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2020 IS NOT OVER YET!

2020 IS NOT OVER YET!

Two huge, unexpected developments have played havoc with the economies of the entire world, both connected with China.

A new virus spread like wildfire, paralyzing countries for months, leaving the future uncertain, and for many devastating. GDPs plummeted, unemployment spiraled, and manufacturing, sales, advertising, product launches were all shelved. The marketing gurus, the research companies, the dynamic business leaders were at a complete loss.

As the world weaved its way, and some semblance was brought to the utter chaos that was engulfing one economy after the other, the US-China trade war escalated, and came close, knocking heavily on India’s doors too. Following a bloody clash at the Indo-China border where the Chinese PLA killed 20 of India’s soldiers, the Ministry of Commerce indicated that the Government of India would be re-looking into Chinese investments in India.

The choice of ostracizing Chinese manufacturers was suddenly no longer a calculated option.

While the others have been busy getting their act together, Jio the disruptor that it has been, went ahead and became debt-free – not just Jio, but its entire holding company, the mammoth RIL, raising Rs 1.15 trillion from social media giant, Facebook, and a raft of private equity global companies in about eight weeks, not a small amount by any yardstick. An impossible feat for any other business house!

The impact of these developments, as expected, will be huge for the Indian telecom industry.

Isolation of China begins

The major private operators, Bharti Airtel, Vodafone Idea, and Reliance Jio are procuring their 4G equipment from multinational companies, Nokia, Ericsson, ZTE, Huawei, and Samsung. In the Rs 12,000 crore annual procurement made by Airtel and Vodafone Idea combined, the market share of Huawei and ZTE is approximately 25 percent, and Nokia and Ericsson a 20 percent share each. Jio has stayed solely with Samsung, right from the beginning of its telecom journey.

Moving forward, Bharti Airtel and Voda Idea will be under pressure to not buy from Chinese vendors, even as contracts for their equipment may be cheaper compared to European manufacturers. The Chinese banks that work in tandem with Chinese telecom equipment makers extend long-term credit lines too. The financially stressed telecom industry is expected to have a setback, as not only will the equipment price go up by at least 20 percent, with the COVID pandemic refusing to relent in Europe, there could be supply chain issues too.

RADHEY S SARDA
CTO Wireless
Huawei Telecom India

“India’s cellular traffic increased between 13 and 30 percent during the lockdown, taking it to the top in terms of data consumption anywhere in the world. By the end of March, it had risen to an unprecedented 307 petabytes per day.”

The smartphone market in India has one of the deepest Chinese penetration and Chinese smartphones dominate over 70 percent of the Indian smartphone market. The Made in India tag is quite a misnomer. The import of mobile phone components during April–February FY20, hit USD 7.5 billion, of which 25 percent was from the Mainland. According to the Ministry of Corporate Affairs’ Invest India data, Chinese IT and tech companies like Xiaomi, Oppo, Vivo, and Huawei have secured 100 percent FDI in contract manufacturing in India, and have set up plants in Greater Noida, Andhra Pradesh, and Tamil Nadu,

The internet consumer sector is also dominated by Chinese companies in India. More than 50 percent of the app downloads in India, include those apps that have Chinese investments. Tiktok, Vigo Video, ShareIt, CamScanner are some of the most downloaded apps in India, and these apps have been developed by companies owned by Chinese investors.

The optical fiber sector has also seen significant Chinese investments over the last few years, and Chinese companies like Fiberhome, ZIT, TG Advait, and Hengtong have made huge investments in India. The Government of India had also allowed Chinese tech giant Huawei to conduct 5G trials in India last year.

On the global front, USA, Australia, New Zealand, Japan, and Taiwan are keeping Huawei out of 5G deployment, while UK, France, the Netherlands, Russia and South Korea have allowed the Chinese equipment makers to participate. The UK though is reviewing the impact of the limited role that it had allowed Huawei.

