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1、Countering the threat to Europes 5G rollout European telco investments under the economic downturn Strategy& | Countering the threat to Europes 5G rollout2 Contacts The Netherlands Steven Pattheeuws Partner, PwC Strategy& Netherlands +31-62-279-1964 steven.pattheeuws Turkey Kaan Karamanolu Partner,
2、PwC Strategy& Turkey +90-212-326-6309 kagan.karamanoglu Germany Jens Niebuhr Partner, PwC Strategy& Germany +49-211-3890-195 jens.niebuhr About the authors Steven Pattheeuws advises clients in the telecom, media, and technology industries on technology, operational transformation and capital allocat
3、ion for Strategy&, PwCs strategy consulting business. Based in Amsterdam, he is a partner with PwC Netherlands. Kaan Karamanolu advises clients in the telecommunications space on growth strategies, transformation and turn-around programs. He has worked with operators in several countries and has clo
4、se to ten years telecoms line experience on commercial strategy, business planning, product and business development as well as front office transformation. Based in Istanbul, he leads Strategy& Turkey. Jens Niebuhr advises clients in the ICT industry bringing perspectives from leading telecom, tech
5、nology and software players together. Jens focus is on digital transformation, go to market and operating model design as well as turn-around programs. Based in Dsseldorf, he is a partner with PwC Strategy& Germany. Strategy& | Countering the threat to Europes 5G rollout1 So far, the COVID-19 pandem
6、ic has had little adverse impact on tele- communications companies (telcos). On the contrary, with a surge in home-working and digitization, communication capacity and quality requirements have increased, making telcos even more critical to our economy and society. However, going forward, the global
7、 economic crisis resulting from the pandemic will have a significant impact on the ability of telcos to invest in rolling out 5G mobile networks. Using the experience of European telcos during the financial crisis of 2008-09, we have modelled the likely effects of the current downturn on their inves
8、tment spending. Following the 2008 crisis, European telcos saw their revenues fall over two years. This revenue decline translated into a significantly larger drop in investment spending that fell particularly hard on mobile networks and IT capital expenditure (capex). Applying our findings to the c
9、urrent situation leads us to some major projections: European telcos investment spending over the next two years will fall by 6bn-9bn Rollout of 5G mobile networks will be delayed by 12 to 18 months Capex budgets will come under additional pressure as telcos invest to accommodate changing patterns o
10、f demand for network capacity, caused notably by increased home-working and reduced commuting A carefully considered response from operators, suppliers and regulators will be needed to respond to COVID-19 impact As a result, telcos need to act urgently to address the squeeze on their 5G investment p
11、lans. Specifically, they must review their 5G business cases and deployment timetables, given the significant growth and changing pattern of demand for network capacity that has emerged due to the COVID-19 lockdown. We expect a reprioritization of capex plans across all areas of the business to secu
12、re sufficient funding, to continue investing in 5G and to partially mitigate the risks of delaying deployment, while at the same time coping with increasing demands on their fixed infrastructure. This will involve tough choices: a complete review of capex plans, a drive to achieve further capex effi
13、ciencies and delays to selected transformation projects in other areas. EXECUTIVE SUMMARY Strategy& | Countering the threat to Europes 5G rollout2 Delays in 5G deployment carry serious risks and costs for telcos, many of which own time- limited 5G spectrum licenses and will struggle to achieve their
14、 return on investment (ROI) targets the longer they delay rolling out services. Operators original business cases also depended on delivering not only faster versions of services available today, but also entirely new applications to support the Internet of Things (IoT) and autonomous vehicles, for
15、example. Unless these can be delivered, the business case for 5G will be compromised. Delays in 5G investments also pose serious risks for equipment vendors whose sales for the next two years may be jeopardized. Finally, regulators also face challenges because their plans to develop the digital econ
16、omy depend heavily on the telcos ability to deliver nationwide 5G connectivity. We conclude this report with a series of detailed recommendations for telcos, equipment vendors and regulators to help them minimize the risks of a prolonged squeeze on telcos investment capacity resulting from the COVID
