Ever watch European casino dealers in action? Impeccably dressed, they deal the cards, then instruct the players in cultured accents, ‘Faites votre jue!’ literally, ‘Make your play’ or ‘Place your bet!’ High stakes gambling seems to best describe the scenario for wireless carriers getting into the 5G game. Big bucks are on the table but as with any bet, what are the odds for success?
Putting that question in context, U.S. wireless carriers reported aggregate capital expenditures (capex) of $27.1 billion in their networks in 2018. That figure is down two percent from the prior year and down 14 percent from peak spending in 2014. Capital intensity hovered in the 15 percent range, just on the cusp of network expansion and network maintenance modes.
The Big 4 – AT&T Mobility, Verizon Wireless, Sprint, T-MobileUS – accounted for 97 percent of the total, with AT&T and Verizon together, making up 61 percent of the total. Network spending at Sprint and T-MobileUS was up markedly in 2018, compared to prior years, even as AT&T’s capex declined. Verizon Wireless, however, was the big downer slashing its capex unexpectedly (see, VZW 2Q Wireless CapEx – A Real Stunner!) and retarding overall network investment for the year.
One could argue that reduced capex is simply the tail end of the 4G LTE deployment cycle and that the industry is prepping for 5G. That’s a valid point. The larger concern, however, is that carriers are in a liquidity crunch and are struggling to maintain sufficient cash flow to fund their 5G plans. The problem is that mobile data usage is going through the roof yet carriers are obligated to deliver high-speed connectivity throughout their respective service areas, while only able to charge most of their postpaid customers on unlimited usage, flat-rate plans. We already raised a flag about the carriers’ ability to fund a massive 5G rollout (see, Can the Carriers Afford 5G?). Articles echoing similar sentiments ran in recent issues of respected business publications, Barron’s and The Wall Street Journal.
Here’s where you hedge your bets.
Carrier guidance for 2019e puts average aggregate capex at $30 billion. That’s an 11 percent year-to-year jump! The outlook for 2020e is another three percent increase to $31 billion. This makes sense when you consider the new 5G New Radio (NR) 3GPP standards, once formally released, allow the carriers to move into full ramp-up mode with new macrocell, small cell and in-building infrastructure construction.
Equipment vendors and service contractors reliant on carrier capex for their revenues must be cautious, though. If ‘past is prologue,’ then carriers again could reign in their quarterly spending to conserve funds for those builds. For them, it is a matter of financial management. They simply revise the full-year guidance each quarter, so it still looks like they are making their numbers. But when this happens, suppliers end up absorbing cancelled, deferred or delayed payments for work already done or yet to come.
As the casino dealers would say: “Alors, mesdames et messieurs, faites votre jeu!”
John Celentano is Inside Towers’ Contributing Analyst. He can be reached at jcelentano1@gmail.com.
by John Celentano, Contributing Analyst to Inside Towers
March 18, 2019
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