Since the India-China border clash, the DoT has moved in, and directed state-owned BSNL and MTNL to exclude Chinese gear makers from supplying telecom equipment any further.

The immediate impact has been on the tender the PSUs had invited for planning, engineering, supplying, installation, testing, commissioning, and annual maintenance of 4G mobile network in the North, East, West, and South zones of BSNL and MTNL, Delhi and Mumbai, on turnkey basis. The value of the order is estimated at Rs 8697 crore.

Moving forward, in the new tender, the specification of the core and RAN of the 4G telecom infrastructure will have to be altered to ensure that it has significant domestic content and indigenous technology. The major Indian players in this segment are ITI, VNL, Tejas Networks, Coral Telecom, Paramount Cables, and Tirumala.

The All Unions and Associations of BSNL (AUAB) had sought the Prime Minister’s intervention to ensure that the authorities examine the issue in a time-bound manner and allow it to go ahead with the 4G tendering process. Their stand was that none of the Indian suppliers manufacture 4G equipment or experience of building 4G networks. On the pretext of Make in India, BSNL is being deprived of world-class equipment, said AUAB, in its letter. It maintained that when BSNL’s competitors are procuring 4G equipment from experienced vendors with proven technology, why should BSNL alone be compelled to procure sub-standard equipment? It alleged that some service providers had vested interest in not letting the tender go through.

The Cellular Operators’ Association of India (COAI) too had made its stand clear that the operators were of the opinion that geopolitical issues are the provenance of the government and such decisions are distinct; and should ideally be kept separate from commercial decisions, which are the provenance of companies. As such, companies are driven in their decisions by the interest of provisioning the best-possible service to their customers and to take care of the interest of their stakeholders.

A serious attempt at indigenisation. The government has so far failed in its various attempts to bring manufacturing to India. The cost of telecom equipment supplied by global firms is much cheaper while the quality is superior; the local firms are yet to make a mark in private sector.

The Digital Communications Commission, the highest decision-making body of DoT, has recently announced an outlay of Rs 50,000 crore for the three schemes, PLI, SPECS, and EMC 2.0 to strengthen the electronics-manufacturing ecosystem in the country. To what extent it translates to large-scale telecom manufacturing and enables domestic supply chain of components and state-of-the-art infrastructure and common facilities for large anchor units and their supply chain partners is of concern.

Debate is still on, whether the preferential market access (PMA) norms, which are currently mandatory for government contracts, should be applied to private players also. The PMA norms would put global firms at a disadvantage. Though companies like Nokia and Ericsson are manufacturing telecom equipment in India, the local content addition is around 40 percent only. If the contract mandates 50 percent or above local value addition, it leaves all the global firms out of the race.

The COVID challenge

While sectors like mining, automobiles, and consumer discretionary have been negatively hit by COVID-19, due to increased proliferation of work from home, IT and telecom are the two sectors that have strong revenue visibility.

While both the sectors have a positive outlook as far as long term is concerned, telecom has been better placed in terms of growth while IT is more of a stable and defensive play largely.

During the lockdown period, the telecom sector has outperformed the Nifty significantly. It is currently enabling 35 percent of the GDP, other than the present 6 percent direct contribution to the GDP.

On the other hand, COVID-19 has triggered a sort of makeover of the IT business model in India, bringing savings for IT companies going ahead as there will be a reduction in travel, admin, and real estate cost.

Ankit Jain
Asst. VP, Corp.
Ratings, ICRA

“Even with modest participation in auctions, the debt levels of the industry, which moderated to around Rs 4.4 lakh crore as of March 31, 2020, may rise further on account of the AGR dues to almost Rs 4.6 lakh crore.”

Cut in budgeted spending of BFSI, which constitutes a major chunk in revenue of the IT services industry, would be one major reason from demand-side perspective amongst others. IT spending is estimated to decline by 8 percent in 2020 against a 5.8 percent growth forecasted earlier by Gartner.

