the health of the telco sector. That’s particularly important now, as telcos have spent heavily on their networks to deploy 5G. Telco capital intensity, or capex/revenues, reached an all-time high in 3Q22 of 17.9% (annualized), up from 16.8% in 3Q21. Telcos, and their investors, expect new revenue streams to result from these buildout costs. So far, 5G has not delivered.
https://www.mtn-c.com/product/huge-capex-outlays-for-5g-fail-to-drive-revenues/
In November 2023, Ericsson predicted there would be 5 billion 5G subscriptions in the world by the end of 2028, as operators took advantage of new spectrum licenses and built out their networks. This would mean 5G accounting for about 55% of all mobile subscriptions that year. By June, however, Ericsson had made a rather dramatic downward revision. The forecast of 5 billion subscriptions had been lowered by a whopping 400 million, or 8%, to 4.6 billion instead. Putting a dent of 100 million subscribers in Ericsson’s forecast of total mobile subscriptions, this change cuts 5G’s share of that total to about 50.5%.
This is all rather alarming for Ericsson. Although it is branching into software and pitching its wares at carmakers, factory owners and other companies that have never previously bought network products, it still generates most of its income by selling 5G equipment to operators. If those operators aren’t building networks because they can’t afford it or don’t have the spectrum, Ericsson isn’t making money.
A 400 million difference in subscriber numbers might affect Ericsson’s customers more than it hurts Ericsson. One scenario is that cash-strapped consumers refuse to upgrade to the 5G networks operators have built. Something like that could be blamed on the “difficult macroeconomic conditions” Ericsson refers to in its latest mobility report.
But operators in many countries don’t even attempt a 5G upsell – they simply provide it to subscribers with compatible gadgets at the same low rates previously charged for older network services. A likelier explanation for the missing 400 million is that 5G networks don’t exist. And auction delays – the other reason Ericsson gives for its adjustment – would obviously hinder their rollout, directly harming Ericsson. This is why the Swedish company routinely complains about authorities that take ages to release spectrum to the telecom sector.
Ericsson’s downgrade implies there will be 73 million fewer 5G subscribers each year over the forecast period than it previously expected, a figure that represents nearly 7% of subscriber numbers at the end of March. To put it in another context, it is roughly equal to the sum of customers served by all four mobile networks in France.
A big concern for Ericsson right now is some of the negative publicity surrounding 5G. It is frequently made out to be a disappointment that has brought no obvious benefits for consumers while driving up capital expenditure for telcos. To counter that, Ericsson is now trying to convince operators that 5G has already fueled sales growth.
But its case is relatively weak. In countries ranked as the “top 20 5G markets,” where average smartphone penetration has risen to about 20% since 2020, telco revenues today are only about 4% higher than they were in 2017, a chart included in Ericsson’s latest mobility report appears to show. Desperate times.
https://www.lightreading.com/5g-and-beyond/ericsson-slashes-5g-outlook-by-400m-subscribers/a/d-id/785418?