17、-19 crisis. The economic downturn following the COVID-19 crisis may delay telecom operator investments in 5G in Europe by 12 to 18 months.” Strategy& | Countering the threat to Europes 5G rollout3 Outlook: The COVID-19 crisis will reduce telco revenues for the next two years Usually, the telecoms se
18、ctor is relatively resilient in times of economic crisis, partly due to its largely contracted revenue model. However, our modelling suggests that the COVID-19 induced recession across Western European markets is likely to cause telcos revenues to decline over the next two years, after which we expe
19、ct a recovery (see Exhibit 1). Our base case forecasts a drop of 2-3 percent in the sectors revenues for 2020 and a further 1-2 percent decline in 2021, before recovery begins during 2022. The key factors driving the decline will be defaults and late payments among consumers and business customers,
20、as well as users downgrading to cheaper subscription packages or renegotiating their contracts with existing suppliers. In addition, telco revenues that depend upon investment programs by business customers installing workspace management systems or new IT tooling, for example will be hit as many su
21、ch investment projects have been paused or cancelled. EXHIBIT 1 Impact of COVID-19 on Telecoms GVA by scenario Source: Strategy& UK economic analysis, April 2020 Smooth exit Bumpy exit % of GVA deviation from baseline 0 -1 -2 -3 -4 -5 2020 Q2 2020 Q1 2020 Q4 2020 Q3 2021 Q2 2021 Q1 2021 Q4 2021 Q3 S
22、trategy& | Countering the threat to Europes 5G rollout4 The revenue implications for capex budgets will be significant, particularly for 5G investments Telcos typically reinvest 15-16 percent of their revenues in infrastructure every year to fund technology upgrades and additional capacity. Any drop
23、 in revenue, therefore, will inevitably have a material impact on their ability to sustain the pace of investment. We expect companies to seek, at best, to maintain their capex intensity as a percentage of their reduced revenues, and in many cases we expect them to reduce capex below that level, in
24、light of the economic conditions. The aftermath of the 2008 financial crisis provides a useful framework to understand the likely effects of the COVID-19 pandemic on telcos investment plans. Although the technology context was different, there were some parallels with the situation today: When the 2
25、008 crisis struck, telcos were investing in 4G and VDSL, transformation projects for their core networks and IT systems, as well as selective innovations. Following the crisis, European telecom revenues declined by 4.7 percent in 2009 from their pre-crisis levels before increasing by 3 percent in 20
26、10. This resulted in a V-shaped dip with revenues in 2010 returning to the pre-crisis trendline. However this revenue decline led to a much larger reduction in capex among European telcos. Our data show that operators were relatively slow to reduce capex initially because when the financial crisis b
27、roke, they had already committed a large proportion of their capex budgets. However, in 2009 they cut capex investments by an average of 13 percent and continued to hold down capex for two years. By 2011, European operators capex was still 4 percent lower than its level in 2007, before the crisis, a
28、lthough at this level it represented a similar level of investment intensity, expressed as a percentage of their revenues (see Exhibit 2). This pattern highlights two key conclusions: For telcos, capex investment is significantly less resilient than revenues The impact on capital budgets of any decl
29、ine in revenues lags by approximately 6-12 months, starting later and continuing for a time after revenues begin to grow again. If the revenue decline is V-shaped, the knock-on effect on capex is more U-shaped. EXHIBIT 2 Capex spend, Europe Source: Strategy& analysis 97% 100% 90% 87% 96% 20082007201
30、020092011 Strategy& | Countering the threat to Europes 5G rollout5 The major capex impacts will be on mobile networks and IT projects We can also use the 2008 crisis to examine how cuts in capex were distributed across different areas. European telcos made the biggest cuts in areas dominated by larg
31、e, discrete projects that were easier to delay or cancel: IT investments fell by 20-25 percent as transformation projects were halted. Investment in this area did not return to pre-crisis levels. Mobile network investments fell 20 percent as deployment projects were delayed. This capex reduction too
32、k place against a background of increasing network usage that necessarily required investments in additional capacity. Fixed and core network investments were relatively protected, declining by 6 percent against the pre-crisis trendline. This is mainly because a large proportion of this spending com
33、prises essential replacements and upgrades to maintain services. The main delays were in projects to deploy fiber and VDSL. Customer-driven capex fell 10 percent mainly due to lower spending on customer acquisition in the consumer segment and delayed investments in the B2B segment. Customer capex in