With the country under lockdown for 10 weeks, telecom had remained one of the backbones of activity, as people increased the usage of voice calls, home broadband, and video-conferencing applications to communicate and continue with business activity while working from home. The result reflected over 1.12 billion connections in a country of 1.35 billion people presently, with over 675 million broadband users. Average data usage has gone up by over 20 percent in April and May, hitting 12.4 GB as compared to 10.3 GB before the lockdown. Though the speeds are still much lower than the global average of 6 percent, they are moving in the right direction.

This has been XXX possible because of the initiative taken by the telcos, albiet with skeletal team who ensure that the networks are manned, and the whopping increase in the voice and data traffic is handled well. It involves using new technology like massive MIMO at a scale not seen anywhere else in the world, increase in capacity, setting up virtual boardrooms, providing solutions to stay connected with business activities, ensuring integrated business connectivity, and deploying suites of digital tools for enterprise customers.

To solve the network coverage deterioration indoors, customers opted for VoWiFi. Wi-Fi coverage inside the home is perfect and by making calls using the Wi-Fi network instead of the cellular network, it helped telcos mitigate the issues related to call setup failure and call-drop issues. And in addition to this, the call traffic also got offloaded to data with the use of voice and video calls on WhatsApp, Messenger, and other such apps. This reduced the traditional voice traffic on cellular networks, helping with better experience.

The increased usage of video conferencing tools such as Microsoft Teams, Zoom, and Cisco Webex, too were useful. Instead of one-to-one voice calls, people preferred video conference as teams started to work remotely and this was the only way for a digital connect.

This also might have contributed to the reduced load on the cellular voice traffic, thus helping in decongesting the network resources, giving better call experience.

For instance, Airtel shut down their 3G services. This was something that they were doing gradually over the last few months, but it helped them to re-use additional 10 MHz spectrum in 2100 MHz band for augmenting 4G capacity. And that is a better way of spectrum utilization. Now that spectrum is technology agonistic, it is prudent for telcos to expand their 4G footprint and shut down the 3G sites and re-use that spectrum to augment 4G capacity and user experience.

During the first four weeks of the lockdown, Vodafone Idea upgraded 66,000 cells (a geographic area that is covered by a single transmitter) with more capacity across India, and is on course to complete its network integration – as part of the Vodafone India and Idea Cellular merger – by end of June as scheduled.

Of course, this in turn may spur new applications such as AR, VR, and IoT.

Reliance Jio

Mukesh Ambani dreamt big, and by attracting massive global capital, Reliance Jio demonstrated how the power of the masses can be used to modernize and monetize, irrespective of business cycles.

In about eight weeks, a marquee set of global financial investors, Facebook, Silver Lake Partners, Vista Equity, General Atlantic, KKR, Mubadala, TPG, L Catterton, Abu Dhabi Investment Authority (ADIA) and The Public Investment Fund announced 11 separate investments into RIL’s wholly owned subsidiary Jio Platforms, which has evolved from a voice-and-data connectivity player to one with integrated ecommerce and online payments platforms. A fourth – 24.7 percent – of Jio has been sold to these investors for a combined total of Rs 115,693.95 crore.

An overseas listing is on the cards for Jio Platforms, once the government issues direct international listing guidelines. Nasdaq in the US will be the most-preferred destination. Morgan Stanley are the lead bankers to manage the overseas listing, and Bank of America Merrill Lynch and Citibank, the bankers for the IPO. This would enable the company access a larger pool of capital.

The enterprise value of Jio Platforms, a six-month old company is Rs. 4.91 lakh crore, making it comparable with global platforms such as Alphabet, Tencent, and Alibaba that are largely debt-free and have large digital ecosystems.

What makes Jio so attractive?Jio Platforms is a technology platform focused on providing affordable digital services across India, with more than 388 million subscribers. It houses the group’s digital business assets including Reliance Jio Infocomm Ltd.

The major strengthJio Platforms has is its multiple revenue streams from the same user base.It is a subscription-driven model, and has a lot of consumer data. It uses latest technology and cloud computing for delivery, which decouples revenue from the number of users or subscribers that it has, which means that the more times the same customer base is used for multiple revenue mechanism, the higher is the valuation. And for an investor, this is very attractive as the growth in user base is also good quarter-on-quarter. To be able to add that kind of subscriber base and do multiple times monetization makes it very interesting as a company.

Jio Platforms has made significant investments across its digital ecosystem, powered by leading technologies spanning broadband connectivity, smart devices, cloud and edge computing, big data analytics, artificial intelligence, Internet of Things, augmented and mixed reality, and blockchain.

Jio’s music streaming JioSaavn, on-demand live television service JioTV, its foray into the gaming console space, its partnership with Microsoft to subsidize Office 365 and Azure for small businesses in India, payments app JioMoney, and e-commerce platform Jio Mart with a ready user base of 400 million WhatsApp users, are just a few of the reasons the platform is attracting a wide range of world-class investors.

Jio Platforms no doubt has led to private equity firms, investment bankers, and analysts closely mapping the ARPU, subscriber costs and churn of these firms. And the pace of change has now risen manifold due to its presence.

These developments are prompting investment bank, Jefferies and credit rating agency, Fitch Ratings, to make positive forecasts that India could see doubling of sector revenues from an estimated USD 19 billion in 2019-20 to USD 38 billion in 2024-25, and the industry mobile service EBITDA increase by 15 percent for FY21, albeit the growth of pre-tax earnings and earnings of Indian telecom companies will slow. Growth in fiscal EBITDA for fiscal year FY 2020 for the telecommunications industry is estimated to be 25 percent.

A flurry of investments in Jio Platforms has accelerated the pace of evolution for other telecom players.

Gopal Vittal
MD and CEO, India & South Asia,
Bharti Airtel Ltd.

“It is our investments in network technologies coupled with our culture of customer obsession that has allowed us to keep the nation connected. We remain committed to delivering a best in class customer experience.”

Bharti Airtel

Piggybacking on the recognition of the Indian growth story and the country’s digital potential, Amazon seems to be wooing Airtel, and Google trying to forge a partnership with Vodafone Idea.

Amazon is in talks with Bharti Airtel to buy equity stake worth as much as USD 2 billion. Bharti Airtel has a market cap of Rs. 3.1 lakh crore, and a USD 2 billion purchase could give Amazon about 5 percent equity stake in the company at the current price.

Amazon counts India as a crucial growth market where it has committed USD 6.5 billion in investments, mainly toward expanding its e-commerce footprint.

The Seattle-based company has in recent years also expanded its digital offerings in India via its voice-activated speakers, video streaming, and cloud storage, as it seeks to tap a rising number of internet and smartphone users in the country of 1.3 billion people. A deal with Bharti could help Amazon expand offerings via its smart speakers, and also boost its cloud business as access to Bharti’s vast telecom fiber network could help Amazon lower costs.

Reliance’s Jio has already partnered with Microsoft for use of its Azure cloud platform.

Bharti Telecom raised Rs 8433 crore, selling 2.75 percent stake in the telecom major to institutional investors through an accelerated book-building process in the secondary market. Moving toward becoming a zero-debt company, the promoter group – Bharti Telecom Ltd, Indian Continent Investment Ltd, Viridian Ltd and Pastel Ltd – is now left owning 56.23 percent of the company.

On May 23, Bharti Telecom, raised about Rs 3500 crore via commercial paper that offered 6.16 percent on an average with a three-month maturity. Commercial paper, typically, is a short-term debt instrument with less than one-year maturity.

In January, Airtel allotted USD 2 billion worth of equity shares to institutional investors to pay the AGR dues to the central government. The company will also raise an additional USD 1 billion as convertible bonds, due in 2025, according to the terms of the transaction.