34、creased after three years as postponed investments in handset replacements and upgrades were carried out. We expect delays in 5G rollouts to result in fewer new handsets being sold and consumers seeking to spend less on 5G handsets, which will have a negative impact on handset manufacturers (see Exh
35、ibit 3). Source: Strategy& analysis 20082007201020092011 7,3 20,8 12,2 20,8 35,9 6,5 18,2 9,3 18,3 34,5 5,8 20,6 9,1 20,1 34,7 21,0 11,0 23,0 38,0 7,0 6,2 21,9 9,7 21,4 36,9 Other, incl. real estate Customer CPE IT Network M Network F EXHIBIT 3 Capex split, Europe Indexed to 2007 Strategy& | Counter
36、ing the threat to Europes 5G rollout6 The read-across from 2008 capex to fall 6bn-9bn In todays context, it is important to note that although the technologies in question have changed since 2008, the split of capex across these major investment categories has not shifted significantly. Our analysis
37、 from the previous crisis therefore reinforces our view that we will see very deep cuts in investment by European telcos over the next two years, and that once again these will be concentrated on IT upgrades and mobile networks (see Exhibit 4). EXHIBIT 4 Europe capex split 2019 EXHIBIT 5 Capex forec
38、ast lower case scenario Source: Strategy& analysis Source: Strategy& analysis Customer driven NW core and replacement Fixed access/fibre Mobile/5G IT 16,2% 29,6% 21,3% 14,9% 18,0% 98% 100% 92% 91% 96% 202020023 Applying the model developed on the basis of the previous crisis to the situat
39、ion today, we forecast that a 2-3 percent decrease in revenues against the pre-crisis trendline for 2020 is likely to result in a decline in capex of 9 percent in 2021. With revenues forecast to decline 1-2 percent in 2021, we expect the squeeze on capex to continue in 2022, leaving it 8 percent bel
40、ow its pre-crisis trendline. We do not therefore expect to see capex return to pre-crisis trend levels until 2023 (see Exhibit 5). Strategy& | Countering the threat to Europes 5G rollout7 In financial terms, the declines in capex that we predict would represent a reduction in investment spending acr
41、oss Europe of between 6bn and 9bn over the next two years. Leading up to the pandemic, European operators had spent several years preparing to launch the next generation of mobile communications. Given our prediction that a large proportion of these capex cuts will impact mobile investments, and par
42、ticularly 5G deployments, we expect investments in mobile networks to be delayed by between 12 and 18 months. For telecoms operators that plan for a technology cycle of six to seven years, a delay of more than a year is significant and calls their pre-COVID-19 roadmaps for 5G deployment into questio
43、n. 5G deployment plans depend on major investments in networks, as well as large investments by corporate users of these networks to develop new use cases. Much of this spending now faces delays. Investments in innovative platforms and service development, meanwhile, could be paused indefinitely, pu
44、shing many of the advanced applications of 5G technology, such as many IoT use cases, further into the future. 1 https:/blog.zoom.us/wordpress/2020/04/01/a-message-to-our-users/ 2 https:/blog.zoom.us/wordpress/2020/04/22/90-day-security-plan-progress-report-april-22/ 3 4 5 How COVID-19 is reshaping
45、demand for telco services With COVID-19 much has changed and we see significant issues on the demand side across all major areas of the telcos operations fixed, mobile and wholesale networks that will challenge their existing 5G rollout plans. Demand has both surged and shifted Since widespread lock
46、downs came into force around the world, broadband video consumption has surged. Netflix reported the biggest quarterly jump in subscribers in its 13-year history, while it is reported that Netflix and YouTube have reduced streaming quality in Europe temporarily to ease the strain on networks. At the
47、 same time, video conferencing has reached the mass market. During March, Zoom passed 200m users a day.1 During April, it passed 300m.2 Online gaming traffic has doubled on mobile and almost trebled on fixed broadband. Telia Carrier, for example, has reported changes in video conferencing traffic of
48、 more than 400 percent at certain times (see Exhibit 6, next page)3. This level of growth has major impacts on fixed, mobile and wholesale networks: Fixed Networks: Streaming traffic on fixed broadband has increased 50 percent across European networks, operators report. Telefnicas fixed data traffic
49、 spiked 35 percent over a month, surpassing the 30 percent growth it had registered over the previous year4. Online education and home-working accounted for most of the jump, according to Telefnica Mobile Networks: Operators report that streaming traffic on mobile networks has increased 40 percent since the start of the COVID-19 crisis, according to European telcos. Vodafone says mobile data usage has increased around 15 percent across Europe in recent weeks, peaking at 30 percent in Spain and Italy.5 W