Manoj Misra
Senior Public Policy Director,
GSMA, India

“India is at a crucial point where a clear, predictable and economically viable policy will help in sustainable investments to come in and provide a boost to the evolution and development of next level of technology revolution.”

Vodafone Idea

Google is looking for a 5-percent stake in the telco. If successful, the deal will put Google and Facebook in the same ring to battle it out for supremacy in India’s growing mobile internet market.

While it has Google Pay and Google Fiber, it would need rich content and a retail play to combine with Vodafone Idea’s telecom infrastructure and subscriber base. In their own interest of survival in the new emerging world, a Google-led alliance among Vodafone Idea, Zee, and Future Retail could be a win-win for all three.

The move assumes significance as Vodafone Idea Ltd., where Vodafone holds just over 45 percent stake, is staring at nearly Rs 58,000 crore in unpaid statutory dues. Vodafone Idea has been under severe financial pressure, and analysts time and again have cautioned that the telco’s longer-term viability remains under cloud.

Governmental support is imperative

All this, though, would require significant governmental support in terms of policy changes, and accommodation from the present restrictive regimes, governing retail, ecommerce, media, and telecom.

Encouraging strategic alliances in telecom and technology – spurred by the small providential window provided by technological trends today – with deep-pocketed global behemoths like Google will generate benefits almost immediately.

Having said that, the Supreme Court’s hard stance is not doing much for the industry. On June 19, the Supreme Court directed the DoT to consider payment proposals by telecom companies, who must furnish their books of accounts and balance sheets of last 10 years to show their financial capacity. The next hearing has been fixed for July.

The DoT had moved an application before the apex court, seeking permission that the telcos be allowed to pay their AGR dues of Rs 1.43 lakh crore in a staggered manner over the time period of 20 years. The apex court in April had already rejected pleas of the three telcos including Vodafone Idea, Bharti Airtel, and Tata Teleservices seeking review of the October 2019 verdict of the Supreme Court that had widened the definition of AGR and directed the telcos to pay their dues.

Vodafone submitted that the company’s position is extremely precarious, with its losses over several quarters and it is not in a position to give any fresh bank guarantee. It has already paid Rs 7000 crore to the DoT. Over Rs 10,000 crore of bank guarantees are lying with the DoT, which should be considered as security. And payment of all the AGRs could be made through instalments over 20 years, as the company earns and pays.

Bharti Airtel submitted that Rs 18,000 crore out of Rs 21,000 crore had been paid. Bank guarantees of Rs 10,800 crore, consisting of Rs 4000 crore toward dues under the license, including the amount of Rs 2800 crore equivalent to two quarters of estimated license fees and Rs 6800 crore toward spectrum deferred liability is pending with the DoT.

The company requested the court to grant a time period of 20 years to pay whatever amounts are required to be paid in accordance with the judgment.

Mats Granryd
Director General,
GSMA

“Our role at the GSMA is to unlock the power of connectivity so that people, industry and society are able to thrive, and we will continue to play a leading role in supporting and amplifying the important work our industry is doing at this time.”

Funds are required urgently

Investment in the network cannot be undermined.

Telcos that annually invested Rs 45,000 crore in their networks, according to their projects, are expected to invest no more than Rs 20,000 crore this year. The telcos have appealed for urgent relief from the government in the form of low-cost funding and a reduction in license and spectrum fees, among other considerations. The refund of Rs 35,000 crore GST credit and pending payment of around Rs 20,000 crore would give some breathing space to the industry.

Temporary improvement during the lockdown has been seen in data speeds primarily because operators made some investments in increasing tower capacity. With the amount of data surge, there is an urgent need for fiber backhaul on towers. But only 35 percent of towers are fiberized, the rest are on microwave. There is a serious need for investment here, otherwise speed will suffer in the immediate future.

For instance, to meet the demand surge, 2600 new towers and over 6000 base transceiver stations (BTSs) have been added by telcos since March 24. However, in April, only 500 BTSs could be added because of the strict lockdown rules and this could not absorb the surge in data usage. But in May, telcos added 10 times more BTSs – over 5500 – as the lockdown eased. The impact of this capacity increase is reflected in better data speeds in June.

Capital will also be required for DoT’s plan of inviting the private sector in implementing the BharatNet project, which has already seen several delays and cost escalation. Through the project, originally conceived in 2011, the government wants to provide high-speed broadband connectivity through optic fiber to all the 2.5 lakh gram panchayats in the country. Due to the delays, the cost of the project has more than doubled to Rs 42,068 crore from the original Rs 20,000 crore. So far, the government has been able to connect around 1.50 lakh panchayats and has disbursed around Rs 22,000 crore.

Various revenue-sharing models are being worked out to that in partner with private players. TRAI, Niti Aayog, and the consultant Deloitte are strongly in favor of the PPP model.

Spectrum

The current pandemic has effectively put forth the importance of a robust network required to run an economy digitally. Spectrum is the fundamental ingredient of telecom infrastructure and a key essential of a connected society.

The industry is now ready for augmenting its 4G spectrum. Reliance Jio and Bharti Airtel have expressed interest in acquiring 4G spectrum, with the recent rise in demand and change in traffic pattern.

DoT is planning to hold the next round of spectrum auction by October this year, in which it would sell around 8000 megahertz of radio waves across several bands at a cumulative value of around Rs 3.8 lakh crore that can be used for 4G services.

The government has relaxed payment terms for auctions that were held earlier as well as for the upcoming round. Earlier, the companies were required to pay for the spectrum purchased in auction in eight annual instalments, which has now been changed to 16 annual instalments.

The DoT has selected public sector firm, MSTC Ltd., as auctioneer for conducting the next round of spectrum sales.

A letter of intent to the mini ratna has been issued. It may take around two months for MSTC Ltd. to design and develop software for e-auction of spectrum. Four bidders had qualified in the technical round – mjunction services Ltd., C1 India Pvt. Ltd., e-Procurement Technologies Ltd., and MSTC Ltd.

The auction shall be without the frequency band range of 3300–3600 MHz band proposed to be used for 5G services. The auction was initially planned for the sale of 8303.05 MHz of airwaves, including 5G spectrum in the 3300–3600 MHz band and 4G spectrum in the 700 MHz, 800 MHz, 900 MHz, 1800 MHz, 2100 MHz, 2300 MHz, and 2500 MHz bands

The rating agency ICRA expects a relatively muted participation fetching around only Rs 55,000–Rs 60,000 crore to the exchequer. It foresees minimal participation in the 700 MHz band and expects relatively better participation in the 800 MHz and 1800 MHz bands, which beholds significant expiries for incumbents in 2021, and thus the telcos will acquire it for continuation of 4G services.

5G seems to be nowhere on the horizon for India. DoT is yet to form relevant study groups and revise the National Frequency Allocation Plan 2018 to include more bands, including mmWave frequencies as a part of 5G roadmap. There is an absence of encouraging use cases, and uncertainty around radio waves sale for the next generation of telecom services.

Stephen Sale
Research Director,
Analysys Mason

“Consumer telecoms services, which account for the majority of telecoms revenue, tend to be resilient during economic downturns, but large increases in unemployment, business closures and the overall decrease in economic activity will cause a sharp decline in business services revenue.”

Global scenario

The global telecom sector is a unique and vibrant industry that is constantly evolving due to the new technologies and infrastructure, which continue to filter into the market.

The overall global telecom statistics are impressive – in 2020 there are around 7.7 billion active mobile broadband subscriptions worldwide, an enormous rise from 3.3 billion just 5 years ago, thanks in part to the deployment of 4G LTE. With mobile technologies dominating the telecommunications sector, there is little doubt that the intense focus on the potential opportunities offered by 5G will continue.

In 2020 there are over 1.1 billion fixed broadband subscribers globally, a rise from around 830 million in 2015; indicating there is still room for growth in the fixed-broadband sector, particularly in the emerging markets and those transitioning to FTTH.

Broadband has played a vital role during the COVID crisis. Governments are relying on it to support frontline workers and services, to keep citizens informed, and to monitor activity. Whole economies – let alone businesses – are relying on employees being able to work from home.

These changes in digital behavior have had a seismic effect on our networks. Until now, broadband operators have been using growth models that predicted a gradual increase in bandwidth demand of 30–40 percent over the next 3 or 4 years. COVID-19 has generated 30–40 percent growth overnight. We have seen huge spikes in usage across online gaming, VPN, streaming services, social media, and video conferencing, to name a few.

Network data also shows that mobile networks have suffered significant degradation in speeds and latency due to congestion that has resulted from the crisis. That is not surprising – mobile is designed for people on the move, not in lockdown. Many countries are increasing mobile network capacity and coverage, including rolling out of 5G, but that alone will not be enough.

Fixed networks have been flooded with traffic but, by and large, have withheld the onslaught, demonstrating that they are the best option for dealing with the demands of a post-COVID world. Fixed networks need to coexist with mobile networks to deliver an affordable, resilient broadband experience to all citizens and businesses.

Yet, there are still almost a billion households around the world with no fixed-broadband connection. On top of that, there are another half billion with broadband services that struggle to cope with the increased demands of lockdown living.

Many operators around the world have experienced challenging issues in recent years and will embrace the improved services and opportunities offered by 5G and fiber-based broadband.

The operators have faced problems relating to market saturation; rising competition from operators; disruption from OTT services; growing demands for increased bandwidth; regulatory restraints, and in some markets, there have been unfavorable economic or civil conditions. This fast-paced evolution for the telecom industry is not over yet – with 5G now on the horizon.

The true impact from the deployment of 5G is still largely unknown, but if predictions are true – it will have both a positive and disruptive impact on our global telecoms sector. It will also be very interesting to observe the changes in global and regional telecom statistics over the next few years – in terms of subscriptions, technology penetration, CapEx, operator revenues, and services.

Revenues for telcos will fall by 3.4 percent in 2020, before returning to growth of 0.8 percent in 2021, amounting to a loss to more than USD 40 billion in the developed market, according to Analysys Mason. Despite this 2020 dip, the telco sector will perform ahead of general GDP trends, accounting for 2.0 percent of the total, an increase from 1.9 percent in 2019.

However, the pandemic’s impact on profitability will be limited. Coronavirus will reinforce and accelerate existing downward trends rather than introducing new ones.

Rupert Wood
Research Director,
Analysys Mason

“Telecoms should stay healthier than almost any industry in this crisis. Telecoms should show some of the strongest post-crisis investment, in part because cash flow is more resilient in the telecoms sector and because some governments will emphasise 5G and fibre in stimulus packages.”

Operator investment strategies

Policy makers may find it prudent to separate the medium-term issues from the long-term, advises James Allen, partner and head of regulation,Analysys Mason.

Medium-term issues

These issues go beyond the immediate short-term responses and represent things that can be achieved with changes to networks and their configuration.

The conflict between rapid network upgrades and seeking ‘trusted’ vendors. If the operators start to run out of network capacity, new technologies may be deployed on existing infrastructure, such as massive MIMO and 10G PON systems.

Assisting in optimizing the system as a whole. Governments and regulators might have a coordination role, and need to understand better where the bottlenecks are.

Operators may seek to reconfigure their mobile networks for more FWA-like traffic, or configure their DSL management/vectoring to preserve upstream capabilities to better support video calls.

End users might buy customer premises equipment (CPE) with better Wi-Fi, or might cable up their home office/kitchen table.

This coordination role could, for example, take the form of mass-endpoint network-performance monitoring that could be correlated with end-user experience on their applications of choice; the resulting data would potentially let operators and end-users see which network parameters were correlated with a poor experience (for example, if latency spikes or packet-loss resulted in certain types of poor audio quality during team calls), and whether these were related to in-home, access network, or internet service provider (ISP) performance issues. This is not easy, for several reasons – application performance is a complex mix of factors; existing mass-monitoring solutions tend to neglect in-building factors and measures when the link is not otherwise in use by that end-user; and finally, the resulting performance indications could be contentious if ISPs (or CPE vendors) thought that they were not fair.

Prioritizing available capacity. In some other countries, net-neutrality rules make it difficult for ISPs to offer services that prioritize traffic in a targeted way. But they do allow these things to be done by end-users, and most CPEs already have simple web interfaces.

Longer-term issues

In the longer term, it is likely that there will be an increased focus on existing areas of network-related public policy as universal service for broadband, system resilience of critical infrastructure, and competition policy in telecoms.

These longer-term debates are just beginning, and are likely to form a significant backdrop to the rebuilding of the economy in the decade ahead.

Telco NI analysis

As far as the vendors are concerned, ResearchandMarkets pegs the telco NI (network infrastructure) products and services to the telco sector at USD 49.5 billion in vendor revenues for 1Q20, down 4.3 percent year-over-year (YoY) from 1Q19. This decline is similar to the 4.7-percent decline recorded in 4Q19. The Telco NI analysis tracked 124 vendors in total, from 1Q13 through 1Q20.

In 1Q20, many vendors reported increases in 5G-related revenues but also began to feel the direct effects of COVID-19-related disruptions. The rapid global shift to working from home benefited many vendors, and network construction’s frequent classification as an essential service allowed many projects to continue apace.

However, many vendors also began to face supply-chain constraints due to slowdowns in manufacturing activity, and the onset of a steep global economic downturn caused many telcos to re-evaluate spending priorities.

The second quarter of 2020 will likely be substantially worse, based upon economic trends and public statements from Nokia, Ericsson, Samsung, and others.

While several Asian and European countries have begun to recover from the worst of the early COVID-19 spread, this recovery is only coming with big changes in society – from the workplace to schools, to how people get around. Some of these changes require increased network investment in new areas, such as residential broadband backhaul, but they restrain spending elsewhere – such as small cells in central business districts.

Moreover, the effect of high unemployment and a recession are far more significant to telecom in Asia and Europe, and net negative. And then there is America. The world’s largest economy continues to address the pandemic erratically, and without responsible leadership. Many US states are already seeing signs of a second wave. A prolonged recession and ongoing impact to telco spending seem a likelihood at this point.

Of all the vendor types tracked, those classified as cabling and connectivity vendors (CCVs) reported the worst performance in 1Q20. These companies suffered from both constraints in manufacturing capacity – due in part to the concentration of fiber production facilities in China – and the labor-intensive nature of fiber installation. CCV revenues dropped nearly 21 percent on a YoY basis in 1Q20. Wuhan-based Fiberhome was hit the hardest.

By contrast, vendors in the network software provider (NSP) segment recorded a 7 percent YoY increase in revenues in 1Q20. This modest surge is due to both the nature of NSP sales, which can largely be done remotely without a need for social distancing, and the ongoing telco shift toward software-centric networks.

COVID-19 has brought a lot of setbacks, and there will be more suffering yet, until we can meet face to face and travel freely again, can communicate, can build a better network together, and can dream of a better future!

Jasmeet Singh Sethi
Head of ConsumerLab,
Ericsson

“The daily average time spent connected to fixed broadband increased by 2.2 hrs while for those connected to 4G networks saw an increase by an average of 1 hour. In India, where 4 in 10 relied on 4G networks, this increase was twice as much on cellular networks.”

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